Who you want to sell your business to is one of the most important considerations you’ll make as you begin to think about selling or transitioning your company. It can affect the dynamics of the structure and operation of your business going forward and even its future existence as an operating entity. Do you still want to be involved in your business? How important is it that your employees are taken care of and remain happily employed? There is a myriad of questions you need to ask. Peter Agrapides, founder of Filotimo Capital Consultants, is a transactional valuation consultant who joins Jeff Allen with some important guidance for business owners on this issue.
At the end of the day, any number that any valuation analyst comes up with is their opinion value.
- Peter H. Agrapides
Jeff: Welcome to the Morgan & Westfield podcast. I'm Jeff Allen. Thanks so much for making us part of your plans today. Now, if you're selling or buying a business or just interested in the subject, this is the place to be. Our mission is to educate and inform you with the help of some of the most credible people in the industry of transacting businesses, and we hope that by the time this show ends, you'll be better informed for when the time comes to make important decisions about selling your business or buying one.
And, once again, joining me on this edition of the Morgan & Westfield podcast is Peter Agrapides. He is an MBA, CVA, and the founder of Filotimo Capital Consultants, and he’s based in Sandy, Utah. Mr. Agrapides has extensive experience in preparing valuations for gift/estate and income taxation and reporting in deep knowledge of court valuation-related case law and extensive knowledge of judicial case law as it relates to the valuation industry.
Peter Agrapides, it's nice to have you back today. Welcome!
Peter: Thanks, Jeff. It's great to be back with you.
Jeff: Peter, I want to take a second because last time we had you on the program, we didn't give you the time to really talk a little bit about your firm and what you do. So maybe, you can fill us in a little bit on your specialties and some of the services you provide.
Peter: My specialties, my firm’s specialties, are 99% transactional-related. It may be somebody coming in and buying a business, selling a business, they need a valuation for that. Really, our cash cow, kind of our forte in the industry, is preparing valuations for taxation purposes—federal taxation, be it income taxation, if somebody is making a charitable donation, if its gift and estate tax planning or estate tax reporting, if somebody has passed away and is a higher net worth and has a business interest. We do some valuations for SBA loan reporting. If somebody is doing a SBA 7[a] Loan, part of that loan package requires that they have the business appraised, so we do that. Last, but certainly not the least, we do some litigation support. We carefully pick and choose those cases we want to get involved in because they can drag on for a significant period of time, be it marital dissolution, partner dispute, or anything like that. That really kind of rounds out the service package that we offer here.
Jeff: Very, very good. We'll have a little bit of time later on where you can get the contact information out to our listeners, Peter. That way, they can contact you with any specific questions they may have. The last time that we talked, we had a potpourri discussion. We're going to do more of that today. But I wanted to lead in a more topical way. I want to talk about selling businesses and who one should sell a business to. I'm going to throw a few different options out there. Selling business to a private equity group—how easy is that to do? Is that a smart decision? And what are some of the risks and benefits that go along with selling a business or attempting to sell your business to a private equity group?
Peter: The issue with that—selling to a private equity group, really, with selling to any group—is timing. Whoever buys the business and what business, or I'm sorry, what industry your business is in. If it's in an industry where there's a high degree of consolidation, of roll-ups within that industry. I mean, we see it sometimes in the construction industry. In the late 90s, it was with mortuaries. They were trying to roll these things up and have these big mortuary-type companies that operated in several different locales. In that instance, in terms of ease of sale, it would probably be very easy to sell your business to one of those private equity groups.
But it does come with a lot of risks. If you're selling to a private equity group, the one risk that you really run is losing control of your business. You may lose control of it to where the private equity group is making all of the decisions. And that really depends on how large of a stake they're purchasing. If they're coming in and providing a small degree of liquidity, obviously, they're going to take a much lesser degree of control of the business. If they're coming in and purchasing a majority stake or providing significant liquidity for the business, they're going to take a much larger stake in terms of the day-to-day control that you have over that business. So, that's something to think about at the onset of where do you want your business to be. Is it something that you are a 100 percent dependent on some outside equity group coming in and giving you liquidity for the business to survive? Or is it something that, maybe if you wrap down your growth plans in the near future, it's something that you can maintain 100 percent ownership and 100 percent control of and keep it for your children and keep it within your family for generations to come?
The issue with that—selling to a private equity group, really, with selling to any group—is timing.
Jeff: Peter, let me ask you something. Are there businesses, specific industries right now, where it might be safe or maybe even advised that someone do look into a private equity group for purchasing that business? Maybe, whether it's a popular type of industry or one that seems to be particularly suited for that kind of a group to buy them?
Peter: Right now I think you'd see more prevalence of private equity firms going after early-stage technology companies.
Peter: And early-stage bio-technology companies. If technology… what I'm referring to is anything outside of the medical area and bio-tech is dealing more with the medical area. The reason for those is the returns. The pay-offs are so high where if one of those thoughts, if one of those pieces of intellectual property pans out, the returns are astronomical to the investor—the private equity investor or the founder of the company. Generally, the founders of those companies don't come in to the companies with a tremendous degree of capital. So, they have to go seek outside rounds of capital financing.
Jeff: Would the same be true for venture group being interested in those particular industries or sectors?
Peter: Yes, absolutely. Where you see one, you see the other.
Jeff: So what would be the difference, then, if I wanted to approach a venture capital group or they approached me? What would be the difference, again, with regards to being a smart decision, one that would be an easy transaction… Is there anything unique to working with a venture capital group in buying your business that maybe we didn't talk about with the private equity group?
Peter: Those two are largely synonymous. They're really similar in terms of the characteristics when they come in and give you the money, they're taking a seat beside you or sometimes bumping you out of your seat.
Peter: But they're largely synonymous in terms of the transaction characteristics and control characteristics that you're giving up to get the money.
Jeff: What about angel investors? Going to an angel investor or they come to you, and a lot of times they're fairly proactive. There are so many of them now it seems it’s going to become its own cottage industry. The angel investor is purchasing your businesses, what do you have to say about that?
Peter: They're very similar. I mean, sometimes, like I said with the private equity group, if they're giving you less money, less money as a percentage of what your total company is worth, then you may retain more control. But with any of those outside groups, even if it was a bank that's giving you a significant amount of money or a bank connected with a large publicly-held company, they are going to want some control. They're going to want some say-so in terms of how that money is spent.
Jeff: But maybe I was misinformed, Peter. I mean, what's in a name? You hear “angel investor.” It was my understanding, at least it was a few years ago, that angel investors aren't as interested in taking a lion’s share of the control of the organization or management of the organization. Is that no longer true?
Peter: That's true. The angel investor is more hands-off in terms of letting you do what you do best in your company and just handing over the money. That depends on how much money you're asking from them. An angel investor may be out of the question when you're asking for enough money where you need to go to private equity or venture capital group.
The angel investor is more hands-off in terms of letting you do what you do best in your company and just handing over the money.
Jeff: I'm talking with Peter Agrapides. He's the founder of Filotimo Capital Consultants in Sandy, Utah, and you're listening to the Morgan & Westfield podcast. My name is Jeff Allen. Welcome back in, if you're just now slipping in or maybe listening over someone's shoulder there at the office or at home or wherever you may be.
Peter, is there an ideal buyer for a business? We just talked about them, private equity group and venture capital group—you said that they had the same kinds of risks and benefits associated. We talked about angel investors, and then there's, of course, the singular owners and maybe they don't have as much money to play with. They're the "little guy," so to speak. Are there people that would probably be the easiest types of buyers to deal with, and if one had choice, if he sat in front of all of these people in the same room, which one should someone consider, really consider working with? Or does it just really vary and depend?
Peter: Well, it varies and depends. I mean, if you're selling, let's simplify it a little bit and say you're selling a 100 percent of your company. Who would I sell to? Probably the most bang for your buck, in terms of getting the most value out of your business, it may be from another business coming in and purchasing your business. Let's go back to the construction company example, and say, here in Salt Lake City, we have a very large—let's say it's a 50 million-dollar general contractor that does a ton of work here—and maybe somebody from the neighboring state, maybe somebody in Denver, Las Vegas, the Phoenix area, is trying to get established here. They may be willing to pay a substantial premium for that construction company in Salt Lake City because they're basically buying the goodwill. They can operate it for few years under the current trade name; they can change it. But if the deal is done correctly, and maybe some of the current management stays on for a period of time, it will be seamless in that whatever goodwill was previously attached to that target is now going to transfer over to the acquirer. So they may be willing to pay a premium for that rather than spend significant financial resources to come in to the Salt Lake market and give it a go and compete head-to-head with that company.
Jeff: Okay. Let's change direction just a little bit. Say I'm the business owner. Can I compare my business—privately-owned—to a publicly-owned business to get an idea of its value? Is it possible, or is it too much comparing [comparison] like comparing the apple to the orange? What are the risks of doing this? How big of a mistake could I be making here?
Peter: That's something we consider in every valuation. Every time we value a privately-held company, we at least make some attempt to compare it to a publicly-traded company.
Peter: The reason for that is that public company information is very timely. It's coming out every single quarter, and it gives us a real look at how the marketplace is looking at a particular industry, how they're looking at a particular company. So if we could find two or three companies that really match up well to our subject company, we can really hone in on a good, strong value for that using, basically, real-time market data that's available at our data valuation.
Now, the risks. The risks of doing that… it's one of those things that you read in the textbook, and you say, “Well, this is the way I'm going to value every single company because this makes the most sense. We're comparing real-time industry data with a subject company.” When the rubber meets the road, though, a lot of times the subject companies are so much smaller that we don't have the opportunity to make those comparisons. There are different adjustments that we can make based off of the smaller size of the subject company: growth, leverage, and that sort of thing. We can make different adjustments to the multiples, but the problem with that is they're very subjective adjustments. So you're laying subjectivity on top of subjectivity because you have subjectivity first off in choosing your comps, in choosing what comparables you have to compare your subject company.
Jeff: Which begs the question, when you're talking about comps, what are the benchmarks you look into? Revenue, industry, market size? Are you looking at all those things or more or different?
Peter: We start with revenue and then earnings. What I will normally find out is if we have a company, let's say my company, again let's say 50-million dollars in revenue. And then we go to the marketplace, the public companies, and they're in the billion range. What we're normally going to find are two things. First off, they're probably not just operating in one finite region, and my subject companies generally are operating in a fixed geographic location. The second thing that we're going to find is maybe my subject company is general contractor, and when I look at the public companies, they're revenues are much larger. One reason they're much larger is they're pilling from a much more diverse array of services, so they're a general contractor. They do design-build services. They may have 10 or 12 different channels where they're getting their revenue from where my company has one. So is that truly comparable? It may not be.
Just to give you an example, I would say in the last 3 years, I've probably had, out of hundreds of engagements, maybe two or three where I've really used the guideline public company method to value the business, just because the companies in this case were so large that they really compared well with their public company counterparts. In other instances, I've spent a significant amount of time searching and doing due diligence on the publicly-traded companies only to come to the conclusion that it's a method that was to be considered but rejected to produce a value estimate for these subject companies. So it's not very common that we're using that methodology to produce a real finite value estimate for the company.
Jeff: Why is it important to compare a private business to a public business for this purpose as opposed to just moving forward and going through the process of appraising my business based on its own merits and based on other private businesses, privately-owned companies like mine? Why should we compare them to the public companies that are similar?
Peter: First off, I touched on the richness of the data.
Peter: We can go and find priced revenue, priced earnings, priced EBITDA multiples that are available for public companies at our exact data valuation. That's first off. The second has to do with the valuation standards. I mentioned in the intro of myself and my company that I do a lot of work that goes to the IRS for federal income taxation or gift and estate taxation. Those have to be written to certain standards, and the standards that are promulgated by the trade group with which I have my designation actually states that we have to consider three approaches to value—income, asset, and market. This is comparable to public companies. The guideline public company method falls under the market approach. So it's actually mandated by the standards that we at least consider it. It doesn't say you have to go and produce the value estimate…
... the standards that are promulgated by the trade group with which I have my designation actually states that we have to consider three approaches to value—income, asset, and market.
Jeff: I see.
Peter: Under each of these, but we do have to consider it. And part of, I'm sure, their reasoning is that there's just so much data out there on these companies. In the few instances where I've actually used this method, there's so much information out there that I have a really high degree of confidence that the number that I've come up with is reasonable. At the end of the day, any number that any valuation analyst comes up with is their opinion of value. This isn't a science. It's not something that if we give everybody the same equation, they're going to come up with the same answer if they do it correctly. It's just our opinion. It's something that I can at least attach some confidence to at the end of the day to say, "Look at all this data that I've pored through. Read through my report, and it will walk you through every step of how I came up with the number." And it's one of the only methods where there's so much data available that you get this high degree of confidence.
Jeff: Now, Peter, just a few moments ago, you used a term that is probably foreign to some members of our listening audience here on the Morgan & Westfield podcast series. You used the term that I've heard a number of times, but I haven't talked to people about the meaning to draw that out for our listeners. “EBITDA multiples,” “EBITDA multiples,” tell us what that means.
Peter: EBITDA multiples. EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization, okay? It's not a gap-defined term, generally accepted accounting principles. It's something that, if you're looking at a company's EBITDA, you need to look and see how they have actually calculated it. Some will calculate it starting with operating income. Some will start with pre-tax income, ad back taxes, ad back interest, ad back depreciation, ad back amortization. It's a very widely used benchmark just going in to how we started out the conversation today, it's a very widely used benchmark in the private equity world and the venture capital world.
EBITDA multiples. EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization.
Jeff: Peter, let me ask you something. Franchises—are they worth more than non-franchise businesses based on your history, based on what you know?
Peter: It depends. It really depends. Some of the franchises that I valued in recent years have probably been worth less than other companies because it was one of the franchises that was, you know, in a rut. They were in a more of difficult financial situation, facing some [more] challenges than some of the other franchises were. So those just depend. It really depends with the franchise.
Jeff: Tell me, when it comes to valuing professional practices, what is the difference between professional practices and other types of businesses in terms of what it is that you have to do and in terms of what it is that the business owner has to or provide you with in terms of information?
Peter: Professional practices are really completely different animal. The reason with that is… Remember, I talked about transferring goodwill…
Peter: With that example with the construction company. What we're talking about there is the company's goodwill. There may be some of what we termed personal goodwill or some goodwill that attaches to the owner, but really, as your company gets larger, more complex, has more operating divisions, has more employees... The larger it gets in all of those terms, the more company goodwill or enterprise goodwill it has, and the less personal goodwill it has. Now, flip that to a professional practice. A professional practice is almost all personal goodwill. If you're going to a particular medical specialist, you're probably going to that medical specialist because your family doctor referred you to them. And your family doctor referred you to them because they have a great reputation for whatever service they actually provide. That's hard to transfer. If you have somebody that's a very talented, let's say, dermatologist that deals with a particular type of skin cancer, that's really hard to transfer unless you have the right buyer, somebody else that comes in with the same academic background.
Jeff: And reputation.
Peter: Yes. And reputation, exactly. Right. It's a lot different. In terms of actual valuation, we look a lot more at the professional's compensation. We look at how much they're compensated in comparison to their peers, and that really is what drives the value in a professional practice.
Jeff: Interesting. Now, does it vary from professional industry to professional industry? Or for the most part, it's just the way these professional practices, whether you're an attorney, it's a legal practice or it's a medical practice or something like that? Are they all the same as far as how you deal with them?
Peter: They're all the same at how we deal with them. What the differentiating factor though is the size. If you have a sole proprietor attorney, we're going to go back and look more at their compensation in comparison to their peers to see how much what we term “excess earnings” or how much higher they compensate themselves and they're able to compensate themselves versus their peers, versus a law firm where there are 50 attorneys. If we're appraising that entire law firm, we may look at that the same way that we would look at the construction company and value it just like we would value any other typical business. Same in the medical industry. If we’re looking at one doctor versus valuing an entire medical clinic for sale, we may look at that the same.
Jeff: That's Peter Agrapides. I'm Jeff Allen, and this is the Morgan & Westfield podcast series. And we thank you once again for giving us a slice of your time today. Peter, as we start to wind things down on this edition of the program, is there a major difference at all between businesses on one side of the border and another? I'm talking about Canada and the United States now. In terms of valuing those businesses on either side of the border and how both sides handle appraising businesses, that you know of, as far as that goes?
Peter: No, they're very similar, and there's been a large push over the last, probably, 10 to 11 years, not only with Canada and the United States, but with companies all over the world, to standardize the valuation standards for what methods we use to value the companies, what's included in the valuation report, terminology, and that sort of thing. The one differentiating factor in terms of something that may augment value, if you're valuing a company in Canada versus valuing a company in Saudi Arabia or somewhere else, would be country-specific risk. That would be something that would affect the discount rate that we would use and maybe a discounted cash flow model or would affect maybe an adjustment that we would make to multiples, EBITDA multiples, or something like that if we were using public company multiples.
The one differentiating factor in terms of something that may augment value, if you're valuing a company in Canada versus valuing a company in Saudi Arabia or somewhere else, would be country-specific risk.
Jeff: To close things down, Peter, I'm interested in your particular practice. Is there anything that you commonly run into, maybe a situation that is common among a number of your clients when you're dealing with them, they can sometimes make your job maybe challenging and actually impair or impede the process of appraising a business? What is an important thing to remember for those people who want to sell a business to know when it comes to working with an appraiser who is trying to do his level best to get them their best value?
Peter: Yes, that's a really good question. The biggest thing that I can stress to somebody, if they're having somebody come in and value their business, is to make themselves available. That's something that in my professional documentation, my engagement letter, my document request, when I send all of that communication out at the beginning, I specify the process. So we're going to have the engagement letter, the data request, my valuation checklist goes out. And here's my time frame for when I expect to be done once I receive the last piece of information. Then after that I specify, "Here are the times I need you, the client, available to respond to me. The first one is to give me everything on the data request, okay? I don't send out a general data request. My data request is tailored to you, the client, specifically, and I need everything on there." So sometimes, they'll send me the tax returns and say, "Okay, I've got you the tax returns, when's the report going to be done?" We have twelve other items on there that I need to have completed. [Laughter] So, make yourself available…
Peter: To get me all of those pieces of information. I want to come by, kick the tires so to speak, meet you, meet your top management, meet your advisers, your attorney, your CPA, your banker, that sort of thing, do an I-term, a site-management interview, get to know the business, see that there is actually a business there, it lends credibility to my report. So, make yourself available for that. I've had instances where I go into the site-visit management interview, and the person I want to meet with, the top level manager or owner, introduces me to everybody around the table and says "Hey, look, I've got to take off. I've got a golf game right now, or I've got.." maybe it is something business-related, and they're gone. And that's somewhat of a waste of time because 90% of what I need is to sit-down with that person. So, it's really to make themselves available.
Jeff: So, communication, responsiveness, and availability are a key. Peter, if someone has a specific question or questions for you, they want to contact you about their particular situation, they've got a business that they either want to sell or buy, what should they do? How can they reach you?
Peter: Probably the most direct way is send me an email. My email address is my first name. It's firstname.lastname@example.org. Telephones always work also. I can be reached at 801.273.1000, and I'm at extension number 2.
Jeff: And where can they find your website, Peter?
Peter: The website is www.fccval.net.
Jeff: Very good. Well, Peter Agrapides, once again, I thank you very much for taking time out of your day. It sounds like you've got some things going on, and I want to go ahead and leave you at that. We're out of time, so it's perfect. You and I will be able to get back together in the future. There's more to talk about. Thanks again.
Peter: Thank you.
Jeff: Thank you again to Peter Agrapides for joining us today on the Morgan & Westfield podcast presented by Morgan & Westfield, a nationwide leader in business sales and appraisals.
Now, 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, I'm Jeff Allen. We'll see you again.