A business appraisal can actually lift the value of your company, which would be useful, particularly when you know you want to sell your business. However, did you know that a valuation is not always necessary and — according to this segment’s guest — not always recommended when you know you are getting ready to sell your business. David Bookbinder is a valuation expert at GBQ Consulting and contributing writer to The Huffington Post. On this installment of “Deal Talk,” David explains to Jeff Allen when and why valuations may not be needed. He’ll also talk about a few things you absolutely will need in order to get the best deal for your company.
"Selling a business is a process. You don't just wake up one morning and say, 'I'm going to sell my business,' and expect to get it done in the next 30 days. There's a lot to be done."
- David Bookbinder
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.
The value of your business or business interest depends on what (in bold) exactly needs to be valued, why it needs to be valued, when it needs to be valued, and for whom it needs to be valued.
And I can tell you horror stories where, for example, an attorney would draft the document based on the intent of the business owner. And then, when the other advisers got involved and read the documents after the deal closed, it was pretty clear that the intent was misconstrued.
It goes tremendously to their [sellers] benefit when a potential buyer receives a confidential information memorandum that says, ‘We have a process, we have an intermediary, and oh, by the way potential buyer. You're not the only one who got this, some of your competitors did, too.
Selling your business may be the most important business transaction you'll ever undertake so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way. From helping you plan your exit strategy, to preparing a comprehensive appraisal, and locating the right buyers. Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.
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Jeff Allen with David Bookbinder, Director of Valuation Services at GBQ Partners LLC in Philadelphia, Pennsylvania. David, what I wanted to talk to you about in this segment of the program concerning valuations, maybe some reason that people may want to have them done. And we're not talking about necessarily, "I'm looking at a divorce soon" or something like that. We touched on a number of different things on the program in the past but really you had some keen insight on this one in your column, what is my business worth. And you talk about some reasons that would give business folks like me own our companies reason to give you a call and ask you to come on out. Let's kind of dive into those just a little bit. Are there really some principles or some objectives that people who come to you with or should have in mind as far as motivation for asking for a valuation, really good reasons.
David: Yeah, great question. Most of the reasons why people come to us for valuations, frankly, is because somebody else is telling them they need to get it done. They're typically trying to achieve some other strategic imperative whether it's gifting shares of their privately held business to their kids or their grandkids, or maybe they're granting stock options to employees, or maybe they're buying other business and they need to get the intangible assets valued. They're told by the other constituent review party, whether it's the audit from the IRS or the SCC that before we can those strategic imperatives, you need to have that thing valued. Those are the typical reasons. But to get to your question about the real value in getting a valuation. There's the planning aspect which we talked about in the last segment, if you're thinking about selling your business.
But here's another one that a lot of people don't really think too much about. And if you think about your investment portfolio, you can envision a pie chart if you will and you've got your portfolio usually allocated, large gaps, small gaps, international bond, etc., and you generated a certain return last year and you're feeling pretty good about that. Now imagine you've got a second pie chart. And then this second pie chart you're not going to lay in your ownership interest in the privately held business whether you're the owner or just a shareholder. You didn't have to know what the number is but you can probably imagine that slice of the pie, it's probably the largest slice of that second pie, which then means your whole asset allocation is out of whack. So there's an opportunity to do some planning about your asset allocation. It's about the idea of maybe taking some money off the table in some degree, reducing your exposure, and also thinking big picture about what is your exit plan.
Jeff: You have the need to not only call in some of the individual to talk about, maybe an attorney, a business adviser. But it sounds to me like that's a place where maybe a personal wealth manager might also come in handy as well.
David: Yeah, no question. They're probably the best suited to have that conversation with the business owner. So I'd put that out there for any of the wealth advisers that are listening in the audience right now, because that's one of those ways where they can really add value and help their clients.
Jeff: Ways to value a business, and kind of give us some things to think about as business owners. Most of us at some point become engaged in the numbers game. We're always thinking in terms of dollars and cents. How much I lost last month, how much I made last month, how much I lost last month, how much I made last month, how much I was able to keep how much we have coming out of the budget in the coming months. We've got a new equipment coming in. So we're always thinking about these types of things. As far as how to value our business is concerned, just another think that we need to really probably think about a little bit. If we don't have a really astute bookkeeper, or accountant on board, how should we think about this? Are there different methods that are used, that you use when you work with your clients? Does it really matter what it is you're preparing the valuation for that determines the method that you use?
David: Generally, the methods are going to be similar. If we're talking a business that's not headed for liquidation, so it's an ongoing operation. And there's two methods that are typically employed. One is what we call an ‘income-based method.’ As I've mentioned previously, valuation's a forward-looking exercise, so in that situation you'd be projecting the future operations of the business out into the future and essentially bringing the net benefit of those cash flows back to a present value to compensate for the appropriate level of risk associated with achieving that forecast.
The other method, if you've ever sold a house or bought a house you understand market approach concept. You look at what other businesses have transacted for recently. And there's two ways to think about a market approach, one is the business in its entirety and in that situation you're going to look towards comparable transactions of the sale of businesses. And the other way to think about a market approach is developing a publicly traded peer group, the idea being that your business is privately held so I can't invest in your business. But if I wanted to participate in the upside and also share the commenter downside risks. I could probably buy a portfolio stocks that trade publicly. Once you identify that peer group basket then you make certain adjustments that account for the differences between the peer group companies and the subject company. So by looking at it from those different lenses you tend to be able to triangulate evaluation.
Jeff: And you're listening to “Deal Talk,” my name is Jeff Allen. That man on the other end of the Morgan & Westfield guest line is David Bookbinder from GBQ Partners in Philadelphia. And we're talking a little bit about valuation, about the things that you absolutely need to do and think about three to five years out from selling your company the things that you don't. And we're talking about why you might need to have a valuation done. We've talked about this on our program in the past but we're kind of coming at this from a different angle. We're talking about different motivations and things like that, and the different types and methods that are used for these valuation calculations. You talk about the importance of why it really depends on the type of method that you would use. You put it in some simple terms I think that can really help people understand the principles of valuation I think a little bit more clearly and very simply, David. And I'm going to quote here from your column here on LinkedIn. He says, "The value of your business or business interest depends on what (in bold) exactly needs to be valued, why it needs to be valued, when it needs to be valued, and for whom it needs to be valued. And then you talk about some important things to consider. And one of those things, and I think a lot of people could probably understand this, is debt and how much is on the balance sheet. Why is this so important?
David: Because at the end of the day the debt on the balance sheet reduces the amount of equity that's available. So you can think about it in the context of your home, again, when you think about the value of your house and you subtract the value of the mortgage that's what's left over. I don't know if you're familiar with the TV show Shark Tank but if you watch the entrepreneurs when they do their pitches, if the sharks ever ask a question about debt and the entrepreneur says yes, they all sigh, and that's because every dollar of debt is going to decrease the equity value.
Jeff: Yeah, you bet, and that's understandable. You talk again here about another item to keep in mind that we've also discussed I think on the program in the past but it's one that bears repeating really because a lot of times a business owner may have a valuation, maybe it's comprehensive, maybe it's something that's simplified and they think, "Okay, I'm done for a while, I had my valuation three, four years ago, why do I need another one, everything has been essentially the same. We've operated the same profits and revenues on trajectory. There hasn't been a tremendous amount of growth but it's been steady, we've been able to manage and keep our expenses and our debts contained. Why is it important to revisit and to have another valuation done from time to time David?
David: Great question, because while the business may be operating at a steady state environment, markets change. So what your valuation was four years ago probably isn't relevant today necessarily. So key things to be thinking about when you talk about the methodologies I just referred to multiples change. Supply and demand in the marketplace and trading multiples for public company ebb and flow based on economic cycles. So if for example you may have been valued at, just to pick to a number out of the air, 4x EBITDA four years ago, that number could be higher or lower in the current situation. Similarly, when you think about the discounted cash flow method or the income method that I alluded to, that forward-looking model where you bring the cash flows back and a risk rate that's appropriate, part of that risk rate includes market-based factors including interest rates.
Jeff: David, as we're running out of time here, I wanted to just find out if you have any last words for our listeners today concerning valuations, concerning their need prior to sale, and just helping business owners in kind of a general way with maybe some key takeaways today, whether they're from our discussion or maybe these are just some parting words of advice that you may have in order to help business owners really focus on improving the values of their companies what would you tell them to do?
David: Yeah, that's a great question. I'm going to go a little bit off the grid here and talk about something we've probably hadn't talked about directly. That's relationship buy-sell agreements. I've seen a lot of harsh stories pertaining to buy-sell agreements, well-intended where people may have built-in things and they say we agree that book value is the right value for the business, although there's a lot of reasons why book value isn't the same as fair market value, so that's a bad metric. Then others may say things with the intent of being a little more scientific and precise and say we agree again for example five times EBITDA is the value of the business. But in reality that may not be a right multiple of that particular point in time when you need to enforce the buy-sell. And how do you define EBITDA? So it's unclear. The best advice I would give is if you're going to have a buy-sell agreement it's probably a good idea, think about building in an agreement there's going to be a valuation done periodically so that everybody understands exactly what's what.
Jeff: David Bookbinder, we have now officially ran out of time and before we go, you have an opportunity to give out your contact information if there is someone in our audience who would like to reach out to you, you're part of the country. No matter where they are they have a specific question or they need your help, how can reach you?
David: They can find us on the web at gbq.com. They can reach me at firstname.lastname@example.org, and my phone is 215-568-2306.
Jeff: And don't forget to get the guy's autograph. Maybe he can fax it or email it to you, whatever it is the technology that you use. Don't forget, you're in touch almost greatness. The man did meet Rush after all, that is why they call him the rock and roll guy of finance. David Bookbinder, it's been a real pleasure sir. Thank you so much for taking the time out of your schedule.
David: It's my pleasure. Thanks so much for having me.
Jeff: There you go, tell a friend about Deal Talk and about David Bookbinder's visit on our program. In addition to Morgan & Westfield you can find us on iTunes, Stitcher, and Libsyn. “Deal Talk” has been brought to you by Morgan & Westfield, 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 to you again soon.
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