Owners of small companies that do business internationally will be interested in this edition of “Deal Talk”. You’ll learn about some of the unique issues and considerations that global businesses may face in preparation for an M&A transaction. In our changing world, we need to have a clear understanding of the industry and the economic forces at play across the entire globe. Our guest, Walter Blijleven, CPA and co-owner of Curacao Financial Group, will explain how appraising global businesses has become more complex in recent times and what you can do to help simplify the process while at the same time building value in your company.
An important part of a good business valuation is the research into the economy and the industry the specific business operates in.
- Walter Blijleven
Jeff: What I'd like to start to do is maybe, have you tell us Walter, if I may call you Walter, a little bit about your company, what it is that you do sir?
Walter: Thank you Jeff. My company is based in Curacao, which is a small island in the Dutch Caribbean area, in the South Caribbean, just north of Venezuela. The Curacao Financial Group is active in the fields of business valuations, value improvement programs, and specifically capital raising. And our primary markets are the Caribbean Islands and the northern countries of South America.
Jeff: Very good sir. You work with clients who have businesses with brick and mortar locations and customers really across the globe. Maybe you've had some past experiences with these types of businesses that you can kind of talk to us just a little bit about. For those business owners who are looking to sell their global business, how complicated is the valuation process compared to a company that simply does business domestically or locally?
Walter: Jeff, indeed, it could be a little bit more complicated and I'll explain to you why. An important part of a good business valuation is the research into the economy and the industry the specific business operates in. In that sense it can be more complicated to analyze a company with customers around the globe. Because you will have to define which market, for instance which countries or which regions of the world the company sells its products, what the economic outlook is for those markets, etc. Of course, this will normally be a little bit less complicated for a company that does its business only domestically. I've got an example of a company that was once my client. It's active in the hedgefundadministration industry. Basically it has clients in Latin America, Asia, and Europe. If you want to value this business properly you will have to really look into the markets in which the clients are in to really have an understanding of what those economies in those regions are going to do in the next upcoming years. That will have an impact on the valuation at stake.
In that sense it can be more complicated to analyze a company with customers around the globe. Because you will have to define which market, for instance which countries or which regions of the world the company sells its products, what the economic outlook is for those markets, etc. Of course, this will normally be a little bit less complicated for a company that does its business only domestically
Jeff: That really does require an ample amount of research and due diligence. This is not something that happens overnight. Obviously, someone has a global business. They need to realize that it can often be a deliberate process in order to get all of the information necessary to proper value that organization. Let's suppose that I also have a global business but this is a little bit different. Inthis day and age so many people conduct business online. Let's say I have my businesses strictly online. I don't have any manufacturing facilities. In fact, I don't produce any physical products and all I provide is information for sale, documentation, downloadable, digital files. We're all familiar with those, PDF's and so forth. And maybe I do revenue anywhere from a million to $5 million a year simply selling downloadable information, no inventory. Is evaluation for my simple business necessarily a simple process or not if I don't have those brick and mortar locations and it's all done online? Explain if this is difficult, is it simple, tell me about that.
Walter: The fact that it's simply online and that it's only about downloadable information, it's not really a critical factor by itself, let's say to conclude in advance if this is going to be a simple or difficult evaluation. Although the setup of this business may look simple at first sight, you don't know yet how popular demand will remain for, let's say it’s downloadable information. And therefore you really have to analyze thoroughly in what life cycle this company is or thespecific part of the industry thatthis company is in. And that can also have a great impact on the evaluation. You have to really do thorough research into the industry and the company itself, and the products that it sells to really get a good understanding if this is a straightforward evaluation approach or that there are signs that this business may already be over the hill, that the product is already getting a little bit obsolete and then this might result in a valuation that might be less easy to perform. And the outcome of it may also be a disappointment for the owner.
Jeff: We're talking with Walter Blijleven. He's the co-founder of Curacao Financial Group and you're listening to Deal Talk. My name is Jeff Allen. Thank you so much once again for punching in and listening today. Mr. Blijleven in the valuation process what are some commonly found red flags that indicate signs of trouble that may drastically impact the value that you've assigned to a business?
Walter: Well, the first ones that come to mind maybe to start with of course, deteriorating economic climate in the markets where the company operates in. Second is the fact that the business may be operating in a mature industry. For instance the manual typewriting industry was once flourishing at a certain time. Let's say these instruments became obsolete and therefore the value of those companies decreased dramatically. What also is very important red flag would be in the intensity of competition or substitutes that attack the revenue that was made in the past and will not be made any more in the near future. What I'm also very sensitive for is let's say the stability of the company itself, for instance if there's a high turnover of key personnel. Normally that would be a red flag to me because if key personnel come and go too fast, it might indicate there's something wrong with the company.
What also is very important red flag would be in the intensity of competition or substitutes that attack the revenue that was made in the past and will not be made any more in the near future
Jeff: When you see these red flags popup, Mr. Blijleven, is this one of those things where you sit down and you see a bunch of them. Let's say you kind of get the sense that this is going to be problematic. This is a real concern. Do you at that point have to sit down with your client and say, "Hey, listen. These are the things that I found. We need to discuss these items one by one." How important is the communication midway through the process to let them know that the value that you're going to assign potentially to their company is not going to be anywhere near what they expect?
Walter: Of course, this is very important if you want to really manage their expectations. So if after your initial work you already noticed that this is not going to be a success story going forward. Definitely I will sit down with the owner and I will explain to him why I come to these preliminary conclusions, and of course I want to hear his feedback on it because in my opinion it's better that he hears from me, and he hears it from me from the start, than let's say I make an evaluation that's too optimistic and then later maybe once he tries to sell his company or something like that nobody would even get near this value that I gave at a certain point in time. So first of all I would be a bad professional if I would make a too optimistic valuation. But second of all it is my personal style to be really straight forward and be very open to my clients of what is positive and what is negative. And if there are too many factors that are negative or to be called red flags, well, he has to be aware. Because as of that moment he might start repairing those red flags or try to change the course of his business in the upcoming period.
Jeff: Have you seen that often when you sit down with a client? You talk about these types of issues that come up. Are you able to basically give them some kind of assurance that they have time to work on these issues, to correct the problems so that you can come back, revisit this in another year, or two years, or whatever the case may be, so that they can take and hopefully increase the value of their company to a level that they're a little bit more comfortable with?
Walter: Of course. It depends a little bit on the red flag that I've seen and if some let's say it could be like maybe repaired so to speak rather quickly; with others, maybe, let’s say if there's a bad company culture and that bad company culture let's say is resulting in a high turnover of key employees. That culture doesn't change overnight within a company, so that might be a little bit more complicated to fix so to speak. In general, a business valuation depends a little bit on the objective. You do have business valuation that are let's say, part of a legal procedure that you just have to be the neutral evaluator that really execute the evaluation and explains to the owner what are the pros and the cons, and come up with an amount. But if you do like an evaluation that is like part of an upcoming selling now or within three to five years, of course, then it might be very interesting for the client to hear also the ideas from you not only giving the value of this company as of today, but also what it could do in the upcoming three to five years or even the shorter period to make his company more valuable and what are his major, or key, action items that he has to address then.
That culture doesn't change overnight within a company, so that might be a little bit more complicated to fix so to speak. In general, a business valuation depends a little bit on the objective
Jeff: Walter Blijleven, the co-founder of Curacao Financial Group is my guest today on Deal Talk. What I'd like to find out now from you Walter is what are some of the most important things that any business owner can do to help prepare for their company's valuation process. There area number of people who would be listening to this program right now and they are making considerations for the future. They're making some determinations about when they're going to sell or how soon, and about the need to get an appraiser to help them place a value on their business. What is it that they can do right now to help prepare their company for that process?
Walter: The first thing that comes to my mind is to me it's still very important that a company has audited financial statements that preferably go back at least three years. If the owner so far decided not to invest in audited financial statements for one reason or another, to me, and I've seen this quite often, it is a set back from the start to start with financial statements that are not audited or not even reviewed and maybe only compiled by an outside accountant, or not even by an outside accountant. It makes a false start to me. So in any case if you're really serious about selling your company, and you have that in mind for the upcoming three to five years, make sure to audit your numbers right away.
Jeff: I think that's really important key to distinguish. We're talking about audited numbers. We're not talking about internal audits, we're talking about independently audited figures from a third party source, is that correct?
Walter: That is completely correct.
Jeff: Let's talk about now some issues. We'd kind of started our discussion talking about international businesses or global businesses and how valuing those business maybe a little bit different, and some of the things that you need to think about, and some of the things that a business owner needs to be concerned about when they're having their business appraised. What are some issues that may come up, Walter Blijleven, that I may face? If I'm a business owner and I want to sell my company, and maybe I'm getting some interest from buyers who are offshore. Maybe they're from overseas or they're across the border and they're interested, they're looking atmy business. What are some issues that may come up when selling mybusiness to an international buyer?
Walter: I would say that in general an international transaction or a transaction that might occur in the near future is more complicated since there are more and there are different legal text and cultural issues to be dealt with, and even sometimes language differences could also result in additional complications. On the other end I have to say in the past decades more and more cross border transaction has taken place. The world has changed, it has become a global village and buyers and sellers out of different countries or region speak more and more the international language of business. So it's maybe less wearisome than it would've been like let's say decades ago. In my experience, what would really help is to hire the right advisers who have experience in executing international transactions because ifboth parties, let's say the seller and the buyer, do have the right advisers,theydo speak the common language then all these complications on the legal text or cultural aspects would be reduced tremendously.
So in any case if you're really serious about selling your company, and you have that in mind for the upcoming three to five years, make sure to audit your numbers right away.
Jeff: If I wanted to buy a business... We're kind of switching gears a little bit. Let's kind of look at things from the buyer's perspective now, Walter, if wemay. I'm looking to buy a business. How can I secure funding for that purchase? I mean, do I have to go through a bank, particularly if it's an international purchase? Or are there other means of funding that purchase?
Walter: Of course, you don't have to go through a bank. It really depends on your own situation. A bank could provide you with part of the funding. But in my experience, normally a bank will never fund a transaction for the full 100 percent. In my experience, that is in the market that we are active in, so that is the Caribbean markets and part of the South America, a bank will require at least 30 or 40 percent equity to fund a transaction amount. So therefore it's good to consider other sources of funds available like private investors, even a rich uncle or private equity funds. It also really depends on your own reputation and track record, your own network, if you have a lot of assets personally that could be used in a certain transaction or secure a certain transaction as well. And also what I would like to mention here is that the bankability of your business that you’re going to buy is a very important aspect. If you are considering to buy a company that your bank or your funders don't really believe in, they will remain hesitant to support you. But if you are about to purchase a company that is very positive and it has a great future ahead of it then of course it will be easier to attract different kind of funds. So to better prepare yourself, the more you’ll improve you ask to get financing from third parties. That's basically the bottom line of it. Of course traditionally going to the bank is the most common source of funding and it's still very viable ones, but it's not the only one.
Jeff: Let's say then, again, I'm the buyer and I understand that a company is coming up. It doesn't have to be an international company, it can be one right down the street. And this is something that I'm very interested in. I've been watching it. Maybe I have even done business there, and I understand the company is going to be listed soon and put up for sale byits owner. But there is the valuation process that needs to take place first. How long might I wait for that? As the buyer, someone who is looking at company A to buy that company and make an offer. How long will I have to wait first of all, Walter, for your company, or any appraiser for that matter to do its work and to put together a value for that?
Walter: What you are asking now is I as a potential buyer engage an evaluator to make a calculation about the business you have an eye on, is that correct?
So therefore it's good to consider other sources of funds available like private investors, even a rich uncle or private equity funds. It also really depends on your own reputation and track record, your own network, if you have a lot of assets personally that could be used in a certain transaction or secure a certain transaction as well
Jeff: What I'm thinking of is let's say I've got plenty of time. Maybe I already own a business and I got my own work I'm doing. But I see a company I'm interested in buying. And I learn that the owner of that company is contracted the services of Curacao Financial Group or another business valuation company. How long does it take your company, or might it take your company, to go through the process from start to finish of placing a value on that company before it goes on for sale?
Walter: That could go rather quickly depending of course on the quality of the homework being done by the owner that wants to sell. Again, as I mentioned earlier in this conversation, if he has been preparing for an upcoming exit for some years most likely he knows already what is, let's say critical for a good exit. So if he indeed already worked with an outside auditor to have his financial statements audited. And if he has all kinds of material already and information collected thathe knows what is necessary for a good valuation. In other words if he already has all the information handy when I or the Curacao Financial Group or any other valuator comes in then basically the process can go pretty quickly. Of course there are other items to be addressed. I have to make an assessment of the industry and economy, etc. But these things could go rather quickly and I'm always telling that a good business valuation, mighttake inbetween 60-100 hours to really make a good report and good analysis. But for instance if this company did its homework well, you might need less hours and you might go quicker through the process. I hope this answer your question.
Jeff: It does, yes. I think the thing to note here, the thing that's really important, is that all companies are different. And the extent of the work required could also be different too depending on how well someone keeps their books or just any number of other things. The number of locations, people, size, and revenue. All of these things are come into play. As long as you're not in a big hurry and you're willing to work through the process, you'll be able to get through that without too much trouble, without too much pain. It just really all kind of depends. There are a number of variables there. One of the things that I know often happens, Walter, at least I've heard of this sort of thing happening, and maybe you can talk a little bit about it, is that oftentimes a buyer and a seller will each have a company appraised. Obviously the seller is interested in having their business appraised and maybe it's just part of an annual process that they have as part of a business plan to have their company appraised on a regular basis and to have that value current, and always have that up to date. But there may be a buyer also who comes in and bring their own appraiser in and has the business valued for the purpose of maybe buying it. So, have you seen this happen? Does it occur often? And when you have seen it happen is there often a significant difference between the appraisals of the buyer and the seller of a given business?
Walter: Of course I've seen this happening and you really have to understand of course that once both sides use their own appraiser in a certain way those appraisers could be, although not maybe professionally the right thing but they could be a little biased, from the sellers perspective, let's say to really highlight the pros of the company and from the buyer's perspective maybe to highlight the cons of the company in order already to position well for the negotiations that may follow. More from the theoretical point of view I would say that if both appraisers, let's say are member of the same association that does business valuations, for instance I'm a member of the National Association of Certified Valuation Analysts, it shouldn’t be that the differences are too big because most appraisers will have to work along the same professional standards, will have to do the same kind of homework. And all these professional standards do have the intention to minimize the risk that an evaluation is being biased by personal preferences or by too subjective approach of the valuation. Yes, it could happen. It depends a little bit of the agenda. Let's say that parties are entering into a certain kind of process because they may already look into the negotiations that come. But if both appraisers are really professional then at least when the discussions come up they should be able to find each other on really neutral ground and they should be able to have professional discussions of maybe the different choices they make in evaluation or the different parameters they use to come up with a discounted value, etc. It really depends a little bit on the context in which seller and buyer are dealing with each other and how professional and how neutral the evaluators involved are performing their duties.
Jeff: Understood. We're getting ready to wrap things up here, Walter, as we're starting to run out of time here. But let me ask you one final question. If there is anything in particular from our discussion today or anything at all based on your experience as a professional business valuation expert, what would you tell someone who is looking to sell their business or looking to have their business appraised for the first time. What kind of advice can you give a business owner today?
Walter: Assuming that the owner already is having his business the main advice I could give is start preparing in time. You will be much more successful in selling your business if you have a plan and that plan is already in place, let's say three to five years before your desired exit moment. That would be my key takeaway for a business owner. If you are considering starting up a business and are not currently having a business I would advise that before you start a business already think about how you would like to exit that business at a certain point in time because it might already have an impact on how you start up this new business. That's basically my answer to this question.
If you are considering starting up a business and are not currently having a business I would advise that before you start a business already think about how you would like to exit that business at a certain point in time because it might already have an impact on how you start up this new business.
Jeff: Walter, there are a number of people I'm sure that have questions, whether they're in Curacao with you or they're listening someplace else. Where can they reach you if they have any questions for you or your team. How can they reach out to you?
Walter: Well, we do have a brand new website which is www.curacaofinancialgroup.com and of course we could be reached through my personal phone number which is an international number, 5999-737-2025.
Jeff: There you have it. Walter Blijleven, we're going to need to leave it there. Thank you so much for joining all of us here today and for bringing your knowledge and your insight that you shared with us today on Deal Talk. It was a pleasure to have you.
Walter: Thank you Jeff, it was my pleasure.
Jeff: Thanks again to Walter Blijleven, co-founder of Curacao Financial Group 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. I'm Jeff Allen, we'll talk to you again.
At Morgan & Westfield, we believe in simplicity. That’s why we have one simple goal: to help you sell your business. To do that, we use a proven, simplified process that allows you to save up to 90 percent off standard broker fees. The Morgan & Westfield team can help you put together a package to present your business to buyers, advertise your business for sale, screen buyers, prepare an offer on your business, manage the due diligence process, and close the transaction. You’ll have access to the same resources and methods that brokers use for their large market clients, and all this without a long term contract, so you can even bring your own buyers without paying a commission. A complicated process that is simplified and executed well gets results. If you’re interested in selling your company or having it appraised, contact Morgan & Westfield for a free consultation--888-693-7834 -- 888-693-7834. Or visit morganandwestfield.com.