You can’t get to where you want to go if you don’t know where you are. Have you taken a close look at your numbers? If you need to build the value of your business, where do you start? Our guest on this segment of “Deal Talk” explains why a professional valuation (or appraisal) is critical to understanding your business’ current situation. He also discusses the key value drivers for businesses that are looking to improve more than just top line growth. Mr. Marcus Sullivan is a Certified Valuation Analyst and Founder of Sullivan Consulting and he offers a fresh perspective gleaned from working with a range of respected global clients.
Each valuation is a unique process where we really sit down with our client, understand their vision, understand their goals, and get into the numbers.
- Marcus A. Sullivan
Jeff: Well, thank you, Sir. I hope that I can call you, “Marcus?” Let’s start by talking about reality versus what we want reality to be. And you’ve been in business, from what I understand, Marcus, for about 15 years. Is that correct?
Marcus: Yes, that’s correct.
Jeff: Some business owners, and probably so many, may have, what they believe is a fairly good idea of the value of their business. After all, they’ve owned their businesses, operated them, and have run them for some time. They’ve been profitable and they’ve done it for maybe 25-30 years, whatever the case may be, maybe 10 years, whatever. But often times, what they believe it may be worth, and what a professional appraiser such as you, says its worth, may be very, very different; vastly different, in fact. Have you found this to be the case?
Marcus: Yes, indeed. We’ve had with most of our cases, we’ve actually witnessed the fact that when we have our clients come in to have the valuation performed of their business, there’s actually a value gap between what they perceive the value of their business to be, and the current reality; and that’s because in most cases, they don’t really understand what are their key value drivers of their business. That’s the main reason. And that is because they have a perception of value that it’s mostly sentimental and passion-related.
So, when we really get down to the numbers, there are different aspects of the business, for instance: growth, profitability, cash flows, that they are not able to really understand and make the right decisions on the day-to-day basis, to really increase that enterprise value. So it happens to us that in most of the cases, this perception is really minimized when you’re able to conduct the business valuation, engage in the analysis of really getting to know the numbers of the business, what is helping your enterprise value increase, what are the risks that your business faces, and how to minimize those risks to really make sure that at the end of the day, your investment value is as high as possible.
We’ve actually witnessed the fact that when we have our clients come in to have the valuation performed of their business, there’s actually a value gap between what they perceive the value of their business to be, and the current reality; and that’s because in most cases, they don’t really understand what are their key value drivers of their business.
Jeff: Marcus, what do you say, how do you help those people that work through that process? There may be some disappointment certainly in the beginning after they’ve had a chance to look at your numbers that you come back with, and this applies to everybody. There’s so many people in your industry who are working with businesses that do the very best that they can to get these companies the value that they really want to get; but how do you address this with the business owner? I would imagine that sometimes, it’s got to be, there are some emotions involved, is that correct?
Marcus: That’s correct, Jeff. Actually, the way we engage our clients is really understanding their vision. Where do they want to be five years from now, three years from now, and that depends on each case. So, it’s really important, first of all, understanding the current situation of our clients, what’s the state of the business, what are the main opportunities and challenges as well, because we often see different case scenarios. We don’t only work for valuation in the United States, we work for valuations internationally. And of course, each business is different. So we really, first of all, want to make sure that we understand what’s the current situation of our client and where is he headed, where would he like to be three – five years down the road. After that, we really work a strategic plan where business valuation is a really important part of that strategic plan.
We really want to make sure that the client is able to see his enterprise value meet his desired number, in a way, three to five years from now, so really break down the business into what are the main value drivers, and understand, and go through with the client to really make sure that he understands what it is at the end of the day that I’m doing that really is helping me increase my enterprise value. And what are the current, and either financial, operational, or legal risk that I’m facing with the business now, and work those through to make sure that we’re able to minimize risk. We are able to mitigate those risks with enough time; another thing is that we see clients come in either because they have a potential offer from a potential buyer, and they really need to get this done very quickly. So it’s really important to get the business valuation done with enough time, and really understand what the client needs and current situation based on that. We work a plan out where business valuation is an integral part of that business.
Jeff: So making sure that you work with a professional valuation company, an appraiser such as yourself, Marcus, or another that you might trust or that you’ve been told about. Part of, from what you’re saying, of getting the value for your business that you would like to have three years from now, five years from now, ten years from now, whatever your plan is, is to make sure that it’s revisited by a professional appraiser, that you follow a course of action, a game plan to get you where you want to be. Is that correct?
Marcus: That’s correct, Jeff. One of the things, and this is really important, a valuation is a dynamic process. It’s not a static process. It’s very dynamic. And what I mean by that is that actually, when we’ve had a valuation engagement from the past, there’s not been a single valuation where the client, where we’ve reached the ceiling, let’s put it that way, so there’s probably, 15% - 20% potential of getting your enterprise value increased. So we work with a client and define a very specific path as to how to meet those goals in the future, and preferably, what are the three core areas where that’s the low-hanging fruit where we can work together with the client, making sure that we’re both on the same page, understanding what are the value drivers of the business, and hopefully by revisiting on an annual basis, by revisiting that valuation analysis, time by time, we’re able to increase that enterprise value at the end of the day.
We work a plan out where business valuation is an integral part of that business.
Jeff: We’re talking with Marcus A. Sullivan. He is with Sullivan Consulting Incorporated in Puerto Rico. He has 15 years of experience in the consulting field, and as an appraiser, Marcus, just a few moments ago, you touched on the concept of the value drivers in a business. From one company to the next, is there, or are there the top three, or the top five main value drivers from business to business that you can talk just a little bit about so we can kind of have a real, clear view of what these key areas are that we really need to be mindful of?
Marcus: Sure. So really, there are, based on our experience, of course, there are key value drivers that we think could help any business in any industry as of now. So one of the very important areas that we like to address with our clients is making sure that there’s growth. So really, having growth in the business, it’s very attractive and really increases your enterprise value. Another aspect critical to valuations is profitability. So you want to make sure that you’re not only growing, but you’re growing profitable. So that’s really important. At the end of the day, having healthy cash flows, is really key to making sure that the enterprise value and that valuation perception that the client has in his mind, well, with those healthy cash flows, stable and predictable cash flows, which can really help your valuation increase.
Other than what I just mentioned, it’s really important to have recurring revenues. So at the end of the day, an investor, someone, a potential buyer that’s willing or coming, or stepping into the business, he wants to see recurring revenues. He wants to see a business model that’s well-diversified. So at the end of the day, you don’t have customer concentration in one key area. And something really, really important, Jeff, is having solid management. At the end of the day, it’s not investing in a specific project, you’re investing in people. So you want to see a solid team that’s behind that business that doesn’t depend on any specific person, rather it has a well-put-in-place management team that has the experience, the knowledge and the commitment to continue with that business into the future.
Jeff: Okay. So we’ll go ahead and we’ll reset those, or touch on them again. Growth profitability, cash flow, recurring revenue, and having a solid team in place are the five key value drivers that from business-to-business, from your experience you’ve seen, can have a true impact on helping a business owner get the premium value that he is looking for from his business. It’s all part of that plan that we talked about earlier, stretching out, looking at your business from a bird’s eye view over three years, five years, ten years, and whatever that time horizon might be, leading up to the day when you might decide to go ahead and sell your business. So I’m just talking in general here. So, Marcus, let’s talk about the things that make businesses, that separate them, from your perspective as an expert on business valuation, what are some of the areas that best define the unique differences from one business to another?
Marcus: Okay. Well, you have businesses that are very scalable, that’s really important. Again, touching with the key value drivers, a question that you asked me before, having a business that is able to grow, in other words, is able to scale up, it’s something very important because most investors or potential buyers will be willing to look into a business that has potential economies of scale and economies of scope. So that’s really important at the end of the day. Again, the people behind the business is what makes a difference, because you want to make sure that you have the right management put in place to make sure that they can implement that business model, revenue model at the end of the day, and differentiate itself from the rest of the players. Also, it’s really important that you have a unique and differentiating product or service that can give you branding, and that can differentiate from your competitors locally or regionally. So those are really important factors that factor into the business valuation analysis. And based on our experience, it has helped differentiate one player from the rest.
Having growth in the business, it’s very attractive and really increases your enterprise value.
Jeff: You had mentioned a little bit ago that you provide valuation for those companies that do business internationally, not just in the United States. So let’s talk a little bit about that and how that is treated a little differently with manufacturing facilities, particularly of interest here, your company manufacture. Your home base is the US, but you’ve got manufacturing operations overseas. There must be a lot more involved in that process, I would imagine, conducting these kinds of appraisals. Tell us a little bit about the process there. And what kind of time is required and what are some of the differences between these types of valuations, the complexities that are involved in terms of providing proper appraisals for those types of operations?
Marcus: So, each valuation is a different project. Each valuation is a unique process where we really sit down with our client, understand their vision, understand their goals, and get into the numbers. When you add the international factor into this equation, it’s really much more complicated in that, because then you start to see other factors that could really, from a qualitative perspective, could change that valuation. And I’m talking about sovereign risk, if you have the manufacturing facility that’s doing business in a country where it’s pretty unpredictable, unstable, things are not as safe to do business as in the United States. So those things could really change the value of the business. When we do a business valuation internationally, first of all, we want to make sure that those are aligned with the GAAP principle accounting, so you want to really compare apples to apples. After that, we sit down and normalize all the financial statements. So we want to make sure that we are really concentrating on the business with operating assets and we really want to understand the operating income statement.
Having done business valuations internationally, you have a different set of challenges, not only from a legal perspective and from a financial perspective, but more importantly, doing business internationally, you have another set of challenges that you’re really not integrating into the equation of doing business valuations in the United States. For instance, the currency exchanges, those are very important as well. Usually, when we do a business valuation, and if we consider these kinds of cash flows, we don’t take into account currency fluctuations because we’re doing it in a dollar-based economy. Now, if we’re doing a valuation of a manufacturing company that’s has 100% of their revenues tied to euros, then things are pretty different, and so it gets much more complicated than that. So you really need to make sure that you not only understand the main factors of a business valuation engagement in the United States, but you’re also conscious about the different challenges such as currency fluctuations that you may have when you’re doing business abroad.
Jeff: Marcus, I know that you have pretty much a full service team there, Sullivan Consulting, but is there the need that you’ve ever had or could have in the future that you’d have to go out and contract the services of a third party, perhaps in the other country where there is that outsourced location set up in order to complete the valuation process?
Marcus: Yes, right. Exactly. So, for instance, I’ve had to hire IP attorneys when we’re evaluating the business. And there is a huge percentage of that enterprise value tied to the intellectual property. Then, I want to make sure that I bring in an expert, an IP expert to make sure that we address those issues early in the process. Also, when we’re going to do a business valuation in the country and we’re not familiar with the legal aspects, and analyzing all of the legal documentation that’s included in the business valuation engagement, we also bring in experts that can really add value in the process and make sure we really see the whole picture. And so, that’s the thing that we’ve done in the past. Although we have a pretty solid team locally, when we do business internationally, we bring people that we’ve either been referred to or done business in the past, and they can add value to the process.
Having done business valuations internationally, you have a different set of challenges, not only from a legal perspective and from a financial perspective, but more importantly, doing business internationally, you have another set of challenges that you’re really not integrating into the equation of doing business valuations in the United States.
Jeff: Marcus Sullivan is the Founder and Managing Partner of Sullivan Consulting Incorporated based in Puerto Rico, and they do business with companies all around the world, and of course, in the United States. You’re listening to Deal Talk. My name is Jeff Allen. Marcus, let’s take this just a step further. We’re going to go the other way though rather than talk about businesses with brick-and-mortar setups, other countries, maybe they’re based in the United States and they have satellite facilities or manufacturing plants in other countries. Let’s talk about online businesses, those companies that are strictly online, maybe they sell physical goods or services, maybe they provide strictly downloadable digital information for sale only. Have you had any experience with appraisals, these types of companies, and is the need for an appraisal just as important as for a brick-and-mortar type of business?
Marcus: Great question, Jeff, actually, we’ve done business with online-based companies. I would say that an appraiser, is needed for every business, no matter what industry or country they’re doing business in. It’s really important to understand again what the key value drivers are. If it’s online, you have a different set of challenges that the traditional business would have. So it’s really important to understand where is that revenue coming from? Is the business model stable? Is the customer pretty much diversified? What are the set of challenges that that company may be facing financially, operationally, legally? So no matter what kind of industry you’re in, you still need the business valuation or still, or I would recommend it pretty much. Like we said before, this is a dynamic process. It’s not unique in defense that you do what you want, and that’s it. So it’s really recommended that either if it’s online, you need to have a different set of views. You really need to reverse that engagement and understand what is it that affected the business two years, three years, maybe 18 months down the road. What are my current challenges? What are my current competitors? What’s the industry’s set of strengths and weaknesses. And other than that, make sure that you’re on the right path to increase that enterprise value.
Jeff: You know, Marcus, I just had a thought, just spontaneously came up, and I’m thinking to myself there are probably people in business, maybe they have – they work out of their home, maybe they go downtown and they’ve got a small office space that they rent, and they’ve been in business for some time. But there may be those who just feel like their business is going to die with them when they go, or that there might be someone in their family to take over when they’re finished and they’re ready to retire. But maybe also that if they believe that their business is going to die with them, and that’s what I think many people who have home-based businesses think, that they don’t really consider that their business has a value, and that in fact, it is something that they could sell and get something out of it. Have you ever found in the past, just talking to people, maybe a casual conversation at the café or something like that, that there are situations where people may not ever have considered that their business could be appraised for a certain marketable value that could provide them with a return that they may have ever considered?
Marcus: Indeed, Jeff, I’ve seen people come up to me and say, “Look, why would I conduct a business valuation? This is a lifestyle business. I really don’t want anything out of this, because I know that it has to have, definitely have any value.” So this is something that we’ve addressed in the past. We’ve had a case where we have this guy, he was working out of his home. He had very valuable clients. I couldn’t say that he saw that he had a solid management team, because that wasn’t the case. But he had a revenue model that was attractive. It makes sense, and although it was very small, his business was recurring. He made a lot of money. His margins were very healthy. And he had a business set up in such a way that his clients were able to constantly renew his contracts because he was adding value and he didn’t understand and he didn’t see this reflected in a way that maybe some other people could have done it in the past in terms of, “Look, I have something valuable. I know that I could scale this up. I know that I could bring management from outside and pump the business.”
So really, it’s really important that when you run into people that have a lifestyle business, sometimes you have key value drivers within that business that probably the owner doesn’t realize. And what’s important, again, doing the business valuation with these people is really asking: what’s the differentiating factor? What’s the unique factor that your business has and try to see if we could scale it up, let’s see if we could bring some people from outside, bring management, maybe bring an investor that could be an active partner of the business and really take your business to the next level. That could add value to the business, making sure that you continue with that path and making sure that in the case of this gentleman, that the clients continue and remain with the business and the main areas of the business, there’s business continuity.
We really work a strategic plan where business valuation is a really important part of that strategic plan.
Jeff: Wow, that’s fascinating. So right there, what you just illustrated is that, in fact, your business can be a means to an end, where the end is. Not only have you been able to provide for your family or make money and have the lifestyle that you enjoy now while you operate the businesses. And some businesses require a lot more work than others. But at the same time, even if you’ve never really considered it, and you’ve simply used your business to pay the bills and you’ve done with it all that you could do, at the end of the day, you may have something in fact that is marketable, that does have value, and very positive value indeed, that you could benefit from at the end of the line, fascinating discussion, fascinating question, and something that people, I think, probably more people should really give a lot more thought to the markets. And I appreciate that.
We’re running a little short on time, and this discussion has gone very, very quickly. It’s hard to believe that we’re almost done for this particular segment of Deal Talk. Let me ask you just what are some of the important parting words of advice or guidance you’d like listeners to take away from our conversation today when it comes to maximizing the value of their business, getting all that they should out of their business when working with a professional appraiser?
Marcus: Well, that’s a great question, Jeff. My takeaway advice to listeners would be to really sit down with a valuation expert and no matter what time we have in mind, what time frame do we have in mind, really sit down with a valuation expert, walk through the business, walk through the main value drivers, and really seek a long-term plan. Again, this is dynamic, so you may have the business valuation done today, and you may not be 100% happy about it. But the good thing about when you do things with enough time is that you can work out a plan, a financial plan, where it could – so you can work with an evaluation expert hand in hand, and you could set up a plan so that you can increase the enterprise value.
Let’s say that someone comes in, and he could be interested in increasing the enterprise value. And he has 18 months from now, so we could identify what are these – the low-hanging fruit so that we can work out this plan and really make sure that the enterprise value is up. When we work with a client and we have enough time, we’re able to adjust and monitor how the work is done and how it is progressing. What are the things that he’s continued to work on? How can we minimize weaknesses? And again, making sure that we go hand in hand throughout the process with the client. At the end of the day, he may see his enterprise value go up 15%, 20%, 30%. We don’t know, it depends, but at the end of the day, having enough time, having the right plan, and having the right expert right next to you, it could help you reach your goals.
A valuation is a dynamic process. It’s not a static process. So you may have the business valuation done today, and you may not be 100% happy about it.
Jeff: Marcus, if someone has any questions and they’d like to go ahead and get in touch with you, how can they do that?
Marcus: Sure, Jeff, thanks for asking. They can either call me, my direct number is (787) 708-6800, or my e-mail is “M” as in Marcus Sullivan, “S-U-L-L-I-V-A-N” @sullivanconsultingpr.com. That’s “S-U-L-L-I-V-A-N C-O-N-S-U-L-T-I-N-G P-R”.com. I will be glad to answer any questions that anyone has.
Jeff: And that, by the way too, Sullivan Consulting PR is the home address for your website which is bilingual too, is it not?
Marcus: That’s correct, Jeff.
Jeff: Okay. Very, very good. Well, Marcus A. Sullivan, thank you so much for joining us on Deal Talk; I really enjoyed it and we’re going to have to have you back on again in the future.
Marcus: Pleasure, Jeff. Glad to be here with you. Thanks for inviting me.
Jeff: That’s Marcus A. Sullivan, CVA, Founder, and Managing Director at Sullivan Consulting Incorporated, and we want to thank him again for joining us today on Deal Talk 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, my name is Jeff Allen. We’ll talk to you again.