This edition of “Deal Talk” features a wide-ranging discussion to help you understand some of the things you should and maybe should not do when you are preparing to sell your company. Is it a good idea to have a business appraiser you know personally appraise your business? Should you help to finance the buyer of your business? Is it a good idea to focus on pumping up revenue prior to selling? For answers to these and other questions, we turn to Walter Zweifler, CEO of Zweifler Financial Research. Mr. Zweifler is a highly sought-after professional in the field with over 40 years of business valuation experience and clients across the country.
The prospects of the economy are central to the psyche of a buyer and seller.
- Walter L. Zweifler
Jeff: Walter, I'd like to start today by having you tell our audience just a little bit about yourself and the important role that you play in helping business owners prepare to sell their companies.
Walter: We've been valuing businesses and professional practices for almost 35 or 40 years and that includes a lot of people out in California, a lot of people in New York, and a lot of people in South America. This involves not only earning assets that are in some cases collector's items, artwork, real estate and various kinds of businesses, all of which… each one of these are unique, it seems to me. And we’re called upon to come up with rather innovative ideas as to how is the best way to approach it. So, we've gone that, and we're happy to be on your program. We hope we can do something for your listeners.
Jeff: Thank you so much again. Walter, we know that you are very highly sought after expert in this field. What is the one big challenge or maybe big question that many of your clients seem to face in common when they're considering selling their business?
Walter: Answers: people are living longer, and they are in a twist as to whether they should sell their business or their practice now because they are 75- or 80-years-old and in much better physical and mental condition than their parents were and are interested in continuing to earn money and continue as a professional for… not only to make money or to make sure that they don't outlive their resources. So, the biggest problem that these people face, women and men, is… the question of whether this is the time to consider entertaining bids or soliciting offers for our company. That's a psychological issue, but that’s extremely important. And that's the best answer that I can give you.
Jeff: Walter, just kind of out of personal curiosity, do you necessarily notice a tremendous influx of people knocking on your door or ringing your phone when the economy has taken a negative turn?
Walter: Actually, the prospects for the economy are central to the psyche of a seller or a buyer. When things are bad, buyers are bound because they think they might be able to bottom fish and get something inexpensively that would otherwise be very much out of their reach. Sellers overlook into putting their businesses or practices on the block because they feel they might be selling at a disadvantaged price. Then conversely, when things begin to bubble over, it's the sellers that feel confident and put their assets up for sale, and the buyers, they take a step back a little bit because they think that it might be better to wait for better times to buy.
The prospects for the economy are central to the psyche of a seller or a buyer.
Jeff: Walter, in this connected world that we live in, business owners tend to be pretty well networked with a number of other business owners. If a person is interested in selling their business, the tendency might be to go to an individual who they happen to know pretty well in the business of valuating and appraising businesses to get their… to use their services, to appraise their business. Is that really the best thing to do when it comes to getting your business appraised? Is it something that we should do to use our network of associates and friends and people that we know who are in your industry, or should we give it a little extra thought and maybe go for a third-party resource—someone who maybe is a little more objective who can give, maybe, a truer assessment as to the value of our business?
Walter: Objectivity credentials are essential. Even when the well-meaning meeting lawyer or accountant or business associate that you've worked with for years who professes to be objective cannot deliver that objectivity. Therefore, what you do have from these relationships is extremely valuable and should not be cast off slightly.
Walter: That is, who to sell it to. And in many instances, the best place to begin looking for people to bid are among your larger customers, your competitors, and your suppliers, all of whom have known you for years. Turn that kind of information over to someone like us, and we can tell them what we think we'd be a good price to pay and can act as an intermediary for that person who has a business on the block or a practice on the block.
Jeff: So, I think again these various repeating and clarification really, Walter, that objectivity is very, very important in this particular case and even though you may know someone very, very well in the business of appraising businesses, you need to shop very, very carefully and talk to others—people who you do not know and who do not know you in order to give you a true assessment and fair value on your business.
Walter: There are two kinds of subjectivity. The first kind is a person who knows he's being subjective and has some ulterior objective or gain to his subjective opinions. The objective evaluator has nothing else to gain except to render an opinion that is viable, correct, and has no axe to grind, nothing to gain from that beyond, and is ready to defend his opinion and nothing more.
Jeff: There you go. Walter Zweifler, president of Zweifler Financial Research in New York is our guest today on the Morgan & Westfield podcast.
What if I don't want to sell my business or all of it, Walter? I mean, if I didn't want to sell my business I wouldn't be coming and talking to you. But what if I wanted to sell only part of it? What then? What are my options
Walter: The first thing you might want to understand is that you, as an individual, as an owner, have a lot of value attended to you. You have relationships with customers, you know how to buy, you understand the product, you understand what the opportunities are in your industry and to cast that off to a buyer without any kind of bridge period is downright foolish. So that in many cases, you might say that the buyer would be smart to keep you on board and in some way, shape, or form or for you to retain a certain percentage of it overtime of the ownership so that the new enterprise and the new owners can benefit from what you have slaved to put into the business over the years.
The objective evaluator has nothing else to gain except to render an opinion that is viable, correct, and has no axe to grind, nothing to gain from that beyond, and is ready to defend his opinion and nothing more.
Jeff: Now, speaking of options, I know that there are probably any number of finance options that are available to the buyer. But as the seller, do I need to provide any financing for the buyer in any case? And if I choose to, does that mean that I'll have to stay involved in the business long term? Or does it mean that I'll get back the business or get back into the business if the buyer stops paying?
Walter: Well, number one, the use of a seller as a means to finance might be the only option that is available. Therefore, if you want a transaction, you have to consider seller financing. It's almost like owning a home in a tight-money market, when you can't get a mortgage, sometimes it’s the seller who arranges to finance the transaction to the buyer. It's important not to cast off that possibility and to understand that if you do it, it's not a permanent relationship. If you begin to pay off this debt and you can demonstrate that the guaranteeing power of the buyer is sufficient collateral, then you can go to a traditional lender and lay off the seller financing to them. There's nothing permanent about it, and if it's structured correctly, it's a good one. I think the point you brought up was very valuable. If you feel that this is the best transaction you can get but you are not absolutely sure about the viability of the buyer, it does give you some recourse. So then, if you want a transaction in some cases you have to use seller financing, and if it's structured correctly, it won’t enslave you and won’t create such rigidity that you can't move and change and substitute new lenders into the picture.
Jeff: Very, very good. And so, again, though just for clarification just so that I have kind of mind wrapped around this in the right way, we have maybe some people, Walter, thinking that "Oh, okay well, that all sounds well and good," but if in fact, the buyer stops paying or they renege, does that actually force the seller to actually get back into the business and have to take over the reins and operate that business?
Walter: I would say yes
Walter: It doesn't make that a mandate, but this is an extreme situation. If you are the former owner and you see mismanagement going on, you can… you do have some influence on policy, and you can preclude or commend the board that reaches their extreme point and say, "Look, you're heading towards a stone wall here." The rights and privileges as the seller put me in a position to reclaim it before it gets to the extreme level. In other words, a debt to a failing corporation becomes ownership in it. That's the way it works. And if you have… and so, if it's structured right, it will be a deal, a transaction, a transfer of ownership where there might not be any… and, yes ,it's not the most optimum answer but nonetheless in lieu of no answer, it certainly has something to be considered.
Jeff: Revenue and profits, profits and revenue—which one has a greater impact on the value of my business?
Walter: I have been told by lawyers that it is a felony to understate revenues, and as such, that is the one inviolable statistic we gather in a financial statement. What falls below is usually the result of opinion. What is a business expense, and how much should it be charged at any given period is something that volumes of books have been written about. But revenue is an extremely important benchmark, and there are a lot of the transactions that take place on the basis of price to revenue. Behind that ratio is the belief that a willing buyer will acquire it on the basis of what he feels he can earn from those revenues. But at the bottomline, a business is only worth what it can yield up to the owner, and that is usually the earnings after taxes.
I have been told by lawyers that it is a felony to understate revenues, and as such, that is the one inviolable statistic we gather in a financial statement.
Jeff: So, I should or shouldn't focus on pumping up the revenues as much as possible, or based on what you just last said, should I only focus on the profitability of my business?
Walter: I do not believe in pumping up.
Walter: I'm a non-pumping up appraiser. I think that you should sell your business on the basis of a valid condition and performance, and you should have your appraiser prepare what is called a discounted cash flow model, which is a model of future earnings, and value it on that basis. Pumping up is something that will come home to roost. When the buyer realizes that pumping has taken place, he'll get somewhat agitated because he won't be able to continue the pump. If he buys it on the basis of valid projection of existing and repeatable earnings, he's got something to deal with, and you won't be making trouble for yourself.
Jeff: My honest answer, it makes a tremendous amount of sense so of course, Walter.
Walter Zweifler, of course, with me on this edition of the Morgan & Westfield podcast. You’ll probably become more and more familiar with Walter. We are looking at having him on for multiple episodes. We have so much to talk about and so much to get in, and we're just not able to do it in the 30 minutes that we have on this particular occasion.
Walter, as you all know… now, do you provide only appraisals, Walter, or do you also help owners with increasing the value of their businesses? Is it all just kind of built into the services that you provide?
Walter: At some future presentation, we will go in to the anatomy of the business appraisal. One of the things that we do, which are essential to prepare for, it is to do what is called a financial profile of the past 5 years of operating statements and balance sheets or the statements of revenues and expenses and the statement of assets and liabilities. And when you do that, and we do a lot of testing of that material, certain questions emerge. You were prompted when you interview the client to ask questions about it—why did this occur? Why did that operation cease? Why did you take this policy decision? Who are the competitors that you are dealing with? What market share do you have with the dollars of the revenue that you have? And a myriad of other questions. Yes, there are lots of questions that emerge and lots of problems that emerge. In many cases, this is the first time that the owner has really focused on a lot of the things that we find essential to coming up with an opinion of their market drive. And then we can prompt them to examine these issues, and we can suggest things. For example, we can say, "We've measured the working capital adequacy of your business, and it's logical that you could have grown a lot faster if you'd had better lines of credits. You have a line of credit now, and this is what you are paying for, and have you considered other sources of lending other than a bank?" for example.[Stuttering] If the answer comes back, "No," as it is many times to us, then we're in a position to make some suggestions to them. And they're in the position to say, "Oh gee, if that's the case we really appreciate your hand in trying to come up with a solution that involves those things you just talked about."
One of the things that we do, which are essential to prepare for, it is to do what is called a financial profile of the past 5 years of operating statements and balance sheets or the statements of revenues and expenses and the statement of assets and liabilities.
another possibility is buy-sell agreement. You have three sons. Have you decided on which one you want or is the most capable? And what will happen if something happen to you in terms of your ownership? Does your will provide? Is there a transfer? And then what about your wife? Were you active or inactive in the business? I'm just touching quickly on a lot of issues [Jeff: Right . . . right . . .] that would have . . .
Jeff: You touched on one a few moments ago about bank loans and equity lines of credit. But how does having a bank loan affect the value of the business, Walter? Can it have a pronounced negative effect?
Walter: Well, okay with that word. And I am, too. There are lots of places where you can borrow funds. The most important places for you to borrow funds from are your suppliers. House payable are extremely good source of working capital. If you understand how that works, you won't pay a cent for it. It's something that you should understand and be familiar with. But if you… as far as the existence of bank loans is by no means a bad mark of any kind. In fact, there's some people who insist on not borrowing and diminish their value accordingly. There are others that use it too much and put themselves in danger. So, the bank loans are not necessarily great or bad depending on the situation and nor is a bank the only place that you can go for a loan. Knowing where to go, what to pay and how to structure it are some of the things that we can lend a hand with.
Jeff: How does other people being involved in the business of that how the transaction, how the process of valuing a business work? I mean, having multiple owners, shareholders… does this kind of complicate the process?
Walter: Yes. It does complicate the process because you sometimes have conflicting opinions about how things should be done. In some cases, you have owners that are passive, don't have any involvement in the management, and in some instances, you have managers that have no ownership. Or, you have some management groups that act in unison now, that might not necessarily continue to work indefinitely together as the years roll on and dementia begins to take hold. So that it's extremely important toward the appraiser to evaluate the ownership structure, and if there is any, as there should be, some kind of an ownership agreement between the shareholders—how the shares can be sold and to whom and what happens when certain events take place—these are… you can't predict everything with accuracy but you should try, you should get a start on it, I think.
Jeff: You mentioned at the top of the program, Walter, that you travel coast to coast, you have clients across the country and you of course are based in New York but you've talked about having clients in California, for example, and other areas that you've traveled to. Does the city the business is located in have an impact, a direct impact, on the value of a business and if all things are equal, is a business in one city worth more than maybe a similar business in another city?
Walter: That's a pretty general question and it's tough to give a blanket answer. Certainly, there are some cities that have strength in certain industrial undertakings and business undertakings. If you're thinking of the city of New York, it probably has a lot more clout in finance and insurance and to some degree, in the real estate markets. If you go to Houston, Texas, you're probably going to be talking to people that are very much connected to the oil markets and the commodity markets in that part of the country. If you go to London, England, as we do, you will find that their interests are similar to New York in many respects and that well, the things that they do are similar to ours. But then, there are a lot of things they do that are not similar to ours. And you try to define why a company by virtue of its geographic location would have more value is really unique to the mission and purpose and endeavor that an individual company undertakes.
Jeff: What about the type of entity that the company would be—whether it's a corporation, an S-Corp or an LLC—how does that impact the value of a business, and what is it that you do to help put that value on that business?
Walter: Of course, the pass-through entities, like the liability corporations and such after S-Corporations, do not pay taxes. The earnings are passed through to the owners and they're obliged to pay. It's an enterprise that is small, as it would have to be. If it took that pass-through identification, then you would value it accordingly, and you would either tax it back, or you would look to what monies were taken out of the business to pay their taxes. There are limitations on the size of pass-through enterprises. I'm not an attorney and God knows I certainly don't want to practice law without a license, but there are limitations specifically loaded in the code and elsewhere about the size of a pass-through enterprise. If you're in that industry that requires a blending out of ownership and a increase in the capital resources that you are going to use, it's probable that you will probably adopt a fully-taxed enterprise as status. That's as much as I could say in general terms about the various structures. The partnership, of course, is a pass-through enterprise. Partnerships, LLCs and some Chapter-S on one end and fully-taxed corporations on the other.
Jeff: We have about four minutes left here, Walter. What I want to try to do is I want to set this side time aside so you might be able to tell us a story, if you have one that you can share with us, about an appraisal that you've done. Maybe it's an interesting story or one that's memorable to you, something that can possibly help a business owner of avoid maybe a really critical pitfall over something that they need to avoid on the way to selling a business and having the process go smoothly as possible. Share with us if you would a story that you might have that we might be interested in.
Walter: A lot of people that come to me recognize what we talked about earlier about objectivity credentials. So, in many instances, lawyers, law firms, and accounting firms come to me, and in some instances they come at the eleventh-most hour. I got a call from an international accounting firm indicating that they had a corporation in Germany that wanted to acquire somebody in Bergen County, New Jersey and required us to do what was called an allocation of purchase price and could it be done within 30 days. A heroic undertaking. We did it. We pulled out all the stoppers and put everything else on advance for a week to ten days and created a result that, I would say, made that transaction take place where it might not have. It required us to engage colleagues who were specialists in real estate, specialists in lots of other… we had to talk to people that were expert in intangible assets like software, copyrights, patents, trademarks, and employment contracts and things of that kind, but we did it. And we did it because beyond the objectivity credentials, we employ innovative talents. We, therefore, are looking for the most challenging questions that anybody can come up with. Not that we would have all the answers to everybody, but if we don't have the answers we'll get them, and we'll find them outside of our enterprise and our practice if we have to, but in many cases, we do find them within our practice.
A lot of people that come to me recognize what we talked about earlier about objectivity credentials.
Jeff: Very good. One thing I want to go ahead and say right now and this is just to let people know—this is not an open invitation to call Walter Zweifler or any other appraiser across the country at the eleventh hour to try to get your business done [Laughter] because that's not probably the optimal course of action to take. Walter, what I'd like you to do right now, if people would like to chat with you, if they have some questions that they would like you to answer personally, some specific questions for their particular situation, what can they do? What number should they call? How can they reach you?
Walter: Number one, they can go to our website which is zweifler.com and send us an email—Z-W-E-I-F-L-E-R.com. Number two, they can telephone us at our New York office, which is 212-809-6435, and finally, if they want to see what we look like, 24-7 they can call us on Skype at zweifler1—Z-W-E-I-F-L-E-R and the numeral one. Those three ways will probably get us, and we will look forward to hearing from anybody.
Jeff: Well, Walter Zweifler, once again, I want to thank you so much. We enjoyed our conversation, and I'm looking forward personally to having you back on again very, very soon.
Walter: Thank you for having me. I'll look forward to it, as well.
Jeff: Thank you again to Walter Zweifler for joining us today on the Morgan & Westfield podcast 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. Again that's 888-693-7834, or visit morganandwestfield.com. Until next time, I'm Jeff Allen. Thanks for listening.