Mergers & Acquisitions

Resources: Interviews with Industry Experts

Our goal at Morgan & Westfield is to provide you, our readers, with high quality information and valuable resources to help you navigate through the process of buying or selling your business. In this section, we provide interviews from various professionals somehow involved in the process of buying or selling a business.

Bryan Goetz

Accredited Senior Appraiser

Bryan Goetz is President/Owner of Capital Advisors, Inc., located in Creve Coeur (St. Louis), Missouri and has been actively engaged in the appraisal/investment banking profession since 1983. Mr. Goetz discusses with us intrinsic value, investment value , premise value, using an appraisal in a courtroom, determining the value of your business, and more!


Key Points from Our Conversation

  • “Business appraisals usually have a stated purpose and a statement that the appraisal should only be used for that purpose.”
  • “The only time an idea of value for a business can be derived by a comparison of the business to publicly-traded companies is if the subject business could realistically be publicly-traded.”
  • “Business appraisals are often challenged by parties who do not agree with the resulting conclusions.”

Interview

Tina: I am selling my business and am preparing to have my business appraised. Can I also use this appraisal in a courtroom, if needed? Why would an appraisal need to be used in a courtroom?

Bryan: Business appraisals usually have a stated purpose and a statement that the appraisal should only be used for that purpose. Most layman do not know that the value of a business can be very different depending on the purpose of the appraisal, so it is very important that the appraisal be used only for the stated purpose, or one runs the risk of utilizing a value that is inappropriate.

For example, the value of a business for divorce purposes needs to comply with state legal precedents which could make it very different than one, for example, for estate tax purposes that needs to comply with the legal precedents in that area. Therefore, an appraisal prepared to establish the value of a business for sale should only be used in a courtroom if the issue at hand is the value of the business for sale. Appraisals are often used in a courtroom when the issue at hand is the value of the property that is the subject of the appraisal. Many times each party will procure an appraisal to support their position as to value.

Most layman do not know that the value of a business can be very different depending on the purpose of the appraisal, so it is very important that the appraisal be used only for the stated purpose, or one runs the risk of utilizing a value that is inappropriate.

Tina: What does it mean to “challenge” an appraisal? What are the most common reasons for “challenging” a business appraisal?

Bryan: Challenging an appraisal means to dispute any of the findings of the appraisal or the methodologies utilized to determine those findings. Business appraisals are often challenged by parties who do not agree with the resulting conclusions. These challenging parties could be a buyer or seller of a business, the Internal Revenue Service, parties to a divorce or lawsuit, or the Department of Labor with respect to an appraisal for an Employee Stock Ownership Plan.

Tina: What do I need to know about “premise of value”? How does it impact my business valuation?

Bryan: A premise of value is the actual or hypothetical transactional circumstances assumed in the appraisal. For instance, if the value of intangible assets are broken out in a business appraisal, the premise of value could be that the subject intangible assets will be valued; 1) in continued use, as part of the going concern of the business, 2) in place, but not producing income, as part of the going concern of the business, 3) in exchange, on a piecemeal basis , as part of an orderly disposition, or 4) in exchange, on a piecemeal basis, as part of a forced liquidation. The value of the subject intangible assets, and overall business value, could be very different under each of the above premises.

Tina: What is investment value and how does it affect the sale of my business?

Bryan: Investment value is the standard of value that establishes the value to a particular person and that person’s investment requirements. Contrast this to fair market value that assumes a hypothetical buyer and seller. The standard of value utilized in the business appraisal could affect the value of the business for sale. For example, if a specific buyer has a history of paying 4 times EBITDA (a commonly used earnings measure defined as Earnings Before Interest, Taxes, Depreciation and Amortization ) for companies in its target industry, despite fair market value transactions at 5 times EBITDA, the investment value to that buyer may indeed be lower than the fair market value by 1 times EBITDA.

Tina: What is intrinsic value and is this something I should be concerned about when buying a business?

Bryan: Intrinsic value is often referred to as the true value or the inherent value of a business despite what other people may consider the value to be as measured by market activity. It is usually derived by an analysis of the fundamentals of the business. Intrinsic value has relevance to a buyer of a business because it represents an opinion, other than the market, of the value of the business. Of course, an opinion as to the intrinsic value of a business could be right or wrong.

Intrinsic value has relevance to a buyer of a business because it represents an opinion, other than the market, of the value of the business.

Tina: Can I compare my business to a publicly owned business to get an idea of the value?

Bryan: The only time an idea of value for a business can be derived by a comparison of the business to publicly-traded companies is if the subject business could realistically be publicly-traded. Many times we see small businesses being erroneously valued by their owners by looking at P/E ratios of public companies in the same industry. Most of the time the publicly-traded companies have much lower risk levels and higher growth rates, both of which produce higher P/E and other valuation ratios.

Tina: How does my role in the business affect the value of my business?

Bryan: In the process of valuing a business an adjustment is often made for compensation of owners, which may be high or low compared to what would be paid to someone else to perform the same duties. Therefore, owner’s compensation could play a big role in the ultimate value of the business. Also, if the owner is a key person that could not easily be replaced, the risk associated with the earnings increases and causes the value of the business to be lower.

Tina: How does the motivation of the buyer affect the price of my business?

Bryan: Just like selling a car, a house or any other asset, the motivation of the buyer could significantly affect value. If the buyer really wants your business, possibly to integrate vertically, access your market, cross-sell products, or any other reason, he may likely pay a higher value. Likewise, an unmotivated buyer may produce a lower value.

Tina: Is my business valued on a pre or post-tax basis?

Bryan: Businesses can properly be valued on either a pre or post-tax basis, as long as it is done on an apples to apples basis. For example, if earnings are pre-tax, discount rates, cap rates and market multiples should also be calculated on a pre-tax basis. Many times, flow-through entities such as S Corporations and LLCs are valued on a pre-tax basis since their reported earnings are pre-tax, but may also properly be valued on a post-tax basis if its done on a consistently post-tax basis.

Businesses can properly be valued on either a pre or post-tax basis, as long as it is done on an apples to apples basis.

Tina: Which industries demand the highest multiples in this marketplace?

Bryan: Multiples vary widely from company to company, even ones in the same industry. That being said, multiples in general industry classifications over the long run tend to be higher in the manufacturing and mining sectors. We have seen very high multiples in the software sector, but that is likely due to high top line growth and low current earnings.

Tina: Which industries demand the lowest multiples in this marketplace?

Bryan: As said above, multiples vary widely from company to company, even ones in the same industry. However, over the long run, we see the lowest multiples in the agriculture and retail sectors, likely due to low relative growth and/or key person risk factors.

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

Bryan: As explained further on our website, the 10 steps to preparing a business for sale are;

Make sure the company’s books are in order

  1. Get organize
  2. Make a good first impression
  3. Show a history of growth and stability
  4. Have a succession plan
  5. Make a long-term strategic plan
  6. Seek out and destroy “deal killers”
  7. Be prepared to answer questions
  8. Be prepared for due diligence
  9. Get your advisory team together

Buyers and sellers of a business should realize that business valuation is more of an art than a science and that different people can have very different opinions as to value. This is due to the fact that many subjective judgments have to be made in valuing a business. Judgments have to be made as to reasonable owner’s compensation, other reasonable discretionary expenses, long-term growth in earnings, the risk level of earnings, strength of management, level of competition, the anticipated success of new products, etc.

Buyers and sellers should also realize that despite what they believe the value of the business is, it is only worth the price at which a buyer and seller will transact. Thus, care should be taken in estimating a reasonable value, or the business might not sell.


Bryan Goetz’s JD, ASA Bio

Bryan Goetz, JD, ASA
1065 Executive Parkway, Suite 205, St. Louis, MO 63141
(314) 434-3800
bgoetz@capitaladvisors.biz
capitaladvisors.biz

Bryan Goetz is President/Owner of Capital Advisors, Inc., located in Creve Coeur (St. Louis), Missouri.

EXPERIENCE:

Mr. Goetz has been actively engaged in the appraisal/investment banking profession since 1983. He has prepared financial analyses and appraisals of stock and partnership interests for many industrial, commercial and institutional clients and assisted in purchase and sale transactions. Appraisals prepared by Mr. Goetz have been used for purposes of mergers and acquisitions, recapitalizations, income tax, gift tax, estate tax, divorces, ESOPs and corporate planning. Mr. Goetz has qualified as an expert witness before various courts, including the United States Tax Court. Mr. Goetz is also active as an investment banker.

PAST EMPLOYMENT:

Prior employment was in the position of Vice President of Commerce Bank, Senior Financial Consultant for Valuation Counselors Inc., Financial Consultant for Marshall and Stevens Incorporated and Business Service Officer for Centerre Trust Company.

EDUCATION:

Mr. Goetz graduated Magna Cum Laude with a Bachelor’s degree in Business Administration from Truman State University. He also graduated from St. Louis University School of Law where he earned a J.D. degree with an emphasis in taxation, and was an Oval Phipps Scholar.

PROFESSIONAL ORGANIZATIONS:

Mr. Goetz is accredited in the valuation of businesses and intangible assets by the American Society of Appraisers (Senior Member), and is also a member of the Missouri State Bar. He also has served on the Missouri Appraisal Advisory Council and has served as President of the St. Louis Chapter of the American Society of Appraisers.

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