Exclusive Interview With Steven Siefert, Accredited Senior Appraiser and Business Valuator

The Role of Strategic Planning in Building Business Value

Steven J. Siefert

CFA, ASA-BV/IA

In this interview, we speak with Steven Siefert, Accredited Senior Appraiser and Business Valuator at Baker Tilly Virchow Krause, LLP, located in Milwaukee, Wisconsin. Anyone who is thinking of selling a business will want to pay close attention to this interview. Here, you will learn about the most important things you can do in order to build business value before a sale. Mr. Siefert points out which types of buyers are likely to pay more for a business. He shares with us his expertise regarding topics such as the different types of business appraisals, the ins and outs of structuring a business sale, and the critical role of timing in the sale of a business.

Key Points from our Conversation

  • For potential sale purposes, I would recommend getting an initial valuation a couple of years before a planned exit.
  • Generally speaking, private equity groups tend to pay somewhat less for a company than strategic buyers.
  • The best way to get a premium value for your business in a sale is by marketing your business to many different potential buyers.
  • Giving potential buyers flexibility with regards to your ability to stay on with the business during the transition period will generally increase the value.

Interview

Tina: How will I know when it is a good time to get my business appraised? How do I find the right business appraiser?

Steven:  The timing of your business appraisal depends on your needs. For potential sales purposes, I would recommend getting an initial valuation a couple of years before a planned exit. A full business valuation report will generally highlight the strengths and weaknesses of your business, which will showcase areas that you may be able to modify to increase business value before an eventual sale.

Finding the right business valuation professional can be a daunting task. Referrals from trusted advisors are a good way to get some initial names of potential business appraisers. I highly recommend hiring an appraiser with certifications that require extensive experience in business valuation, as well as hiring an appraiser with experience in valuing other businesses that are similar to your business. In addition, interviewing several business appraisers will give you some comfort regarding individual capabilities and making sure you get a fair price for the service.

 

Tina: I am preparing to sell my business within the next year. Can the timing of when I get a valuation affect the "value" of my business?

Steven: The short answer is no. A valuation report for potential sales purposes does not need to be shared with potential buyers, and should not have an impact on the value of the overall business.  However, if you choose to share the results of the appraisal report with prospective buyers, this may positively or negatively influence their perception of the business and what it is worth. The longer answer is that expectations regarding a potential sale of a business may affect the valuation of non-controlling, non-marketable interests in the company’s stock. If you plan to sell your business within the next year, the value of a non-controlling, non-marketable interest will generally be higher than if there were no plans to sell the business.

The timing of your business appraisal depends on your needs.

Tina: Can I sell my business to a private equity group? Is this a smart decision? What are the risks/benefits of this?

Steven: The decision of what type of buyer to sell your company to is not an easy decision. There are pluses and minuses to selling to private equity groups, just as there are with strategic buyers. Generally speaking, private equity groups tend to pay somewhat less for a company than strategic buyers. This is the result of many strategic buyers being able to extract “synergies” from a combination of your business with their business. However, private equity buyers continue to have record levels of cash sitting on the sidelines, and they need to deploy that cash. These result in private equity buyers tending to be very competitive on price compared to strategic buyers.

Selling to a private equity buyer can be beneficial to you, depending on your needs. Some of the main benefits of selling to private equity buyers include the possibility of rollover equity, the possibility of continuing to manage the business and finding key partners to take your business to the next level.  Generally, strategic buyers want to purchase 100% of your business and may not take certain employees to achieve cost synergies. The primary downside of private equity buyers is that they tend to have less ability to pay top dollar relative to strategic buyers.

Business valuations consider the three valuation approaches: income, cost and market.

Tina: How do the appraisal approaches differ for appraising businesses vs. real estate?

Steven: Like real estate appraisals, business valuations consider the three valuation approaches: income, cost and market. Unlike many types of real estate, “comparable” business transactions tend to be limited in number, lacking information, or very dated. As a result, business appraisers tend to rely on an income approach as their main indicator of value. I would say that due to the reliance on projected cash flows, which can be extremely difficult to estimate, there tends to be more variation in values estimated for business appraisals than real estate appraisals.

 

Tina: How does an appraisal differ for the purposes of an ESOP vs. other types of appraisals?

Steven:  An Employee Stock Ownership Plan ("ESOP") appraisal will differ somewhat from other types of appraisals due to requirements under Section 3(18) of the Employee Retirement Income Security Act (“ERISA”) and the nature of the ESOP.  An ESOP creates liquidity for participants due to the put option of participants, which creates additional liquidity. While this reduces marketability issues with non-controlling ESOP shareholders, this obligation can create potential liquidity issues for the overall business. That being said, much of the valuation analysis for an ESOP appraisal is similar to other valuation analyses.

When selling your company, choosing to sell assets or stock has a direct impact on both the value of your business and the proceeds you receive.

Tina: Does structuring the sale as an asset or stock sale impact the valuation of my company?

Steven:  When selling your company, choosing to sell assets or stock has a direct impact on both the value of your business and the proceeds you receive. In general, an asset sale will result in the highest value of a business. This is due to the fact that the buyer will get a step-up in the basis of the assets to the sale price of the business, which will increase tax savings for the buyer. While this will generally net you the highest sale price for the business, this could result in less proceeds than a stock sale due to taxation on the sale of the business. In structuring the sale of your business, careful consideration should be given to whether a stock or asset sale would result in higher net proceeds.

Tina: Is there a practical difference between value and price, or is that just a theoretical discussion? How close to the final valuation figure can I expect to sell my business?

Steven: I think there is a lot of confusion regarding the definition of value and price. I like to think of price as a negotiated amount between two parties, and value as a result of calculations. In business valuations, value is typically defined as fair market value per IRS Revenue Ruling 59-60. The definition of fair market value can cause substantial differences from a “price,” but I would like to think that they are generally close to each other. The business appraisal conclusion can vary considerably from a sale price depending on multiple factors. Differences in the date of the appraisal and sale date, the type and amount of potential buyers and the definition of value used for the business valuation engagement can cause big differences. 

 

Tina: I am preparing to sell my business and I do not need a full appraisal. Can I hire a business appraiser to just offer me some guidance and help?

Steven:  Most business appraisers will offer services that do not include a full-blown appraisal. Many professionals will offer advice on an hourly basis to assist you with your business valuation needs. It is important to clearly explain questions to the business valuation professionals to make sure that fees are kept reasonable.

I highly recommend hiring an appraiser with certifications that require extensive experience in business valuation, as well as hiring an appraiser with experience in valuing businesses similar to your business.

Tina: Will I need to finance part of the purchase price of the business?

Steven: Virtually all business acquisitions will require buyers to provide some equity financing to consummate a business acquisition. The amount of financing will depend on several factors, such as the borrowing base of the assets acquired, the amount of seller financing and the payment terms of the purchase price. I would say that industries that have a significant amount of hard assets, such as manufacturing firms, tend to require much lower levels of equity financing, whereas technology companies tend to require significant amounts of equity financing.

 

Tina: How can I get a premium value for my business?

Steven:  The best way to get a premium value for your business in a sale is by marketing your business to many different potential buyers.  An ideal situation would be to create a bidding war resulting in a purchase price for the business above its fair market value. The ability to get significant interest in your business will depend on many factors, such as the size and profitability of your business, growth trends, customer concentration, etc. To maximize the value of your business, I highly recommend retaining a highly qualified deal team. This would include, at a minimum, an investment banker, attorney and accountant.

Tina: I am willing to help with the transition long-term, possibly for up to one year. Will that help improve the value of my business?

Steven:  Giving potential buyer’s flexibility with regards to your ability to stay on with the business during the transition period will generally increase the value.  At worst, the buyers will thank you for the offer, and not increase the purchase price. The more instrumental you are in the operations of the business, the more buyers will pay. An example would be if you are the main contact on several key accounts. Buyers will pay less for a business if there is retention risk for key customers after you leave the business.

The more instrumental you are to the operations of the business, the more buyers will pay.

Tina: Do you have any other tips or advice for anyone buying, selling or appraising a business?

Steven:  My tip for buyers and sellers of a business is to read the purchase agreement carefully. I have run into issues where parties to a transaction were unclear or unaware of certain purchase agreement provisions that caused either pre or post deal issues.