Having tight financial records sounds like a no-brainer, but do you know how often a business appraiser, CPA or business attorney finds errors or omissions or just evidence of generally poor bookkeeping that could actually kill an M&A deal? Oftentimes owners are completely oblivious. T.J. Liles-Tims, a certified valuations analyst and co-founder of BVFF Partners LCC in Oklahoma City, talks about the importance of having properly prepared financial statements and working with someone who can help you uncover issues that could negatively impact the valuation of your company.
Contact someone about having a business valuation done because not all the time is net income, so to speak, the value driver of a business.
- T.J. Liles-Tims
Jeff: Thank you sir. Tell us a little bit about your firm, where you guys are, and who you help.
T.J.: Our firm is located here in Oklahoma City, Oklahoma, hence the name BVFF. We deal strictly with business valuations and financial forensics. The valuations that we do are either for transactions, whether that be from a buyer to a seller, or an estate and gift tax where maybe there is some gifting of shares of a business to son or daughter, or to a sibling. We also do some litigation-type valuation for small, closely held businesses as well.
Jeff: Really, a variety of services here and really would you say that your company kind of exists for use throughout the entire life cycle of a business regardless of really the need for someone to give you a call?
T.J.: Absolutely. We do valuations from start-up companies. In fact I'm in the process right now, just prior to this podcast met with a company that is a start-up and just came across venture capital money. And so we had to do the valuation because of some transaction issues, good issues, not bad issues, and so that's an example of even from the startup. And then also when just after that, I met with a client or just before that met with a client who is giving all of the shares to his two kids. And so there's a prime example of our valuations are from the get-go of the company all the way to maybe the conclusion of the current owners or the founders of the company who are then gifting it to someone else, or deciding to sell that business. So yeah, throughout the businesses is a perfect example.
And so there's a prime example of our valuations are from the get-go of the company all the way to maybe the conclusion of the current owners or the founders of the company who are then gifting it to someone else, or deciding to sell that business.
Jeff: Very, very good, I'm glad we were able to bring that up because it really is important to see that a valuation analyst is there not just in the beginning or not just in the middle. Maybe you're considering, you're preparing your business for sale but it can be there for a number of different reasons and purposes. You mentioned financial forensics. I want to camp out on this for just a moment. That's a clinical term but is one that is come into vogue and has become more popular to hear it thrown around in the industry over the last five to 10 years. Financial forensics, exactly what does that mean to a business owner and why would you be called in to provide forensics, if you would?
T.J.: Most financial forensic issues deal with litigations. If you're not in litigation you're most likely not going to have a use for financial forensics. However, there are instances outside of litigation that maybe someone can come in. A perfect example is we have a deal going right now where the owner believes that one of his employees might be embezzling money. And so in that sense prior to litigation and prior to going through the cost of hiring an attorney they contacted us and asked us to go through the books of the company to determine has this happened, if so how much so that we can maybe resolve this outside of litigation.
Jeff: You guys are really kind of the numbers detectives. You delve deep into this stuff, you go into the details. Are you able to even help, for example law enforcement, do they call upon you to help them with their own investigations?
T.J.: We have yet to be contacted by law enforcement. It's definitely something that we invite and hope that sometime law enforcement does contact us. But especially here in Oklahoma City we have the University of Central Oklahoma that has a forensics college. It's actually a forensics department within the University of Central Oklahoma. And they are actually kind of on the forefront of involving numbers in forensics type investigations where maybe the Oklahoma State Bureau of Investigation, or the IRS, or someone like that, they actually have internal people that will go in and do a forensic accounting or a financial forensics engagement. But there are the occasions where maybe a government agency does contact a third party. We have not been but of course would invite that.
Jeff: I think it bears maybe discussing just really quickly or at least mentioning from the onset, financial forensics can be very, very useful to a business owner basically is what we're talking about here and that if you suspect that there is a loss somewhere, you're not able to track it down but you suspect that there is a loss. TJ has a client right now he's been working with, they can provide the services necessary in order to confirm the dollars lost, essentially the amount lost, and where that's coming from essentially. And so these people provide a service that's very, very important, because after all, TJ, it's important. If you have plans, if one has plans to sell their business and they're losing money somehow, and this stuff is happening behind the scenes and they're not able to trace it, this is something that can certainly impact the value of a company. And when you're thinking about selling your business at some point, particularly if it's in the near future, one, two, three years down the line, this is something you really need to get out in front of.
T.J.: Exactly. There are times when we sit down to do a valuation engagement and I might ask a question that I'm sure we'll get into it at a later point about expenses and where those expenses are going or why this type of expense is so high and the business owners had no idea. And at that time a valuation engagement then turns into a financial forensics engagement to where we go in and see, why is this maybe it's a cost of goods sold account, or maybe it's a meals and entertainment account, why is that account so high and where is that money going?
They actually have internal people that will go in and do a forensic accounting or a financial forensics engagement. But there are the occasions where maybe a government agency does contact a third party.
Jeff: Really, really important indeed, so keep all of these things in mind. Again, financial forensics, this is really kind of a subject where we can have our own show just discussing this one area, and TJ we may have you back to do just that. But what I would like to do is kind of ask you about the wisdom of contacting a certified valuation analyst to come on in. I know that I want to sell my business or be free of it at some point down the line, and I've got a loose game plan of what I'd like to do, but I also know I'm not going anywhere for a while. I've got a lot of things to do to kind of grow my business right now and I'm happy and I'm content to do that. I enjoy going to work every day. It's going to be a while. Is there one though, or maybe two things that I should be doing now anyway to help me at least be somewhat prepared for the eventuality and that it may kind of cut down the workload somewhat later on when I'm more prepared to sell my business? Anything that you can share with us right now about certain things we could be doing in the early stages whether or not we're ready to sell just right now?
T.J.: A couple of things, number one is having financial statements prepared by a CPA or an accountant. So many times closely held businesses, they don't have financial statements prepared. They understand the operations of the business and they know I've enough cash in the account, I'm able to handle the ongoing operation. So just my annual tax return does just fine. So number one is contact someone to get some financial statements prepared whether that's on a monthly basis, or a quarterly basis, just have that prepared so that you see what is going on within the business not just from the operational side but also from the financial side as well. Because the financial piece is what drives the value of a business. And if you know what that value driver is or you may not know, which leads then to number two is getting a business valuation at the moment that possibly selling the business even comes into your mind. And it's exactly it's like what you said, that might be five years down the road, that might be 10 years down the road. Contact someone about having a business valuation done because not all the time is net income so to speak the value driver of a business. And it could be the gross income itself, there are a multiple of what we call value drivers that increase the value of the company and it may not just be the net income of the business. So contacting the valuation professional and having them value the company, and sit down with you, and go through their report and say, “Here's where your company increases its value” and hone in on that as well as the operational piece. Hone in on that value driver to then increase the value. And you know as that time gets closer that you want to exit the business, you know what that value driver is and how to increase it to therefore increase the value of the business.
Jeff: TJ Liles-Tims is a certified valuation analyst and co-founder of BVFF Partners LLC, you're listening to Deal Talk, my name is Jeff Allen. Let's talk about some of those value drivers right now, TJ, just some of the more common ones that you advise your own clients on a regular basis about it, the types of areas where they could improve, or seek to improve the overall value of the company, those drivers.
T.J.: Number one typically is cash flow. Cash flow generally is defined as the net income for the business plus some non-cash expenses which would be depreciation, could be bad debt write-off. It's the cash that the business generates. It's probably going to be the number one value driver. And the reason is that that is what an investor or someone who's looking to buy the company cares about. They want to know if I'm going to put in $10,000 into this business, or I’m going to put in $100,000 into this business, what is the cash that I'm going to get in return. It's not necessarily what is the net income that I'm going to receive, or what is the revenue that I'm going to get, it's what cash am I going to receive in turn for my investment. So that's value driver number one. And number two generally is what we call in accounting overall is EBITDA which stands for Earnings Before Interest, Taxes, Depreciation and Amortization. And the reason is, this is your earnings number before interest and taxes and depreciation, and interest and taxes, especially in a closely held company, can be "manipulated." And when we say manipulated that means that the business can incur as much debt as it wants or as little as it wants, which then causes the interest to fluctuate. In terms of taxes it can pay out large owner compensation, or it could pay out very little owner compensation, which would then increase or decrease the taxes owed by that individual or the business itself. And then depreciation and amortization is the business owner can buy as much equipment as he wants and depreciate it, or can buy as little equipment as he wants and depreciate it. So interest, taxes and depreciation can easily be manipulated. And so if we're talking in terms of selling a 100 percent interest or a majority interest in a business we sometimes will look at EBITDA because that number is not as easily manipulated as maybe a cash flow number or as a net income number.
Because the financial piece is what drives the value of a business.
Jeff: Interesting, and I hope that our listeners are taking notes and if not, heck, this is a podcast, you can come on back and listen to it again. The CVA and what he or she can do for you in the early stages of business ownership. I'm Jeff Allen and I'll continue my visit with TJ Liles-Tims when Deal Talk returns in a moment.
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Jeff: Welcome back to Deal Talk, my name is Jeff Allen, I'm so glad that you could join us for this segment. I'm joined by Mr. TJ Liles-Tims. He's co-founder of BVFF Partners LLC in Oklahoma. He's a certified valuation analyst and we're proud to have him here on Deal Talk today. TJ, we talked a little bit earlier about financial forensics and sometimes you'll go in and you'll find that you've been contacted by a business owner, find out that their business is losing money. And maybe there's a criminal investigation that may go along with that and maybe not. Certainly some of those types of things are handled outside the courtroom and everybody does all of this, and does it with the agreement that things are going to be settled that way. Sometimes, let's face it, companies will be doing their level best and will be losing business in other ways. And that's simply the fact that things aren't going well. It could be an economic climate that is not particularly friendly to a particular line of business or an industry at that given point in time. Someone needs to put their business up for sale and they’re concerned that maybe recent hard times that their business has taken on may impact whether or not they're even going to be able to find a buyer. Have you seen situations where you'll go in and find a business that is in declining value for whatever reason is still able to entertain buyers and find someone who'll take on maybe a ship that isn't necessarily sinking but one that's taking on water?
T.J.: Absolutely. There are times ... Granted if the business is continually losing money, common sense says value is not going to be as high. However, that does not mean that there is no value and the business cannot be sold. The business has assets. Maybe it's a back hoe, maybe it's computers, maybe it's different inventory. The business has assets and those assets can be sold. That has to be taken into consideration, of course that has to be paid back. That in itself, those assets have value. And another reason and another example of when a business that is losing money can still sell to a buyer and a buyer be interested in it is maybe in a strategic move. Maybe that buyer has a business himself and your business is a complement to his business. And he's thinking to himself, "If I can acquire this business, our listeners business, then I can then capitalize on the products that they offer and bring it into my business. And therefore I can maybe double my business." And so from a strategic standpoint and from synergies, a buyer may be willing to buy a company that has been losing money over the last couple of years just because of the complementary aspects of it. And that he knows that some of the expenses of our listeners' business can be eliminated, and therefore might bring it to profitability.
Granted if the business is continually losing money, common sense says value is not going to be as high. However, that does not mean that there is no value and the business cannot be sold.
Jeff: Interesting points. Let me ask you about the different types of valuators that are out there and your business handles so many different types of valuations as far as that goes, TJ. But what kind of business valuator do I need? You can run an entire list out there, does it just kind of matter that the type of situation that I'm in, is that kind of what dictates the kind of person that I'm going to look for to come out and provide me with an estimate on my business?
T.J.: The key thing is to make sure that whomever it is that you retain is credentialed in valuation. In fact the internal revenue service requires that and defined a qualified appraiser as someone who is certified by one of the credentialing boards and often does business valuations. And there are different associations. The National Association of Certified Valuators and Analysts is one. The Institute of Business Appraisers is one. The American Institute of Certified Public Accountants, the American Society of Appraisers, those are all fantastic associations and they all have credentials for someone who is doing business valuation within each of those associations. So I would say the key thing is make sure that whomever it is that you're going to hire is certified and that they do it on a full-time basis. Used to doing it on a full-time basis was not as key as it is today. With today's technology and today's information the value of businesses is constantly changing and the information available to value those businesses accurately is constantly changing. So you want to make sure that that person is doing valuation work on a daily basis and understands what the economy is doing to the value of closely held businesses and pull up new concepts out there, and what the different states, and federal courts, and the tax court, how they look at valuation. That's probably more than anything the biggest key to look for when you're looking for an valuation professional.
Jeff: What if I had a partnership? I've got partners that are involved, maybe just one and I know that I have to make some decisions, we have to make some decisions, are most valuators essentially skilled in being able to come on out and provide me with valuation of our business whether I've got a partnership, or maybe I'm getting ... On a personal level, the wife and I aren't getting along, we need to get a divorce. I'm probably going to have to have the business appraised in case things fall apart there. If I pick up the phone and I call the first guy in the phone book is there going to be any guarantee that he's going to be able to help me out with any given situation that I find myself in?
T.J.: Most of the valuation professionals that I have been around, again falls back to do they do this on a full-time basis because if someone does not feel that they can do that valuation they're going to tell you that this is something that's outside of my realm and therefore call this person. The valuation community is very tight knit and most of us are not against turning something down and sending it to one of our colleagues and saying, This person deals more with that area and he/she would take care of you very well so can you pick up the phone.”
To answer your question, being certified in evaluation, in most instances yes, a business valuator can value any kind of a business. Now, you're going to see more and more people are specializing in the types of businesses that they do. Now, the second part of your questions in terms of maybe it's a husband and a wife getting divorced, the key there is going to be is, is this someone who has been accepted in the courts as an expert, and how comfortable are they in a litigation setting. Some of my colleagues that I talk with on a daily basis are not comfortable in a litigation setting and so therefore they're most likely not going to take that type of an engagement. It takes a different type of person to enjoy getting up on a stand and being hammered with questions as to valuation. But like I said, it goes back to someone who does this on a full-time basis is going to know their limit. So question number one is, is this what you do? Is valuation what you do to earn your living, or is it just something that you do that earns a little extra cash? That would be the first question as our listeners need to contact someone is: do you do this on a full-time basis and are you certified?
To answer your question, being certified in evaluation, in most instances yes, a business valuator can value any kind of a business.
Jeff: You really should consider this as an interview. You're going to be talking to someone who really does have a lot to say about the valuation of your business. After all, that's why you're hiring them. So you want to make sure that you hire the best. They're going to be completely honest. You may have an idea of how much you want your business to be worth but wouldn't you really rather know the truth from someone who has a lot of experience, depth of experience, has outstanding references, and people who really know their business. Really important things to talk about there, TJ, and I appreciate you bringing those up.
Real quick, our show is running down on time this particular segment. Any other piece of advice or key take aways from our conversation today that you'd like to leave our audience with? Maybe they are considering, we've got people who might be considering having an appraiser come out for the first time, talk to them about how much their business is worth. Before they do that, before they pick up the phone and call them, any advice at all that you'd be willing to share that could help them in their decision making in bringing somebody out to help them place a value on their business?
T.J.: Number one would be referring back to my earlier comment in terms of having financial statements prepared and being familiar with those financial statements. Knowing what different types of expenses this business incurs and which of those expenses are pivotal to the business, and which of those expenses are what we call discretionary expenses. Are they expenses that not really has anything to do with the business but I arguably can write that off as a business expense? Be familiar with that. So closely held business owners, they know the operations of their business. That's their blood, sweat, and tears. That's exactly what they have done for their whole life, and so they know the operations. So the piece now as you start approaching exiting the businesses, you've got the operations, you're an expert at the operations, now become an expert in the financial piece of your business. Know how your business runs from a financial aspect. And lastly is I cannot stress enough, when you interview a valuation professional make sure that individual is certified. There are professional standards that they have to abide by if they are certified that just protect you, and know that they have training in valuing businesses.
Just recapping, one is become familiar with the financial statements of the business, and number two is make sure that whomever you hire to do the valuation of your business, make sure that they are certified, because after all they're valuing your blood, sweat, and tears, so make sure that they have the appropriate background to do it.
Jeff: T.J., no doubt we have people in our audience right now who might be nodding their heads thinking, you know what, this guy knows what he's talking about. They may have questions that are specific to their business. How can they reach you? Where can they contact you?
T.J.: They can absolutely call the office here at our Oklahoma City office. We have clients all over the US. Luckily, here in Oklahoma City we're centrally located. The phone number here to the office is 405-608-8805. And then the best email to reach me is firstname.lastname@example.org.
Just recapping, one is become familiar with the financial statements of the business, and number two is make sure that whomever you hire to do the valuation of your business, make sure that they are certified,
Jeff: There you go, email@example.com. With that, TJ Liles-Tims, we're going to have to leave it there. Thank you so much for joining us today on Deal Talk, it's been a pleasure.
Tony: Thank you Jeff, I really do appreciate it.
T.J.: That's T.J. Liles-Tims, co-founder of BVFF Partners LLC in Oklahoma City.
Deal Talk has presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. If you think you're ready to sell your business or you're thinking about buying one for that matter, call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing and I mean rapidly expanding list of small business experts make sure to join us again here on Deal Talk. I'm Jeff Allen, thanks again for listening and we'll talk again soon.