T. J. Liles-Tims

T.J.: First and foremost, I always suggest that the Seller have financial statements prepared, at least, on a quarterly basis . One of the first things a Buyer is going to want to see are financial statements and not just the tax return, because the tax return typically has atypical expenses included ( depreciation , 50% of meals and entertainment, etc.). Second, is to have some sort of sales price in mind; whether you have a business valuation conducted, or just have something in mind, take the time to think about a price. Lastly, of course, as a business valuation professional, I highly recommend contacting a valuation professional who can give you an estimate on the value of the business.

T.J.: The business valuation is pivotal in many different aspects of the exit planning process, but one of the biggest roles is allowing the Seller to prepare for exiting the business. I have had engagements where the Sellers were ready for retirement and thought that the value of the business would allow them to retire. These particular sellers were surprised that they had overvalued the business and will not be able to retire. Vice versa, I have had engagements where once the valuation was determined, the Seller said, “I wish I had known that sooner and I would have retired sooner.” Bottom-line, the business valuation will narrow the decision that must be made in an exit plan.

T.J.: If the valuation is not conducted for the sale of a business, then typically it is for either estate or gift tax purposes. If an owner of the business passes away, then their shares in the company must be valued and included on the deceased’s estate tax return. This is also true if an owner of the company decides to gift shares of the company stock, then the shares must be valued to include a gift tax return.

Another popular reason is for buy-sell agreements. It is much more common now for a company to be valued, to place that value in the buy-sell agreement should a triggering event occur. It is not unusual for this valuation to be updated each year to include in the buy sell agreement. There are many other reasons for a business valuation, but the ones mentioned above are the most popular reasons why owners or management have them conducted.

There are many people who say they can value a business, but are not credentialed to do so.

T.J.: The cost is highly dependent on the complexity of the business. In my engagements, I will typically ask for the financial statements of the company prior to quoting a fee, as I want to see the complexity of the business. I ask the client: are there multiple revenue streams? Are there a lot of non-business related expenses? There are many owners who are searching for the lowest price on a business valuation and, unfortunately, that is not a good idea. Depending on the purpose of the valuation, if someone gets the lowest price without the highest quality, it could cost them more in the long run.

The time to complete the engagement is also tied to the complexity of the engagement, so it is hard to give an estimate on time; however, at most of the engagements in my office, we try to complete within four weeks. A big part of getting a business valuation completed in a timely manner is based on how quickly the owner can get the requested documents to whomever is conducting the valuation.

I typically advise my clients to have the business valued once they even consider selling the business so they can make an informed decision on whether to move forward with the sale or not. Then, if the business does not sell within a year of the original valuation, have it valued again to determine what the value has done in that year.

T.J.: So long as you engage a business valuator who is credentialed by one of the major credentialing associations, then you should be good to go. The major credentialing associations are: The National Association of Certified Valuators and Analysts (NACVA); Institute of Business Appraisers (IBA); American Institute of Certified Public Accountants (AICPA); and American Society of Appraisers (ASA).

T.J.: Of course, someone could still be interested. Someone may be interested in just the assets of the company, maybe they have an “idea” that could turn the company around, or they could currently own a business that is complimentary to yours and buying your business would assist there current business and possibly yours.

T.J.: On the face, yes, buying new equipment could increase value; however, this is just on paper, not in the eyes of a Buyer. It is anticipated that your company should continue on forever, so the ability of that new piece of equipment to generate income is more valuable than the piece of equipment itself. I would not suggest that anyone buy a new piece of equipment to solely increase the value of the business, unless the company can afford the new equipment and/or the new equipment will generate more income than the piece of equipment it is replacing.

T.J.: This is the million-dollar question, there is no one way to value the business. The best way is to engage someone who values businesses as their normal course of business.

If a Seller is willing to finance a piece of the transaction it will make it easier for someone to purchase the business.

T.J.: Seller financing is often a selling point, because traditional banks will not loan money on “goodwill” or “blue-sky,” and if the business is expected to continue forever, then it will undoubtedly have “goodwill.” So, if a Seller is willing to finance a piece of the transaction, then it will make it easier for someone to purchase the business. I would not say that a Seller would be at a “real” disadvantage for not providing seller financing, but I do believe it would make the process more difficult.

T.J: “Recasting” or “normalizing” financial statements refers to removing any income, expenses, assets, or liabilities that are not directly related to the operations of the company – non-operating in nature. This can be cars driven by family members who do not work at the business, cell phones of family members, or a popular one is travel that is not business related. Recasting or normalizing can also be removing any items that are not recurring. Litigation costs is a good example, or remodeling an office. This refers to an item that is not expected to occur each year. A recasted financial statement takes these non-operating and non-recurring items and adds them back to the net income or equity of the business to give a truer picture of the company.

T.J.: These three items, especially cash and accounts receivable, are negotiated items between the Seller and Buyer. Most times the cash and accounts receivable are retained by the Buyer.

Most business owners do not like to think about, or know, the financial details of their business.

T.J.: Most business owners do not like to think about or know the financial details of their business. I would highly recommend that you understand the financial piece of the business. It will go a lot further in negotiations if you understand, not only the operations, but the financial piece of the business as well. Lastly, seek the advice of a professional who deals with business valuation on a daily basis. There are many people who say they can value a business, but are not credentialed to do so. Look for the credentials because more times than not you will be getting good advice.

T.J. Liles-Tim’s Bio

T.J. Liles-Tims, MBA, CVA, CFE, MAFF
BVFF Partners, LLC
3035 N.W. 63rd St., Ste 101 Oklahoma City, Oklahoma 73116
(405) 608-8805
TJ@BVFFPartners.com

T. J. Liles-Tims is a Partner at BVFF Partners, LLC, a certified business valuation and financial forensics firm. His expertise lies in business valuations, business litigation and fraud examination. T. J. received a B.B.A and an M.B.A in Finance from the University of Central Oklahoma, where his field of graduate study was financial management and investment analysis focusing on valuation models and financial analysis. Additionally, he has earned his designation as a Certified Valuation Analyst (CVA), Certified Fraud Examiner (CFE), Master Analyst in Financial Forensics (MAFF) in Commercial Damages/Lost Profits. He is a Contributor, Author and Instructor for the National Association of Valuators and Analysts (NACVA) in the areas of business valuation, litigation consulting, expert witness, and financial forensics. He has also taught continuing education classes in the areas of business valuations and financial forensics.

T. J. has provided consulting and financial management services for a variety of industries. These services have included business valuations, financial fraud examinations and financial consulting to distressed companies. Experience in litigation consulting includes business valuations, detection and quantification of various forms of financial fraud, divorce-related matters, embezzlement, criminal tax fraud and damages associated with securities fraud. Testimonial experience includes cases in federal and state court, as well as, FINRA arbitrations.