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.

Drew Dorweiler

Certified Business Appraiser and Certified Valuation Analyst

Choosing the Right Business Appraiser

Our interview today is provided by Drew Dorweiler, founder of Dartmouth Partners Limited and a world-renown business valuation professional. Mr. Dorweiler discusses the importance of finding a business appraiser in your industry and the different types of business appraisers. He also explains earnouts and what it means to recast financial statement, discusses how fees are structured, explains when you should get a valuation, assists readers in determining a price for your business, and, finally, gives the benefits of staying involved in the business after you sell.


Key Points from Our Conversation

  • “The most critical characteristic a business owner should seek when engaging a business appraiser is the overall experience of the valuation professional and her/his firm.”
  • “One trend that is becoming increasingly popular in the appraisal (and other) professions is “value-based pricing,” representing a transition from a fixed-cost structure to one relating to value perceived or realized by the customer.
  • ”Business valuation comprises the determination of two variables: the rate of return/multiple and the benefits stream to be multiplied (capitalized).”
  • “The key to the success of an earnout is that it enhances the marketability of a business by providing both sides in a transaction with a common incentive to maximize ongoing financial and operating performance.”

Interview

Tina: I own a vehicle repair shop and am preparing to sell my business. Is it necessary to find a business appraiser that specializes in my industry?

Drew: While previous appraisal or transaction advisory experience in an industry is desirable if a business owner wishes to engage a sell-side valuation expert, it is not by any means imperative. The most critical characteristic a business owner should seek when engaging a business appraiser is the overall experience of the valuation professional and her/his firm. Most seasoned business appraisers possess experience in dozens, if not several hundred industries serving valuation clients.

Tina: What type of business appraiser do I need? Are there different types of appraisers?

Drew: As is the case with most professions, appraisers may practice as generalists with experience in as many as several hundred industries, or they may target a highly specific niche of clientele. While prior valuation experience in an industry is ideal, it is by no means essential. A seasoned business appraiser is accustomed to performing valuation mandates in industries for the first time; he/she is required under our professional standards of practice to obtain sufficient knowledge of the industry and business prior to issuing a conclusion of value.

Most seasoned business appraisers possess experience in dozens, if not several hundred industries serving valuation clients.

Tina: How do most business appraisers structure their fees?

Drew: If the appraisal report is independent in nature, according to our professional standards of practice, fees are to be structured on an hourly or fixed-price basis , and may in no way be contingent on the valuation conclusion or outcome of the transaction/litigation to which the mandate relates. However, if the appraisal mandate is of a non-independent “advisory” nature, then hourly fees, fixed-pricing, success or contingency fees, or a combination thereof are permitted. One trend that is becoming increasingly popular in the appraisal (and other) professions is “value-based pricing,” representing a transition from a fixed-cost structure to one relating to value perceived or realized by the customer.

Tina: I own a small bakery and I have not kept very detailed records of my business. I am looking to sell the bakery to my daughter. Do I need a valuation and what kinds of records will be required for my valuation?

Drew: While a valuation is not mandatory in a non-arm’s length transaction, it is nevertheless desirable to obtain an independent conclusion of value, preferably on a contemporaneous basis. Among the reasons that a valuation would be worthwhile in such situations include its comprehensive utility for such varied purposes, such as price determination (if a fair market value standard is desired), tax planning, estate planning, and bank financing. Moreover, a valuation in these circumstances does not necessitate a significant outlay of management time or expense ; often a lower level of assurance (calculation of value as contrasted with a formal valuation opinion) will suffice.

While a valuation is not mandatory in a non-arm’s length transaction, it is nevertheless desirable to obtain an independent conclusion of value, preferably on a contemporaneous basis.

Tina: There are small discrepancies in my financials. Is it necessary to have my financial statements “cleaned up” prior to performing a valuation?

Drew: One of the benefits of retaining a business appraiser is that the valuation process will inherently constitute reviewing and analyzing all relevant existing financial information, making appropriate inquiries of management and/or third-party sources, and using the data gleaned therefrom to arrive at a conclusion of value. Hence, no “clean-up” is required.

Tina: What does "recasting financial statements" refer to and how are you involved with the process?

Drew: Recasting financial statements is an integral part of the valuation process. This activity comprises the analysis and normalization of comparative financial statements to reflect an indicated level of prospective benefits ( cash flow , earnings , revenue, etc.) to be obtained from the subject business as at the valuation date. Typical adjustments made include normalization of non-recurring, non-operational and non-representative amounts of income and expenses to maintainable levels that an arm’s-length purchaser would require to sustain ongoing operations. The balance sheet is also frequently “recast” as assets and liabilities are adjusted from their reported “accounting” amounts to market values, removed (if non-operating in nature) or added (if not recorded).

Recasting financial statements is an integral part of the valuation process.

Tina: Many buyers use universal benchmarks to price a business, such as three or five times their earnings. Is there a quick and dirty way to establish a price for my business?

Drew: One of my favorite phrases in the valuation profession (yes we do have more than a few witticisms) is “rules of thumb are dumb.” Far from being a self-serving view, our rejection of the use of rules-of-thumb as useful for little more than corroboration purposes emanates from the fact that the valuation of a business requires significant professional expertise and judgment. Essentially, business valuation comprises the determination of two variables: the rate of return/multiple and the benefits stream to be multiplied (capitalized). However, which is the appropriate multiple to use? And what is the definition of the benefits stream to be used? To what extent, if any, should the benefits stream be adjusted or normalized to reflect a representative level of ongoing operations? At this point, the conundrum begins. Attempting to value a business using a rule-of-thumb is like using the Internet to diagnose an illness: if you are lucky, you might coincidentally obtain the correct result.

Tina: Should I consider an earnout when selling my business?

Drew: I frequently advise my clients when working on a sell-side mandate that an earnout may represent a highly beneficial mechanism to successfully achieve the goal of closing the transaction on a timely basis at the desired sale price. Earnouts are an excellent means of reconciling divergent seller and purchaser positions with respect to price. The key to the success of an earnout is that it enhances the marketability of a business by providing both sides in a transaction with a common incentive to maximize ongoing financial and operating performance.

Earnouts are an excellent means of reconciling divergent seller and purchaser positions with respect to price.

Tina: I am willing to help with the transition long-term, possibly up to one year. Will that help improve the value of my business?

Drew: The willingness of a vendor to participate with transitioning the control of a business is an excellent means to facilitate transactions, particularly for those in service businesses, professional firms or companies where personal goodwill represents a significant asset. The ongoing involvement of the vendor may constitute a valuable mechanism where he/she continues to meet customers while providing them an introduction to the purchaser, facilitating the transition process and heightening the probability of customer retention. Other attractive attributes include the potential for the vendor to earn consulting fees for her/his continued involvement with the business, as well as the ability of the vendor to closely monitor ongoing performance and assist in maximizing firm value if the transaction price incorporates an earnout into the structure.

Tina: Is there a practical difference between value and price or is that just a theoretical discussion? How close to the final valuation figure can I expect to sell my business?

Drew: While a valuation is often performed in order to arrive at a notional conclusion of fair market value, this concept of “intrinsic” value at which an arm’s length investor would transact may, in practice, be significantly below the price that an actual purchaser would be willing to pay for a particular business. This is because certain “special purchasers” (e.g., competitors and companies with the potential to horizontally or vertically integrate with the target business) may be able to benefit from economies of scale, synergies , strategic advantages, etc., and hence willing to pay a price substantially in excess of fair market value. Therefore, a seasoned business appraiser will be able to identify and quantify such synergies available to a particular special purchaser, advice that may prove highly valuable to the vendor or the purchaser in negotiating the transaction price.

Attempting to value a business using a rule-of-thumb is like using the internet to diagnose an illness: if you are lucky, you might coincidentally obtain the correct result.

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

Drew: If you are contemplating either purchasing or selling a business, a business valuator is an essential element of your financial advisory team. The business appraiser can be relied upon to provide valuable advice with respect to identifying and quantifying synergies available to specific purchasers, assistance with respect to tax-related strategies, expertise concerning the transaction structure (e.g., earnout, continued “key person” involvement, client retention methods), as well as a professional opinion of value.


Drew Stuart Dorweiler’s Bio

Drew Stuart Dorweiler, MBA, CPA, ABV, CBV, ASA, CFE, CBA, CVA, FRICS
Dartmouth Partners Limited
308 Square Saint-Louis, Montréal (Québec), Canada H2X 1A5
1 (514) 962-6896
DrewDorweiler@gmail.com

Dartmouth Partners Limited was founded by Drew Dorweiler, a world-renown business valuation professional, who has testified as an expert witness in more than twenty cases before the Québec Superior Court, Ontario Superior Court of Justice, U.S. District Court, Tax Court of Canada, Court of Queen’s Bench of Alberta and arbitration panels in high-profile, complex financial litigation and valuation matters. Mr. Dorweiler is recognized as one of North America’s pre-eminent valuers of professional sports franchises and properties. His valuation and transaction repertoire includes NHL, MLB, NBA, CFL, English Premier League, European and semi-professional sports teams, arenas, broadcasting and naming rights. Mr. Dorweiler graduated with a Bachelor of Arts, Economics, Dartmouth College. He obtained a dual MBA, Corporate Finance and Accounting, Lubin Graduate School of Business, Pace University.

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