Business Appraisal: Far More than an Exit Strategy

Business valuations — or business appraisals — are an important part of a successful transaction of any M&A deal, but valuations are also important for a number of other non-transactional purposes. In this edition of “Deal Talk,” you’ll learn about the other business and personal uses for business valuations. If you have business partners, are involved in forming a new entity, are married with a family or have special considerations, this show will be of special interest to you. Join Jeff Allen as he speaks with professional business valuation consultant Trisch Garthoeffner, CVA and owner of Anchor Business Valuations & Financial Services LLC.

Questions Answered For You


It's important to find an expert that has experience within the certain specific service and niche sector that you're looking for expertise on.

- Trisch Garthoeffner

Key Takeaways

  • For each different scenario and situation in which a valuation is needed, there are different pieces of the puzzle that must be considered.
  • I always suggest, find somebody on their own so they can be assured that it’s a non-biased opinion.
  • For business owners to do, right in the very beginning, when they are establishing the entity, when they know that they will have partners, is to give a business valuation at the point in which the operating agreement, the buy-sell agreement, all the necessary paperwork, is being established with the business being established within itself.
  • Business owners need to be really aware that they need to get a true, accurate valuation of their business early on so that they can prepare their business for the sale that will go through at some point or another.

Read Full Interview

Jeff: Welcome to Deal Talk, presented by Morgan & Westfield. I’m Jeff Allen. Now, if you are selling or buying a business, or if you are just interested in the subject, this is the place to be. As you know, our mission is to educate and inform you with the help of some of the most credible, highly regarded experts in the industry of transacting businesses, so you’ll be better prepared to make some very important decisions when the time comes to sell your business, or to buy one. There are a number of reasons that you should have your business appraised, the most common reason to have your business appraised, we all know, is to prepare for its eventual sale, whenever that might be. But there are other reasons as well. On this edition of Deal Talk, we’re going to talk about some of those reasons, and also how to go about finding a good, reputable appraiser. And to help us do that, we are joined by a reputable appraiser in her own right, Trisch Garthoeffner, Founder and President of Anchor Business Valuation and Financial Services, LLC. Trisch, thanks so much for joining us. It’s good to have you.

Trisch: Thank you for having me, I appreciate it.


Jeff: Trisch, let’s talk about, well, let’s kind of use this as the foundation for the talk, and I think it’s really important to start with this. Why is it so important to take the time to do your research? When I say, do your research, I’m talking about people who are interested in maybe moving forward with the sale of their business, or the eventual sale of their business, to find a good, reputable appraiser. Why is it so important that we take our time to do that rather than rush through the process of finding one?

Trisch: Well, first and foremost, most people’s businesses are almost like children to them, in the respect that they created the business, they raised it, and they brought it up. And by the point that they reach out to me, this is their fully-grown child, in terms of a good analogy. And they’re looking to basically set it free to the world, and it’s very sensitive process. It’s a very technical process, but it’s also a very sensitive psychological process, in which a good appraiser has a number of different attributes that aren’t necessarily found or known about by just reading a bio. Maybe just being referred to somebody, which is why I always suggest that whomever I’m working with, or if I can sense in any which way that they might be uncertain about either the monetary involvement to get their business evaluated, or the fact that there’s so much information that I need to delve through, that they meet with a couple of different people.

So they can really get an idea as to the comfort level that they have with the chemistry of that individual and themselves, and also find out about their technical knowledge and the background that they have in terms of how they’ve applied their expertise in the past. So there are a number of CPAs, accountants and so forth out there that have the smarts undeniably to do it. But it’s a matter of finding the complete package to take care of their child, of the client’s child, going back to the analogy, and preparing it to be set free, and to get the most money for the hard work that the business owner has put in terms of growing the business. So it’s extremely important to find all of these different characteristics in a good fit. And you will be working with them, the client will be working with me on average, anywhere, well, it depends on the specific case, but anywhere from a minimum of two months to upwards of a year. So you really have to have somebody that’s smart and somebody that you have good chemistry with, it’s extremely a sensitive process.

Most people’s businesses are almost like children to them, in the respect that they created the business, they raised it, and they brought it up.

Jeff: Trisch, let me ask you a question, are there certain strings in particular, or key attributes, as you talked about just a moment ago, that really stand out? For example, if someone were to come to you and maybe they had questions about your background or your qualifications, are there a couple of leading qualities that you would lead with to explain to them how you are best qualified or suited to help them as an appraiser? Something that I, as a business owner, would really, really be interested in knowing about you?

Trisch: Well, I think besides my background or another expert’s background, in terms of the work that they’ve done in the past, to be able to show that they actually have the work experience, it’s also important to find an expert that has experience within the certain specific service and niche sector that you’re looking for expertise on. So for example, there are many generalists out there. I have a couple of different areas, like medical, facility services; there are a number that I specialize in. And I’m a certified business valuation analyst and financial forensic expert. And so it’s important to find not simply an accountant, but someone that has the specific training to do a business valuation, to do the financial forensic work that you need to have done within the sector that you work within.

 

Jeff: That’s really important to know because I think sometimes we’re led to believe that appraisers just like any other type of business, you might be able to just simply go to an online resource, pick an appraiser and they’re going to be suitable, provided they have the background and the qualifications to help you up. But it really does, I think, bear some careful consideration that one needs to look for someone who has a fair amount of experience really treating those businesses that are key in your particular industry, or sector as you put it, to help you out rather than just go and find someone around the corner who’s been in the appraisal business for a long time and has extensive experience valuing businesses regardless of their industry. You want to pick someone who has experience who specializes in your particular industry or sector. So I think that’s very, very important news. Now, is there a resource online or a tool that someone can use if they are just embarking on their research right now to look for an appraiser that you might recommend, or what are some ways that they could approach their search? Where should they go? What kind of resources should they consult?

Trisch: Well, I am a member of the National Association of Certified Evaluators and Analysts and I’m one of the state chapter presidents, so I’m very biased towards NAPFA, which is the acronym for the association I’m certified through. But, there are a number of associations, or a handful, I should say - AICPA, NAPFA, ISBA. And on all of these different association websites, there are directories. If I was thinking of myself as someone that was seeking my service, I wouldn’t feel necessarily comfortable just blindly reaching out to someone on one of the association websites, not because they wouldn’t be qualified, but just because I would want to have a referral or maybe do a little bit more research beyond through their website, looking at various articles that they’ve written that show their expertise, that might give examples of testimony that they have given, or different cases that they have worked on and have that peer-based different resources to reach out to. So I think that where you could start, would be through one of the association websites and begin your search. You want to find a site, originally, that has plenty of business valuation analysts to be found.

I wouldn’t feel necessarily comfortable just blindly reaching out to someone on one of the association websites, not because they wouldn’t be qualified, but just because I would want to have potentially a referral, or maybe do a little bit more research beyond through their website.

Jeff: She’s Trisch Garthoeffner, Founder and President of Anchor Business Valuations and Financial Services LLC. And I’m Jeff Allen, you’re listening to Deal Talk, brought to you by Morgan & Westfield. And Trisch, again, we appreciate you taking time out of your schedule today to chat with us about these important ideas, and about the thought to considering the idea of finding a suitable appraiser, and the best appraiser possible to help people with the valuation and appraisal of their businesses. Now, I’d like to shift gears just a little bit and talk about reasons for getting an appraisal; maybe not just an appraisal for the purpose of preparing for the sale of the business, but maybe there are some other really important reasons for gaining an appraisal. Can we talk about some of those? What are some of the reasons that a business owner would come to you, Trisch? Maybe they’re not selling their business right away, certainly, or they’re not looking to do so even in the shorter or medium-term, but what are some other reasons that people might come to you?

Trisch: Sure. I actually served in a public company business valuation sector for a long time, and in the public company in which I worked. We did business valuations for underwriting, and in terms of the analogy for the private company sector, it would be for SBA loans. So business valuations are needed if a private company is seeking an SBA loan. Typically, a bank works together with the business owner to refer them into somebody or the business owner, I always suggest, find somebody on their own so they can be assured that it’s a non-biased opinion.

But actually, when I started my own business, I had found a need in this area for a state and gifting valuation. So whenever a gift of a portion or an asset is done for tax purposes, the IRS suggests or doesn’t suggest it. It demands that a valuation is put into place. And there are guidelines that are put forth by the IRS that are provided by business valuation analysts such as myself. So for gifting, I do a number in this area and then matrimonial is an area in which there’s a high demand. A lot of times, I get pulled into a case in which there is a dispute as to the value of the business, and an outside expert needs to be brought in to assign a value to that business. And very rarely does that business ever go through a transaction…it’s in order to put a value on it, to divide that asset.

 

Jeff: So, Trisch, I have, let’s say I’ve got that appraisal in hand, and I’ve had it prepared by your office, and I’m using this for tax-related purposes for the IRS and so forth, can I use that same valuation, the same business appraisal for the other purposes that you talked about, such as divorce proceedings and any other thing that we can think that might require a business appraisal?

Trisch: No, there are very strict guidelines in terms of the scope of the use of the business valuation. And they are all specified not only in my engagement letter, but also in the report itself. And the reason behind that, it’s not because I’m being greedy and I don’t want them to be able to use the valuation as much as they can, it’s because for each different scenario and situation in which a valuation is needed, there are different pieces of the puzzle that must be considered. So for example, in the matrimonial situation or different case law, there’s different approaches; there’s different standards. There are different standards, I should say, in different case law that are considered versus, say, for a gifting valuation or for shareholder oppression valuation; and this is where we get into more of the nuts and bolts of the valuation itself. But just as an overall answer to that question, it’s definitively no. And I have had pushback from clients before, specifically on a matrimonial side, because they pay a certain amount to have the valuation done. And then they say, “Oh, the business is worth X amount. Maybe I will consider a sale.” And then they want to start easing that valuation to shy about the business. And I have to go back in point to my engagement letter and say, “That just cannot be done.” So the answer is no, it works that way.

 

Jeff: Okay. No, that’s okay, and it’s really important too that we clear that up, because that almost fits into that one-size-fits-all category or purpose of the valuation, which in this case we’re learning, is not something that we want to consider. You’re going to have to make your intentions for the use of your valuation or your business appraisal very, very clear to the person who’s doing the work for you. If you’re the business owner, you need to make sure that you know exactly why you’re having it done, and make sure that that is clear upfront, so that if you do in fact want to have it done for a consideration for either tax purposes, to sell your business, for the matrimonial issues we just talked about, divorce settlement and so forth, we need to make sure that that’s absolutely clear then, according to Trisch. Trisch, I want to branch off now and go to a different area of our conversation where we’re going to talk about the types of entities and types of businesses that are out there, incorporations, is there a difference there in terms of the impact or the way that those entities can affect the value of a business? Let’s talk about, and we use the word “entities,” C Corp, S Corp, LLC, are there differences and do they have a noticeable impact on the value of a business and the way that it’s treated?

Trisch: It definitely can; for S Corporations, they flow through an LLC, and so there are tax advantages, they’re avoiding that double taxation, because they’re taxed at one level which is a.k.a., the flow through aspect of it. This is a topic that is heavily discussed in the business valuation world, and it can get really technical, and there are varying opinions and this is where, when people ask me about what I do for a living, I think this is one of the areas in which it’s very clear that it’s not a black and white deal. And so my approach is always to look at S Corporations, look at the tax advantages that you have of that flow through corporation, compared to as if it was a C Corporation, and then I incorporate that more than not into the valuation. Sometimes I don’t, in terms of the particulars, but I always consider it.

My approach is always to look at S Corporations, look at the tax advantages that you have of that flow through corporation, compared to as if it was a C Corporation, and then I incorporate that more than not into the valuation.

Jeff: So I would imagine then, if what you’re saying is correct, having multiple entities complicates the process even more, I would imagine. Is that right?

Trisch: It can, for sure. When it becomes complicated, I have given an example once before when I was asked this question and it was when I had started out on my own early on, and I had work, the gentleman wants before that the valuation for him to sell his business. And then, he came back and wanted the valuation to gift portions of two of his businesses to his son. And when I actually delved into the particulars of the two entities, I saw housed within those entities that one was basically a holding company. So there were a multitude of entities housed/umbrella-ed within the one other entity that I had valued. When I delved into it, I thought, “Oh, wow, this isn’t just two. This is actually going to be a lot more to value than what I had initially thought. So it can be real. If you don’t ask the particulars upfront, and a good business valuation analyst or one that’s been doing this for a long time knows all the ins and outs, and knows the questions to ask, and I always do a pre-screening of the engagement before I accept it, and to give a chance not only to see if there’s chemistry there, but also to find out what exactly I’ll be valuing, and see if I have time to do it, because if it’s a valuation of a holding company with 75 contracts housed within the one holding company, then that’s going to take considerable amount longer than just one retail store.

 

Jeff: You’re listening to Deal Talk brought to you by Morgan & Westfield; my name is Jeff Allen. My guest today is Trisch Garthoeffner; she’s Founder and President of Anchor Business Valuations and Financial Services, LLC. Now, let’s say, for example, Trisch, that I own a small business and I’ve got a couple of partners in that business. I would imagine that this is going to take some careful handling because down the line, we always try to expect the best and then we’ll want to prepare for the worst, and that involves possibly some court proceedings down the line if we want to go ahead and sell our business off, or if there are arguments or a split between ownership for whatever reason, there is some animosity there. So, multiple owners involved in a company, tell us how that is treated if that also is a rather complicated process, and if that necessitates really being a little more mindful as far as a the business owner is concerned, and the need to maybe have your business appraised in the very early stages of its existence when you have multiple ownership.

Trisch: Basically, what I suggest for business owners to do, right in the very beginning, when they are establishing the entity, when they know that they will have partners, is to give a business valuation at the point in which the operating agreement, the buy-sell agreement, all the necessary paperwork, is being established with the business being established within itself. And then for the buy-sell agreement, you typically have a calculation formula of some type in there, in which the value of the business and the percentage allocation holding of the business to each of the shareholders, there’s a specific instruction in terms of how that entity portion will be valued.

Frequently, I find that small business owners want to cut corners, they want to save money, and so they don’t necessarily get a valuation in place in the beginning. And that’s not a great idea, because as you mentioned, and many times, you can’t predict the future. And unfortunately, in a lot of different situations, there can be an issue when it comes time for one of the shareholders to sell their fraction of the business, and there’s animosity and then there’s conflict and confusion as to what the actual percentage in ownership is of the business. So I always suggest to the business owners right in the very beginning, and it doesn’t have to be every year that you get a business valuation, but you want to have some idea as to how the percentage allocation of the shareholder’s holding within the business is going to be valued when that shareholder decides to leave and/or sell the portion of his business.

Unfortunately, in a lot of different situations, there can be an issue when it comes time for one of the shareholders to sell their fraction of the business, and there’s animosity and then there’s conflict and confusion as to what the actual percentage in ownership is of the business.

Jeff: Obviously, Trisch, a lot to be mindful of there, when you’ve got different folks involved in the leadership and the management of an organization. And so you really want to be prepared for every eventuality, and be as clear-cut as possible. So let’s go ahead and let’s talk about some other things with respect to equipment and capital, with respect to your business, equipment, machinery; are those things separately appraised, or will that be included in my overall appraisal? How does that work?

Trisch: It really depends on the business. So most businesses that I value are going to concern businesses; which means that the business is not at the point, t’s still generating earnings and is profitable, and the asset value is considered more so as an evaluation. So if you’re a business that’s at the point to where it’s not profitable, and you’re going to liquidate your business, then appraisals are needed for the hard assets. I always consider all three approaches in a business valuation/summary evaluation, and an asset approach is one of the three approaches. I will look at any appraisals that the business owner happens to have, or look at very minimum, hopefully have the balance sheet and be able to look at the assets broken apart and the tax basis of those assets. But unless it’s a liquidation event, for most valuation work that I do, I don’t have to get outside appraisals. If I’m doing a family limited partnership valuation in that situation, I frequently have to get, I have to bring in an outside appraiser, and one that specializes potentially in real estate or in equipment, as you mentioned. And that’s a different type of valuation, than, say, a valuation for a divorce or a valuation for merger & acquisition purposes, and then which case those are more prevalent to look at and obtain, outside appraisals for assets, but in average, I’d say no.

 

Jeff: Let’s say for example, Trisch, and we’re running a little bit down toward the end of our program today; you’re at a cocktail party, a mixer, a networking event of some kind; it doesn’t really matter what kind of event it is, but you are approached by someone who knows what you do, and maybe they’ve had a chance to meet you a little bit, they’re interested in selling their business, but they’re not sure quite what to do as far as first steps; what are some tips, some guidance that you could provide here, general types of things that people need to be mindful of as they’re trying to get their head around the idea that they need to have their business appraised, even if maybe they don’t plan on selling their business right now or even five or ten years from now, maybe it’s long-term, but they need to have their business appraised and they know that; what are some things that you can leave us with as far as takeaways go?

Trisch: Well, I see this a lot and I work with a lot of small business owners; unfortunately, frequently, you get approached by small business owners and people that I know in the community, through different positions that I’ve had that I’ve met through the years, and when they go to sell, they have a business that is profitable, and I know that it’s profitable because of the communications that I’ve had with the business owner, but the tax returns might not necessarily be showing the profitability. And this happens a lot, and I always want the business owners to come to me, at least a minimum of five years, before the time that they consider a sale, so that we can really look at all of the potential discretionary expenses that might be run through the business, that might affect profitability, to look at the way in which the accounts are set up and make sure that all of the expenses are operational in nature.

With business owners, which I’ve been doing several actually right now, happens to be that I give them a quick and dirty valuation of their business. So I might not necessarily have to do a summary valuation, I could do a calculation valuation, in which case we really come through the numbers, and I always put myself in the business owner’s situation of saying, let’s just say hypothetically you have someone interested in your business, they’ve put an interest or a letter of intent on the table and they say, “I would like to buy,” or an indication of interest, “So I would like to buy your business for X amount.” Are you going to feel comfortable with them going through due diligence in your office, and looking through basically all of the information that acquirers look through to verify that the numbers you’re telling them on the financial statements, whether or not they do in fact match up with the tax returns are backed up? And a lot of times, business owners aren’t prepared for that type of invasive due diligence process. And that happens with every acquisition. Business owners need to be really aware that they need to get a true, accurate valuation of their business early on so that they can prepare their business for the sale that will go through at some point or another.

 

Jeff: As a business owner, someone like myself who owns his own small business, the one thing that, I guess I don’t really think too much about when I get up in the morning is, in addition to all the things that I have to do and the clients that I have to work with and satisfy and take care of and fill their orders, the one thing I don’t think about is down the line, is thinking about the day that will come that I might be interested in selling my business, and that it in turn or at the end of the day, the sale of the business is just as important perhaps as the day-to-day operation and generating cash flow and revenue to simply pay my bills and to survive, there’s actually an opportunity, I think, that business owners need to consider that when they’re ready to sell, they have potentially an outstanding pay day that comes along at the end of the line to help them in the retirement years. And so if they’re preparing for that eventuality as they go along, and they’re keeping good, accurate strong records, and they’re doing all the work ahead of time in preparation for that day, it makes your job that much easier. And not only that, but it could help the sales process go more smoothly too at the end.

Trisch: Exponentially, it’s unfortunate because business owners do get caught up in the day-to-day operations of a business, I’m to blame for the same going on. But the bottom line is what happens is I am approached by business owners. I go in and I try to help them. And it’s at the point where they’re at their wit’s end. They’re exhausted, they’re tired, they’ve been working for how many every years, they want to retire, and unfortunately, at that point, it’s too late for us to turn everything around and get everything in a smooth working order for a potential acquirer to come in and have a nice payday. Unfortunately, business owners don’t think about that enough ahead of time, and it’s frustrating for all the parties involved, and it’s not exceedingly expensive to get a business valuation, to get that preparation in place. And you mentioned it, it could potentially make you a lot more money versus not doing that. So it’s extremely important to plan for the sale of your business a minimum of five years in advance.

I always want the business owners to come to me, at least a minimum of five years, before the time that they consider a sale, so that we can really look at all of the potential discretionary expenses that might be run through the business, that might affect profitability, to look at the way in which the accounts are set up and make sure that all of the expenses are operational in nature.

Jeff: Trisch, if there is anyone listening right now that may think, “You know, this lady, I need to talk to Trisch, and I’ve got some questions for her.” How can they reach you?

Trisch: The best way to reach me, I think, is through my phone, through my office, it’s (312) 632-9144, or by e-mail, which is Trisch, “T-R-I-S-C-H” @anchor, “A-N-C-H-O-R-B-V-F-S”.com (trisch@anchorbvfs.com). I have my cellphone on me pretty much 24/7, and I love to talk to my clients and help them out. I don’t charge for initial consultations, and I don’t nickel-and-dime people. I really love what I do for a living, and then I love it when I can get a good result for each and every one of my clients, and that’s what I strive to do every day.

 

Jeff: And anchorBVFS.com is the website in case you want to go and learn more about Trisch before you call, or just get an understanding of Trisch’s capabilities or skillsets, and what she’s been doing, and the clients she’s been working with. Trisch, I want to thank you so much for this conversation. I’ve really enjoyed it and it’s been valuable, I think, for our listeners, and we hope that we can have you back on again sometime soon.

Trisch: Thanks a lot, Jeff, I appreciate it.

 

Jeff: Thanks again to Trisch Garthoeffner, Founder and President of Anchor Business Valuations and Financial Services, LLC, for joining us today. And that brings another edition of our program to a close.

Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you’d like more information about buying or selling a business, call Morgan & Westfield at (888) 693-7834, or visit MorganandWestfield.com. Until next time, I’m Jeff Allen; I’ll talk to you again.