Factors That Influence Valuation

When considering having your business appraised, you might want to give some thought to how the numbers could be impacted by a variety of issues, both internal and external, some of which may be well within your control. The fact is that valuations often reveal the consequences of a lack of oversight that could lower your company’s true value, leaving money on the table and jeopardizing the prospects for a succssful sale in the future. On this edition of “Deal Talk,” Trisch Garthoeffner, founder and president of Anchor Business Valuations & Financial Services, LLC, returns to talk about the most common factors that influence the result of a valuation as well as the appraisal process itself.

Questions Answered For You

  • What is the difference between an asset sale and a stock sale? And does structuring a deal as either one have any kind of pronounced impact on the valuation of the company?
  • Does the location of a business have any direct influence on the valuation of the company?
  • What is the difference between fair value and fair market value, and why is it important to business owners?
  • What is goodwill impairment?

I personally find stock sales to be a lot less complicated, and I would think that most people in my position would agree. Because, unlike in asset sales, stocks sales do not require numerous, separate conveyances of each individual asset, because the title of each asset lies within the corporation itself.

- Trisch Garthoeffner

Key Takeaways

  • There are many differences in valuations of a company when valuing for an asset transaction versus an equity transaction.
  • Buyers prefer asset sales over stock sales because the buyer is only buying the assets and not the real and contingent liabilities; these transactions are called cash-free/debt-free transactions.
  • A business valuation, or an appraisal, will provide a business owner with a real advantage and could significantly impact the value of the company.
  • If a business isn't especially profitable currently but owns a substantial amount of intellectual property, that intellectual property alone could help to elevate the company's value.

Read Full Interview


Jeff: Valuations, how they're performed depends on many factors, and each situation is in fact different. Why is that important for you to know? If you're a business owner looking for answers, you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world, this is “Deal Talk,” brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.

Jeff: Welcome to the web's number one content source for small business owners committed to building a business for eventual sale. It's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

And value, that's what we're talking about today: valuations, business appraisals. And we've had this person on before in the past. Trisch Garthoeffner, certified valuation analyst and the founder and president of Anchor Business Valuations & Financial Services LLC, is once again joining us as our guest. Trisch Garthoeffner, nice to have you back on the program.

Trisch: Thank you, Jeff. Nice to be here.


Jeff: You were able to share such a wealth of information with us before. We wanted to have you hack on again as we kind of break things down a little bit further, Trisch. What I'd like to kind of talk about first of all, there's a difference between asset sales and stock sales. Does structuring a deal as either one, asset sale or stock sale, have any kind of pronounced effect one way or the other on the valuation that you're going to do with my company, and if it does, how so?

Trisch: That's a great question. There will be many differences in valuations of a company when valuing for an asset transaction versus an equity transaction. But I'm not sure if I would say the differences are always necessarily pronounced. Many of the smaller transactions that I work on, they're asset transactions. And the reason that that is, is because about 60% I'd say of the businesses that I value are sole proprietors, LLC's and partnerships, and therefore they don't have stock to sell. But if the business were to be an S corporation or a C corporation, then of course the decision must be made to structure as either an asset or a stock sale. Buyers prefer asset sales over stock sales because then the buyer is only buying the assets and not the real and contingent liabilities, and these transactions are called cash free/debt free transactions. Therefore, when I'm calculating the value for an asset deal I would subtract the cash and the liabilities, and obtain valuations for the hard, tangible assets and assign a value for goodwill based off of normalized cash flow. I also of course always work with the entity's accountant to determine tax implications. Different assets carry different tax implications, and when determining the bottom line, the walk away value, the clients often want to see the sale price of the asset's tax affected. I personally find stock sales to be a lot less complicated, and I would think that most people in my position would agree. Because, unlike in asset sales, stocks sales do not require numerous, separate conveyances of each individual asset, because the title of each asset lies within the corporation itself.

“I would say that most people don't want to expend any type of money or have the time to do the proper planning to even get their business in place to have a sale, to have the liquidation event someday that would allow them to retire at a reasonable age.”

Jeff: Typically speaking, when you're asked to do these valuations for these deals, are you contacted to do so by the seller or by the acquiring company?

Trisch: The M&A side I would say, because I also do family loss, divorce valuations and other types of valuations. But on the M&A side it's usually the seller. I think because of my background, and I worked on the sell side in Manhattan for a number of years in investment banking. And so I think that they know my experience and know my expertise, and will often want me to do the valuation to start and then help them through the transaction as a consultant as well.

 

Jeff: Let me ask you this, Trisch, what do sellers tend to prefer? How do they like to have the sale of their business structure to the transaction? Do they typically prefer a stock transaction if they can get it, if they're looking to get out altogether?

Trisch: Definitely. It's more advantageous on the tax side. It's more fluid. They don't have to worry about any of the liabilities sitting on the balance sheet and within the entity itself. It's hard to get a stock sale frequently for the size businesses, the smaller businesses that, I'd say, anything under even $20 million. The bigger the business the more leverage you have, unless there's synergistic reasons or other types of ability that you have to leverage the deal and have it on your side to negotiate a stock versus an asset sale.

 

Jeff: And of course you mentioned too, asset sale, those are preferred typically by the acquiring ownership, is that correct?

Trisch: Yes.

“It was a proprietary software that a very large public company needed in order to increase their own profits to the maximum levels, if they could, within a parallel product. And so this business ended up, I think I valued it around $350,000, and they received an offer for $13 million.”

Jeff: Have you ever been in a situation with your background, Trisch, as kind of working in the M&A industry, were you ever a part of a situation where the two sides came in to negotiate, and one side, the acquiring, came in and they wanted an asset sale, whereas the sell-side company was more interested a stock transaction?

Trisch: Yes. I'd say more than not we would lose that argument for obtaining the stock sale, but not, like I said, with the bigger companies, working in bulge bracket firms on Wall Street, those are typically stock sales.

 

Jeff: Very interesting.

Trisch: But the smaller ones are now … living in Southwest Florida, in a smaller metropolitan area, not even metropolitan, just a smaller area in Naples, Florida. I don't deal with those same types of transactions that I had in the past. So I'd say everyone that I worked on this far except a couple have been asset.

 

Jeff: Trisch, by the way, and for the folks listening today, we're going to get more into a little bit later on in the program talking to Trisch about her background and how that background can be advantageous to her clientele, to people who are interested in maybe business valuations or selling their companies. Trisch, let me continue now. Depending on where I am, where my company is located, does that have any direct influence on the valuation of my company?

Trisch: Yes, it definitely does, and abiding by the procedures for the association that I'm certified through and through every association, you always have to look for summary evaluations, where within summary evaluations you always have to consider and apply any type of micro or even smaller metropolitan areas. I use a number of different governmental websites like BEA, census.gov, a number of different resources. And I obtain various types of data within these metro- and micro-politan areas. And I apply that data. So different pieces of information or variables that I look at are unemployment rate within the area, migration rates into the area, the compound annual growth rate, population growth, that type of thing. For example, in Naples, Florida, if I were to value a high-end clothing store and I just happened to look up before our call what the per capita of personal income is within Naples, Florida. It's 74,000, and that ranks fourth actually in the U.S. So therefore that higher-end clothing store would most likely have a higher value than if I were to value a higher-end clothing store in an area that had a lower per capita personal income. It's definitely very important to look at various types of economic information and apply that to the valuation.

 

Jeff: Now, where you're at, and you specialize in really appraisals for smaller companies, and they tend to be privately held, correct?

Trisch: Yes.

 

Jeff: OK, very, very good. In your past, did you have experience working with publicly-owned companies when you were with the M&A companies you talked about earlier?

Trisch: Yes, in doing valuations. Yes.

 

Jeff: OK, let's talk about that just a little bit. What are the differences there? Do you appraise privately-held companies differently than the ones that are publicly-owned?

Trisch: I would say the biggest difference there are the technical models, so the financial models that I use. A public company, obviously by definition, all their financial information, that's publicly accessible. And I use various financial models when I'm valuing a public company that I wouldn't use if I were valuing a privately-held company, because then the outcome would not be nearly as accurate. So the types of technical, financial models that I use when valuing a private company are different and would obtain the value that would be more appropriate for a smaller, privately held company.

 

Jeff: Understood. And entity type as far as the types of corporations that are out there, whether it be S corp, C corp, LLC. Are each of the most popular entities, are they appraised differently as well?

Trisch: I would say in a macro level no, but in reality each valuation that I do is different from the previous one, which is why I love my job so much. But it means that each valuation, in some ways I always go back to my tool box, but I'm re-creating the wheel in different areas of every company that I value. It will depend on the need for the valuation, the standard that is used, the type of report that is needed. And I always go over in the very beginning what exactly are the needs of my client. I had a client call me last week. He said, "I need a valuation of the business." When it got to the end of the conversation, I realized that he actually needed a formula to be put in place for a buy-sell agreement, which is intertwined, but it needed to be the scope of my engagement, it needed to be nuanced down. So then therefore that valuation would've been different. Even if it was an S corp, it would've been a different type of setup than another S corp that I would've valued.

 

Jeff: Why is that important to a business owner in terms of the differences here we talked about? We don't need to get into the micro explanations of the various differences, Trisch, but what I mean is, what is the expectation that you have for the owner in terms of what it is that they have to provide for you and how involved they have to be in the process? If you're an S corp or a C corp, for example, is the process more involved than it would be, say, for an LLC or an LP in terms of all of the information, the data, all of this stuff, the numbers that they have to provide for you and the information that the ownership has to provide in order for you to do your job?

Trisch: It depends on the need. I was recently engaged to be a neutral on a divorce proceeding. I'm working with both sides, which is a great setup to be in if we have to work on a divorce valuation. But then if I were valuing this business for, say, the owner wanted to obtain value in order to do some business optimization to plan for retirement in five years. There would be a different level or depth of forensic accounting basically that would take place versus if I was doing a divorce proceeding. This divorce proceeding, I know that it will be a several week valuation because I'm recreating financials, I'm going into QuickBooks, and questioning a lot of the accounts and a lot of the charges. I'm looking at personal statements as well as business statements. It's similar to almost like an audit. It depends on the need itself and how much the client wants and needs to expend, whether or not it's a legal proceeding or if it's just out of curiosity and just what's ballpark.

 

Jeff: We're going to take a break here, Trisch, in just a moment. But last question I'd like to ask you for this particular segment of our program today. From your experience working with so many different companies and performing valuations for them, on the other side of the coin, how many companies can get by without a valuation at all performed and have a company come out of the clear blue sky and actually make an offer for that company? How many times have you seen that? I've heard that only 50% of companies actually bother having an appraisal done. What have you heard? What's been your experience?

Trisch: If I had to guess I would say even less. I would say that most people don't want to expend any type of money or have the time to do the proper planning to even get their business in place to have a sale, to have the liquidation event someday that would allow them to retire at a reasonable age. I would say it's probably less than 50% of small business owners obtain business valuations unless they have to or unless they're smart business operators.

 

Jeff: It seems to me, and we're going to drag this out just a little bit before we go to the break here. It seems to me then that a business valuation or an appraisal, if that's what you'd like to call it really maybe depending on the size of your company, to have that would provide you with a real advantage and could really too significantly impact the value of your company. Am I just imagining that, or is that true?

Trisch: No, that's definitely true, and it's very unfortunate, because what I see happening a lot, and I've seen this through the years, is that small business... When I say small, for most normal people $50 million in sales isn't small, so I'm saying up to $50 million top line, but say on average $10 million. Most business owners are so involved in the day-to-day operations, they don't think about the value of their business. They're not planning for retirement; they barely are putting away. They just think someday this is my nest egg; this is my retirement account. I'm going to sell this business and I'm going to make $5 million post-tax and be able to lay on the beach in the Bahamas. And it gets to the point of their life when their significant other has retired or is ready for them to retire. And so they come to me and they're close to 60. I see this a lot, and they say, "I would like a valuation," and I'm looking at tax returns, which are on average not reflecting what the financials within the business are showing me, which means that then that's going to add a deep layer of due diligence with the potential acquirer to prove that the internal financials are accurate and potential amendments of tax returns. The proper planning is just not in place. And if they would have obtained a valuation at even 50 and to start getting all the financials in order, and start counting inventory as they should, and have the proper procedures in place, then they would potentially be able to retire at a reasonable age with $5 million in the Bahamas.

 

Jeff: You're talking about really a situation here where people don't have a valuation or get their business appraised, and you could say once maybe they only need to have it done or maybe two or three years before they sell their company, but people aren't even doing that. You're saying it's less than 50%. It would seem to me that to not have one you could be leaving potentially tens, hundreds of thousands of dollars on the table, and in some cases even more than that.

Trisch: Yeah, definitely. And it puts me in a tough situation too, because I'll do valuations, like I said, for individuals that are nearing retirement and they have these higher expectations of say $2 million, and I find the value to be at $350,000. If only they would've obtained and had the proper planning, then they could've maybe reached that goal of $2 million.

“It's really important, because it does get very technical, and there are nuances that only certified valuation analysts know the differences and will be able to properly apply.”

Jeff: And made the adjustments necessary, or in the early going in order to actually get the value of their company where they thought it should be or where they thought it was, and then only to have you come in and basically drop the anvil on their head saying, "Oh dear, that's not exactly what it is." Oh my gosh, I can't imagine. But at any rate, we're talking with Trisch Garthoeffner. She's the certified valuation, founder and president at Anchor Business Valuations & Financial Services LLC.

And, by the way, if you have a question for Trisch, or about any of the topics that you've heard us discuss on past “Deal Talk” episodes, all you have to do is ask. This is a show that's dedicated to you. It's committed to bringing you answers and finding solutions. Simply call our Ask Deal info line at any time, 24 hours a day, at 888-693-7834 extension 350. Simply follow the instructions to leave your question. We'll reach out to one of our guest experts depending on that question so that we can feature your question and their response on a future edition of “Deal Talk.” Ask Deal Talk at 888-693-7834 extension 350. And we're going to be right back when “Deal Talk” continues after this.

If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on a future edition of “Deal Talk.” Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, area of specialty and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com.


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Jeff: Welcome back to “Deal Talk.” Jeff Allen with you, and my guest today is Trisch Garthoeffner, return appearance, command performance you might say. Certified valuation analyst and the founder and president of Anchor Business Valuations & Financial Services. What I'd like to ask you is kind of a business 101 type of question here, but I think it's important, Trisch, this is something you deal with on a regular, daily basis, explaining the difference between fair value and fair market value, and why that's important to business owners.

Trisch: Sure. I thought for this question it might be interesting for the listeners to hear the differences in terms of the definitions of fair value as a price that would be received to sell an asset or pay to transfer liability in an orderly transaction between market participants at the measurement date. Whereas a fair market value is a price the property would sell for on an open market. It's a price that would be agreed on between a willing buyer and a willing seller with neither being required to act and both having reasonable knowledge of the relevant facts. So I would think in remembering way back when I first started doing business valuations that the differences are subtle. This is why it's imperative to have a certified valuation analyst. I do reviews of other accountants mostly that are not certified that have done valuations, and I will find frequently that they don't understand the proper standard that should be applied, whether it's fair value or fair market value, to the valuation. Fair value does not include discounts, whereas fair market value you consider and on average apply a discount for lack of marketability and a discount for lack of control. Fair value is used in goodwill impairment and to determine goodwill impairment, and for shareholder descent, shareholder oppression cases. Fair market value is used in my state in marital dissolution, divorce cases, and a number of different scenarios. It's really important because it does get very technical, and there are nuances that only certified, typically on average, certified valuation analysts know the differences and will be able to properly apply.

 

Jeff: You talked about goodwill impairment, what is that?

Trisch: That's when a transaction takes place and there is goodwill, which is the residual amount beyond the other parts of the balance sheet, basically. And an on annual basis certain companies within a certain size frame need to have that goodwill value to see whether or not it's properly valued and reflected as such on the balance sheet so that shareholders are not misled, basically.

 

Jeff: So would that be an amount over and above that I would pay for a business for whatever reason because there are certain conveniences that were provided that I don't have to worry about? Is that the kind of goodwill that we're talking about?

Trisch: Yes, it could be. Yes, exactly, and tangible.

 

Jeff: OK.

Trisch: It's not a tangible asset.

“I do reviews of other accountants mostly that are not certified that have done valuations, and I will find frequently that they don't understand the proper standard that should be applied, whether it's fair value or fair market value, to the valuation.”

Jeff: OK, very good. Let's say that my business isn't especially profitable at this time, which is not exactly true. However, let's say that that were in fact the case. I do own a substantial amount, however, of intellectual property. Might that intellectual property alone help to elevate my company's value even if maybe I'm not as profitable as I'd like to be?

Trisch: It definitely could. It is possible that an asset approach would be the best approach in a situation like that or a projected cash flow based off of foreseen profits of the intellectual property or the intangible asset in the operations of the entity in the future. Selling the business to a strategic acquirer versus a financial acquirer, so another comparable business versus a private equity firm would potentially be the best bet for selling the intellectual property. I recently … I'd say it was about a year ago now ... I valued a business that was not exceedingly profitable but they had an intangible asset. It was a proprietary software that a very large public company needed in order to increase their own profits to the maximum levels if they could within a parallel product. And so this business ended up, I think I valued it around $350,000, and they received an offer for $13 million.

 

Jeff: Wow.

Trisch: So you never know.

 

Jeff: Oh my gosh, no kidding, really, that's a true story? Unbelievable.

Trisch: Yes, it came out of nowhere.

 

Jeff: Trisch, you have a very impressive background, and anyone who visits not just your website but your LinkedIn profile page, they'll see all of this. And we talked a little bit about your involvement and actually working for an M&A firm in the past. And I was wondering if you could tell me, having that background that you do, working directly in the M&A space, does that provide your clients or someone, any business owner with a true advantage as far as getting a business appraisal is concerned?

Trisch: I believe so. I have a diversified financial services background, so actually I started initially thinking I wanted to be an investment adviser, and so I attained my securities licenses and then I got into mergers and acquisitions and did valuations, and worked through the transaction process that way. And then when I went to owning my own firm and really concentrating on business valuations. It wasn't until that point that I realized how beneficial it was for me to know the vernacular of a lot of the different terminology basically that takes place in other areas of finance. Because I will frequently obtain an engagement, and on average I work with … attorneys are my clients. They will look at me as the all-knowing, omnipotent, financial expert. And I will be very clear within my scope of my engagement letter, but it's useful in a mediation or in a meeting with a client to have that background, be able to speak intelligently on different areas besides business valuations. And it's also allowed me to work and continue to work in consulting on M&A side after I've done the initial valuation for selling parties.

 

Jeff: Because you've had that experience with the processes, and we're talking about the M&A process, is something that could take for some deals years, quite frankly, as we've seen before, not just months. But in addition to having that M&A experience, you also have experience as a forensic accountant. We've talked to forensic accountants on this program before. It's very, very interesting, but it's very, very detailed, and there is really a need for that in many, many cases. What does that difference, having that background as a forensic accountant, mean in terms of what you're able to provide for a business owner in the course of providing that business valuation for them?

Trisch: It's invaluable. I use it on every valuation. I would say that the area where I use it the most is within divorce, which is very common, and frequently within divorce for valuing business that have ... the smaller business … they have poor record-keeping, and we have to recreate financials, or look at how many personal items the owner was running through the business. I valued an asphalt paving company, this was years ago. This actually was a pump for sell side, and there was an item on their balance sheet that I wasn't getting enough feedback as to what exactly it was after I dug in. And I found out it was about 10 Rolex watches that he was withholding within the business to hide from his wife. So it's helped through the years. You can't just take financials at face value, you can't take often tax returns even, you have to really do the work that needs to be done in order to have your work product reflect an accurate value.

“Most business owners are so involved in the day-to-day operations, they don't think about the value of their business. They're not planning for retirement; they barely are putting away.”

Jeff: Trisch, we're winding things down now, and in fact time is slipping away very quickly for us, but this has been a great conversation. No doubt there are a number of people listening, and maybe in your area, who might want to talk with you a little bit and have you consult with them and answer their specific questions as it pertains to business valuations. How can they reach you?

Trisch: Sure. The best way to reach me is through my office, and it's 239-324-0611. Also, feel free to send me an email trisch@anchorbvfs.com.

 

Jeff: Easy enough, Trisch Garthoeffner, a real pleasure. Thank you so much for joining us again. No doubt we'll have an opportunity, I think, to have you back on another future addition of “Deal Talk.”

Trisch: Thank you, Jeff, have a great day.

 

Jeff: Garthoeffner, founder and president of Anchor Business Valuations & Financial Services LLC, has been my guest, and we hope that you enjoyed this show, I know that I did. But what I'd like to do is hear from you. We're interested to know your thoughts about this show and about “Deal Talk” in general. We want to know what you like, we want to know what you don't like, and suggestions for improving this program. We wouldn't be here if it weren't for you, so send us an email to dealtalk@morganandwestfield.com. Again, that's dealtalk@morganandwestfield.com.

“Deal Talk” is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen, thanks so much for listening. We'll talk again soon.

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