What are some of the things that can have a direct or even indirect effect on the valuation of your company? Are these things that you can control? And with so many professionals now providing valuation services how do you know if your business is receiving a fair valuation or not? For some answers to these important questions we've reached out to C. Fred Hall, CEO of Affordable Business Valuations. Mr. Hall is certified business valuations expert and a business consultant with clients nationwide. Fred Hall, welcome to Deal Talk sir, good to have you in.
Fred: I appreciate it. I'm glad to be here.
Jeff: Let me ask you right off the bat, Fred, will an appraisal be helpful in determining if my business is ready to sell? What do you think?
Fred: I think it's an important thing. You really have to see all the issues that come into play and determine the value of a business, and you got to see how buyers react to your business, when it's actually listed on the marketplace. An appraisal really helps you focus on the strengths of your company and your weaknesses. It's a good starting point for an owner to go through the exit strategy process. Determine what the business is worth. If it comes in significantly less than what you think it's worth then maybe you'll just table that process of trying to sell the business until you get the business value up to where you need it to be. So I think the appraiser really helps you to understand the whole process and gives you a good base starting point for valuing your business, what it could sell for.
An appraisal really helps you focus on the strengths of your company and your weaknesses.
Jeff: What I hear you saying, Fred, really through all of that is that because it is a good starting point it is probably important, correct me if I'm wrong, to have your business appraised from time to time. Not just a one-off appraisal. Say, "Boom, won and done, I'm ready to sell my business.” But this is something that you should probably include in your list of to-do's over a period of years and to have your business re-evaluated.
Fred: Yeah, I agree. The exit strategy that an owner should take should be a long-term exit strategy. It should be over the course of one, two, or three years really. So throughout that period of time it's good to get benchmarks for what your company is doing and what it's worth. So yes, a regular annual updated valuation would certainly go a long way to make sure that the owner sees, “I've done these things for my company this year and look what it's done to the value of the business. So that means I can do these things next year, maybe that'll also increase the value a second time.” It's really good to do multiple valuations over a period of time and see where the company's going.
Jeff: Let me ask you another question, Fred, with regard to this. As a business owner I know that I've been successful and I'm just kind of playing the role here, just kind of setting up a hypothetical. And I suspect that my business is probably worth about a million dollars. I'm not ready to sell it. I'm happy doing what I'm doing and I have kind of a long range goal here. But I don't really want to have to pony up for a full 100 percent comprehensive valuation of my business just now. Is there another kind of valuation or appraisal that maybe doesn't, it's not the full enchilada but it gives me a really good idea of what my business may in fact be worth right now? Kind of more of an approximate but something that's fairly close.
Fred: I do, it's a very simplified valuation that I call a snapshot. And I think most appraisers do that as well. But the snapshots are valuations that are directly oriented towards an owner of a business. The only audience that I play to is just the owner. The formal valuations that are very expensive are ones where you're having to submit documents to the IRS or the court, or financing companies. Those valuations have to be very technical and very extensive, and they're very expensive. But when I'm just appealing to the owner to let them know where the market is I can do those very inexpensively. I don't have to do all the market researchers required for an IRS appraisal. So a snapshot’s probably one fourth or one fifth the cost of a formal valuation. The number crunching that we go through in the snapshots is basically the same number crunching that we go through in a formal valuation. We just don't have all the other analyses that goes along with it. The owner of a company doesn't need to know about the industry that he's in. He's been in it all his life. But the banks and IRS need to know that information so you spend five pages on your report describing the industry. So the snapshots are very simple. They're very inexpensive, and you can update quarterly, annually, or whatever, very inexpensively. And you can then get a good benchmark and a turn marker. You're going to see where the valuation of your business is going.
It's really good to do multiple valuations over a period of time and see where the company's going.
Jeff: So you think these snapshots Fred - I'm sorry, I didn't mean to talk on top of you - but these snapshots you think can really be a valuable tool in helping a business owner actually raise, improve the value of his company by seeing where he's at now and where he'd like to be?
Fred: Absolutely. It's interesting, when I'm going through the whole process of a snapshot with an owner I go through a very detailed question and answer period. During this interview I'm asking dozens and dozens of questions about the company. And of course the owner of the company doesn't know what these questions all mean in terms of creating value, but when he gets the valuation report he suddenly sees all these numbers and how they went together and realize, "If I keep on doing this to my business I'm going to improve value. So maybe I should focus on those points in the coming year and I should be able to increase the value of my business faster.” The snapshot does help to focus the owner on the key issues surrounding his business and its ultimate value.
Jeff: That man right there is Fred Hall. He's CEO of affordable business valuations. I'm Jeff Allen. You're listening to Deal Talk. I'd like to kind of now step aside for just a second and talk to you about something else, Fred, that I've kind often wondered about. And that is whether or not valuation professionals such as yourself tend to use the same methodology for calculating appraisals and valuations. We know that there are some different processes but is everybody kind of pretty much doing the same thing out there?
Fred: Well, I'll tell you what. There's probably as many different methodologies as there are businesses to appraise. There's hundreds and hundreds of them and the reason is fairly simple for that is that we're trying to develop a mathematical formula or model if you will that predicts the future. And of course that's impossible. Nobody can predict the future. So we look at the past history and try to make certain assumptions based on what we've seen, and try to extrapolate that into the future. So as a result depending on the company that you're looking, the industry that you're looking at, the state, the economy, and all these factors might mean that we have to use different methodologies to get to the meat of what this company is worth. So you'll see a dozen different companies, valuations done on them and they're all completely different because the companies are in different industries or whatever. And so the appraiser had to use different methodologies to kind of capture all the issues surrounding that particular company. So there's a lot of different methodologies out there. Basically there are two basic models that we use, doing appraisals and whatnot. The most common one is the market approach which is just like in a real estate appraisal where we're comparing your company with a number of companies similar to yours that have sold in the past. So that's a market approach. In income approach we are looking at your company from an investor's perspective. In other words, what kind of rate of return can I expect? What should I be paying for that rate of return? So those are the two basic models that are out there. There are numerous adaptations of each of those models. There's probably a hundred different ways you can do the market approach, and there are a hundred different ways that you can do the income approach. But basically the income approach is basically an investor's methodology and the market approach is a comparative one where you're comparing similar companies that have sold in the past. In any case above and beyond there's numerous methodologies that I've seen appraisers use, but the market approach and the income approach are the basic ones.
But basically the income approach is basically an investor's methodology and the market approach is a comparative one where you're comparing similar companies that have sold in the past.
Jeff: Are you aware, Fred, of any ways that some appraisers out there have misled their clients by maybe giving them essentially an appraisal that, I don't know, is kind of based on a cookie cutter kind of formula for establishing valuation? Can you talk to that at all?
Fred: Yeah. I don't know whether misled, I don't think appraisers intentionally mislead but some of them are not trained properly to be able to do a good comprehensive valuation, so maybe due to lack of training they have produced an appraised value that is not realistic. And I've seen a number of cases where the appraiser often times has an opportunity to gain a long term relationship with his client, and so the appraiser's thinking, “Maybe I should give a very high value to impress the owner of the business.” And I see this occasionally with business brokers who are trying to solicit a listing, and as a result they will put a high value on the business to be able to solicit that listing. And as a result they may spend months and months and months trying to sell a business at an unrealistically high price. Those are the areas where I see misleading in the worst case. For what appraisers are typically doing it's more of a misunderstanding issue that I think surrounds these valuations. So for example I will be interviewing an owner about his business I might ask a question like, "Gee, your inventory has increased a lot over the last couple of years. What's happening here?" The owner isn't sure how my line of questioning is going to affect the value of the business. So he tries to guess what I want to see out of that question. So he might come back and say, "I've been increasing inventory for years trying to push my sales up. So I think if I increase inventory next year I'll get more business as a result.” Then he reads my valuation and finds out the increase in inventory is going to take a huge bite out of his cash flow and that will hurt the value of the business. So sometimes the owner is trying to guess what the appraiser means by a certain question and he is guessing wrong. The best defense for an owner in this situation is to not try to guess what the appraiser means by a question but answer the question is factually and honestly as you possibly can and not try to over-think it. Anyway, that's the biggest issues I see out there that facing an owner to avoid being misled I guess.
Jeff: How closely, Fred, are you involved with the business owner when conducting an appraisal or evaluation? There are certain pieces of information that you need prior to getting underway?
Fred: Yeah, that's always been a problem with me and most appraisers will have this long laundry list of information that we need to get because there's a lot of information that goes into these appraisals. And so you submit a very lengthy list of documents that you want to get from the owner. And the owners don't want to spend hours trying to extract information from their accounting systems. And so they usually send you half of what you've asked for. So you have to kind of try to fight through the process, trying to get everything you need to be able to do a good, comprehensive valuation. So it slows the process down trying to get that information. When I don't get everything I need, I try to make up for it in the interview that I subsequently do with the owners. I’ll spend two or three hours with the owner interviewing him about the nature of the business and all the financials that he's given me. And most of the time I can get the information I need out of those interviews but it really helps the appraiser if the owners of the business will give that appraiser everything that he asked for and not try to hold anything back. And it works to his advantage to do that.
The best defense for an owner in this situation is to not try to guess what the appraiser means by a question but answer the question is factually and honestly as you possibly can and not try to over-think it.
Jeff: I guess if you're going to pony up the money, invest in proper appraisal and something that's comprehensive, you might as well be cooperative with the appraiser really when he or she comes to your door and gets things underway. And remember this is all for your benefit. Fred, I appreciate your thoughts on it. So far that's going to wrap up the first segment of Deal Talk. You're listening to C. Fred Hall, CVA and CEO of Affordable Business Valuations with yours truly. My name is Jeff Allen. We'll be back on Deal Talk after this.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with my guest Fred Hall, CEO of Affordable Business Appraisals. Fred it's been really great talking to you so far in this program and I really do appreciate you joining us today. I'd like to talk about the types of things that impact or affect my appraisal as a business owner, and maybe these are things that I have something to do with and some of them are things that I can't really control. Let's talk about it a little bit, starting with the entity. Does the entity of a business make a major difference in the appraisal process itself and in terms of how long that process may take, how complicated it can be?
Fred: Definitely, entity type can affect the value of the business but not all valuations though. The purpose of the valuation that an owner would need done on his business sometimes will dictate whether the entity is going to be an effect on the overall valuation. So for example if I were doing a valuation that was going to be used for IRS purposes, or it's a state valuations or gifting, or things like that, or evaluation that would be for doing bank financing and things of that nature. Those types of formal valuations, I'm going through the whole income approach methodology. And the difference between an S Corp and a C Corp has a significant impact on the value of the business. So C Corps have a disadvantage in that the corporation itself pays the income taxes on the profits. And if the owner tries to remove those profits from the C corp he's taxed a second time in a form of a dividend tax. So owners or sellers of some businesses will find that a buyer is going to be resistant to buying a C corp because of this one double taxation issue. As a result the valuation of the businesses for C corps is going to be less than the valuation of an S corp. But if I were doing a valuation say for example the snapshots that we've referred to where we're just trying to tell the owner what the value of this business is, we're comparing his company with all the other companies that have sold and all the other companies that have sold are collections of S corps, C corps and proprietorships and whatnot. So we're getting kind of a composite valuation of all the different types of entities out there. So if I'm doing a valuation for a business owner I'm not going to take into account the differences that might come into play on entity types. But for IRS valuations and similar valuations I will. In this case if I see a company and an owner comes to me and says I need a valuation, and that company is a C corp I will certainly recommend that if the owner is considering selling his business that he should consider electing to go with S corp as soon as he possibly can to possibly save taxes in the future, and to make the sale of the business a little bit easier. So those are the differences on entities that come into play in the valuation.
Jeff: You just brought up something too I think that's really, really important to mention Fred and that is that you're not just an appraiser but you are a consultant. And so it does help to be able to wear both of those hats because you're really working on the side of the business owner. You're trying to help them improve the value of their company, save money wherever they can.
Fred: Absolutely. Something as simple as electing to go to S corp. That doesn't cost the owner anything to do that. His accountant could fill out a one-page document, send it to the IRS and it's done. It doesn't cost you anything. But if the owner is looking down range, three, to four, to five years before he sells the business, it's a lot easier selling an S corp that has been seasoned for a number of years like that rather than do a C corp. Owners that have a long range exit strategy are the ones that really could benefit from getting involved in the appraisal process as early as they can possibly can and have a business consultant review their company to show them where he can make changes to improve the overall value.
The purpose of the valuation that an owner would need done on his business sometimes will dictate whether the entity is going to be an effect on the overall valuation.
Jeff: Other types of things that can have an impact on the value of a business, let's talk about the overall economy, obviously that's not something that I can control or you can control Fred, or any business owner for that matter. But from your experience, does a recession always have a negative impact on a business' valuation?
Fred: If that business suffers profitability as a result of that recession then the answer is yes. Interestingly enough, I've done some research on this over the last couple of years because I had an awful lot of brokers who approached me and said, “We're seeing a tremendous drop in the multipliers that our companies are getting when we sell them because of this recession.” So I did some research and found out that there was a D-day drop off in the revenue multipliers and cash flow multipliers that we used to estimate the value of a business as a result of the recession. But what I also saw was most of the smaller companies, and these are companies that are doing less than 2 million a year. What I saw happening was that these companies were losing revenue because the overall economy was bad. And as a result of losing revenue, the potential for losing cash flow from the lower levels of revenue was pretty great. But it turned out from what I can see that a great many of the owners who saw the economy beating their companies down a bit suddenly realized that if they wanted to protect their own personal lifestyle they really had to jump into the trenches and start putting in more hours in their company, paring out all the excessive costs that have accumulated in the company and doing everything they can to preserve the bottom line. So I started seeing an awful lot of companies that are sold in the 2007-2010 period where revenues did indeed decline, and moderately so as a result of the recession. But the bottom line only declined slightly because the owner was doing far more now than he had in the past to make sure that the profitability of the company stayed up. So as a result a lot of the companies that are sold during the recession didn't suffer on the price as much as you might think because the cash flow had stayed moderately high as a result of the owner's actions.
But I think today when we're looking at a period of time where the economy's been really strong for the last three or four years and we look into the future and say, “Is the economy going to continue on to do this for the next four or five years?” Well, we could probably make a bet that there's never been a time in our history where there's been a bull market for more than, say, eight years. That's been the maximum. So right now we're at about year six or almost year seven, in a bull market. Odds are that we're going to see a recession sometime in the future. Will this affect the value of their business? It may very well do that. So an owner who's thinking of selling his business, he would probably do well to sell the business at the peak of the economy and the peak of his business’ revenues and profitability, which would probably be right about now. You just really don't want to try to have to sell the business when the economy is declining rapidly because the buyers can only assume the worst. And that will drive the value of your business down.
Jeff: And we know of course that there are some businesses obviously that are recession-proof, not necessarily bulletproof but that aren't as impacted by swift downturns or long downturns in the economy, Fred, but that's probably a story for another time. We could talk about that. We could probably go through that list one by one. What about those situations Fred when you have a partner or a spouse, or the business owner, him or herself involved in a company and maybe their business is successful. But they have their own personal issues. Maybe they've got poor credit, or maybe they've got tax liens, or maybe there's a divorce that is coming down the pipe. Situations like that that are personal issues aside from the business. Can those types of things impact the value of a company?
Fred: I think indirectly they will if the owner changes his focus from the business over to his personal life and kind of takes his foot off the accelerator for the business and starts looking at the divorce issues and whatnot. And I've seen an awful lot of businesses where the business starts to slide sideways and downward because the owner is now focused in a divorce situation. And that's the most common situation. It's just a change of focus by the owners. What I'm doing appraisals for situations where there's a partnership split up or a divorce splitting up the company, when I'm doing appraisals for those types of situations I will interview one of the spouses or one of the owners who are most knowledgeable about the financials of the company and interview him or her for three or four hours. And then I will produce a draft that I give to both parties, both owners or both spouses, and have both parties review what I have written based on the conversations that I had with one of those owners. And that gives the second owner or spouse the opportunity to review what was said and make comments that might change the way I did the valuation. So I usually submit a draft to the owners or spouses during this type of situation so that both spouses or partners can respond to way that I analyze the business. And if there are any changes that one of the partners or spouses thinks is necessary, well they can come back and say, "No, you got this wrong. The partner you spoke to didn't understand your question. This is the right answer." In which case I'll correct or change the draft that I did and then send out to both parties as a final draft. That's the fairest way to handle those situations or those types of appraisals.
So an owner who's thinking of selling his business, he would probably do well to sell the business at the peak of the economy and the peak of his business’ revenues and profitability.
Jeff: Fred, we've got just a couple of minutes left. Let me ask you for your elevator tips. You're in an elevator. You're going up to maybe the 60th floor of a high rise downtown. You've got just a moment or two to share with someone next to you know as a small business owner and you'd like to give them some advice that might help them either improve the value of their business or at least maintain it. Anything at all that you could share, important take aways. Maybe this is something that would even help you as the valuation consultant come in and give them a fair appraisal of their company.
Fred: Yeah, if I were trapped in an elevator with somebody and had to give a 10-second consultation the first point that I would give to any owner of their businesses, to look at your financials, get together with your CPA, clean up the mess, make your accounting as clear and concise as you possibly can. Make it as honest as it possibly could be, get all the personal expenses that you've been burying in the financials in the past years, take them out. And at the end of this year producing a tax return that is squeaky clean. That will go a long way to attracting good quality buyers. They won't look suspiciously at your financials because they are very clean. And the banks, when they're doing the appraisal on the business will have a good, quality looking financial statement to base the value off of that shows the true cash flow with the company. And if you produce a tax return that has their true cash flow showing on it you'll get a much, much higher value out of your business than a tax return that has all kinds of personal expenses buried in miscellaneous, or cost of goods sold, or something like that.
Jeff: Ding. We've reached the 60th floor. I think that's where I said we were going and that's a great advice, Fred, and we appreciate it. We are out of time. I want to thank you so much for joining us today on Deal Talk, it's been a pleasure.
Fred: It's been a pleasure. I appreciate the invitation.
Jeff: C. Fred Hall, CVA and CEO of Affordable Business Appraisals has been our guest expert on this edition of Deal Talk.
If you're a professional who normally consults with small business owners, a serial entrepreneur who owns multiple successful businesses, or a small business owner who has sold a business and you'd like to share your experience with our listeners, we'd like to hear from you about joining as a possible future guest on Deal Talk. Simply give us a call at 888-693-7834. Deal Talk has been presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. So if you're thinking about selling a business or buying one call Morgan & Westfield today at 888-693-7834 or visit morganandwestfield.com. I'm Jeff Allen, thanks again for listening. We'll talk again soon.
Jeff: I'd like to start by talking about just basically in terms of legal risks, tell us how much of a concern this should be to a business owner in addition to all the other things that he or she has to be concerned about with respect to their companies?
Virginia: Sure, again, a pleasure to be with you and your audience. One of the most important aspects that I like to talk to and especially when I first open up the concept of legal risk management to my students is the issue of perception. We perceive that we may know a lot about our industry because we've been in our industry for several years. We perceive that we know how to handle certain issues, certain aspects because we've been through certain cycles before. In any industry be it a large company, a small company, apparel or aerospace and defense, you do have that mentality of “We've seen it and we've done it, and we're good to go.” What is changing, however, especially in the last few years is the perception with regard to legal risk management. Very interesting 2013 study by Accenture which is a management consulting firm, they did a global risk management study and that included legal risks. And they reported that 98 percent of those surveyed respondents reported an increase in their perceived importance of risk management, which also includes legal risks, at their organization. So essentially a conclusion was: today we've categorized legal risk management as very important. It enables execution, it enables our achievement of our objectives. Legal risks are number one on the list of top risks expected to rise over the next few years, just given of the changes in regulatory matters, globalization, and other aspects that are coming down the pipe. What's interesting about this study and then also with interactions that I have with business owners, the interactions that I have with students, interactions that I have with other professionals, they tell me risk management used to be seen as a bump in the road, something that we really don't want to spend too much resources on that because we have everything under control. Now it's being seen more as an objective and something that is vital to not only the company's well-being but vital to the company's future well-being as well.
Now it's being seen more as an objective and something that is vital to not only the company's well-being but vital to the company's future well-being as well.
Jeff: I've mentioned at the top about the potential damage on a company's value. Do you believe that that's true? Is there something to the effect that litigation and legal challenges, and the financial cost that come with those can have a damaging effect on a company's value even years after this stuff has gone by the wayside, things have been fixed, things have been repaired, and the company has had fantastic revenue growth? Is it true that there can be a lasting impact on the company in its perceived value?
Virginia: Certainly. There are several matters to go in. I actually looked up certain statistics with regard to litigation since you mentioned that. And litigation is certainly a big worry and legitimately so for many business owners and business professionals in general. What I like to do is I like to include various studies and various statistics, and those help for instance to bring home the principles with regard to legal risk management, to students and other people that I give presentations to. One of the more interesting studies was done fairly recently in 2012 by the National Center for State Courts in cooperation with the American Board of Trial Advocates. American Board of Trial Advocates is a very important, one of the largest, most active professional organizations in the country for litigators. What they found was their study was done on 43 general jurisdiction courts, so they are the first courts that you go to, so akin to our superior courts in California. They've looked at median cost of litigation by case type. One of the more interesting ones, for instance real property case types, average cost would be $66,000. Employment average cost would be $88,000, and contract disputes, $91,000. And this can be found if people want to look at the study courtstatistics.org. So litigation is one aspect to look at. And people think while we do have a policy in place or we do have certain... regarded in those areas. But litigation, it's just one piece of the puzzle.
As I've mentioned before, regulatory compliance is going to become more and more of an issue to handle, why? Over the last few years we've had tens of thousands of regulations come down the pipe from Washington, D.C., and a very interesting study by the National Association of Manufacturers, and this was just from 2014. Complying with federal regulations cost around 2 trillion in lost economic growth annually, or roughly equivalent to 12 percent of total national GDP. The study which was conducted by economists Nicole and Mark Crain concluded that manufacturing, so they're talking strictly about manufacturing in this study. Manufacturing businesses face disproportionate share of the burden, or around $20,000 per employee, per year, nearly double what the average US business pays to comply the federal rules. Here's another important point that will probably ring true to certain members of your audience. Small manufacturers pay more than three times as much as the average US firm. That is around $35,000 per employee, per year that small manufacturers instead could use to grow their business and create jobs.
Virginia: So you have two aspects, you certainly have the litigation aspects, and usually the general counsel of the company, or the attorney that the company works with usually can handle the litigation areas well because you understand your industry and you understand the culture of your company, you understand what litigation risks tend to come up. But the more risks are involved, especially with regulatory compliance, so that could be anything from environmental regulations to if you want to go into federal government contracts, you have the far federal acquisition regulation, there are just a myriad. And it's important to understand not only your business, your company, but understand the industry you're in and see what potential regulations coming down the pipe could affect your industry and consequently your business.
And it's important to understand not only your business, your company, but understand the industry you're in and see what potential regulations coming down the pipe could affect your industry and consequently your business.
Jeff: Interesting point. So really depending again on the industry. There may be certain types of legal risks that you face that certainly other industries may not or maybe they don't have quite the exposure that your industry does and certainly with regard to manufacturing, there's really a whole host of possibilities out there lying in wait, and you've just talked about how much, it just seems like the legal risks for manufacturers far outweigh those in other industries or in other sectors, let's put it that way. But having said that, Virginia, what do you believe are the most significant legal risks that most companies regardless of industry face today?
Virginia: I think a very important aspect ... So with legal risk management we're talking about, it's like an umbrella concept. We have several areas of the law that fall under legal risk management. However, one of the more important areas under the legal risk management umbrella if you will is contract risk management, because with businesses it's just business in general. It's just based so much on the contractual relationships, be it contracts between private entities, or be it contracts with the state or federal governments. So contract risk management is an essential component of managing legal risk. We talked briefly about legal risks but the essence of legal risk management is the process of analyzing the organization's exposure to risk and determining how to best handle such exposure. It's the process of identification, assessment, and prioritization.
With contract risk management what we're looking at is contract risk evaluation as well as other areas of identification. We may be looking at evaluation of the likelihood and consequences, of identified risks, implementation of risk avoidance, engagement in risk reduction, use of insurance, use of risk transfer, those sorts of matters. So contract risk management is one area. Another area that you will see especially if a company is doing business internationally is the issue of Foreign Corrupt Practices Act. The US Department of Justice is continuing to prosecute violations of Foreign Corrupt Practices Act and they're making it a top priority. I give the Foreign Corrupt Practices Act as an example because it's also important to understand where is the government looking at to enforce. So you want to see where is enforcement coming down from, the government. And that's very critical point when we're talking about risk management. Are your policies up to date, how have you responded in the past? And to be able to better respond to those risks one of the most important areas to understand is how: are your people trained, do your employees understand not only the company's goals but also understand that risk management is essential to the company's health? One of the more important points as well is to be successful in any given business endeavor, we know that business leaders have to communicate with others. So from that we then see that board and management must reconsider their traditional risk approaches and demand better information from their employees to help them achieve their organization's objective.s A lot of it has to deal with communication with key employees, and the employees who are working because what you see is the people closest to the work are those who best be able to identify what potential risks exist for the company in question.
Jeff: We're talking about managing legal risks and how important it is that you need to take a look at your company and find out where your weaknesses are, where you're exposed. You need to try to find out what it is that you don't know. And a good way to do that would be to consult your attorney, and you can also keep listening to this program. Because when we come back we're going to talk more about this very important concept, something that could really at the end of the day cause your company to lose a tremendous amount of money, cause a tremendous decline in value, and that would make it very difficult indeed for you to continue operating and also could put your future in jeopardy as far as that opportunity to sell or acquire other businesses and your business, to sell your business. Virginia Suveiu is my guest. My name is Jeff Allen and I'll be back with more when Deal Talk returns after this.
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Jeff: Welcome back to Deal Talk, my name is Jeff Allen and I'm here with my guest Virginia Suveiu, and she's an attorney, and she is also a teacher at UC Irvine, at University of California Irvine, the extension there for the contract management certificate program, and the legal risk management certificate program that she actually helped develop over there. I'd like to start this segment of the program by talking about why you believe that most businesses seem to come up short in protecting themselves against such risks. Is it just one of those things where when you're talking about documentation, you're talking about contracts, you're talking about tremendous volumes of paperwork, and language, and legalese and stuff, and you can't go through it all and completely define and identify all of these areas that you need to be mindful of, and so you just kind of take and pass it off having signatures on both sides, "Okay, we're good to go. File it away. We'll just be really, really careful. We'll mind our business." Why do so many businesses have a problem protecting themselves in this day and age?
Virginia: I think the way you phrase your question really hits the nail on the head. There's a silo mentality. We tend to compartmentalize, and we tend to think, to act, and to deliberate within our own whatever our expertise is. So if your expertise is tax you think of those matters, etc. So the pre-financial crisis mentality was focused squarely on a company or an entity's failure to comply. I'm sure a lot of your listeners have heard of enterprise risk management, and perhaps many of them, in general many organizations have used a traditional form of enterprise risk management. So essentially what enterprise risk management purports to do is to focus on identifying, measuring, and reporting on an organization's top risk. And they tend to the ask experts from the various fields about what their feelings are and what their conclusions are based on the information that is given from their points of view. What the problem is that when you compartmentalize and you have a silo mentality where you do not have an open forum of communication, you do not see what the left hand and what the right hand are doing. You completely miss an entity-threatening risk.
At the beginning of 2013 the National Association of Corporate Directors, they said, “We have a fundamental re-thinking of risk as it pertains to business matters.” So they said that every board and every management member must be certain. It's not a guess, it's not an estimation, but they have to be certain that the risk appetite which is implicit in their company's business model and strategy is appropriate. So risk appetite, you have to fundamentally understand, can our company really go through with whatever endeavor that we have in mind to go forward with? It's not just a guess, it’s not just an estimate, it's do we have the resources necessary, can we carry through with the goal that we have in mind to accomplish?
The next point is that the expected risks are commensurate with the expected rewards. Also, management has to have a system in place to properly manage, monitor, and mitigate risk. And that system is appropriate given the company's business model and strategy. So if we're talking about a company that has domestic business and is in a certain industry, probably having a policy on Foreign Corrupt Practices Act wouldn't be applicable yet, but it depends. If the company wants to expand and go internationally then they have to consider Foreign Corrupt Practices Act in other matters. That is why they're so critical to have open and flowing communication with your experts, be it your general counsel, your attorney, be it the tax attorney, be it your CPA, whatever expert you're working with, that communication line has to be very strong otherwise you cannot make a true decision and you cannot move forward. That communication has to be intact.
And the other point is: the risk management system informs the board and management of the major risks that are facing the company. What that means is, is there's an appropriate culture of risk in the company? That means setting the tone at the top. It's one thing to have a policy on paper, but it's quite a different matter to have the training, to have everybody from the contract manager, to the project manager, to your contract administrator, to your administrative assistant fully engaged and understanding that the processes and policies in place at the company are there to achieve the company's end.
So contract risk management is an essential component of managing legal risk.
Jeff: I'm assuming then, Virginia, that if a company has any issues or if they don't know how to get started, in basically getting kind of that, taking that proactive approach toward ensuring that they are actively protecting it, proactively protecting it by getting out in front of these potential risk management exposures that they could have that they need to contact a business attorney and do that in the early going, is that right?
Virginia: Oh yes. Fundamentally contacting an attorney at the very beginning, so even for a start-up, even before the bare beginning you contact that attorney and it could be that you need help with intellectual property. So you then talk with an attorney who specializes in that. It's akin to if you have a heart condition you go to a heart specialist. You identify, you have to arm yourself with the necessary information, that's the bottom line. And by arming yourself with the necessary information that also includes with whom you consult in finding those experts. People, and usually I've heard that business people, they tend to find these experts be it within their industry, if they go to conferences they tend to know who the experts are. They can find for instance from the local bar association usually will give a list out of attorneys that are involved. But usually what I’ve found from various business people is that they tend to find the experts that they needed to contact from within the industry. So from conferences, or from presentations or workshops, they tend to find those people. And it could also be word of mouth whom they've consulted with. And the role of the attorney, I just want to make this clear, it's to represent the client's interest. Client makes the ultimate decision but attorneys look to see how we as the expert, as the attorney, can serve the client's interest. It's not just solely the problem at the moment. So the attorney is a trusted advisor. As is the CPA, as is whatever other expert you consult with. Law is fundamentally a specialty field, very complex. So as I said before if there are IP, intellectual property issues, you'd want to speak to a specialist in that area especially when we're talking about technology or other matters. Especially if you're thinking about going abroad. A lot of companies that do work internationally, they'll tend to connect with attorneys who are in that country and understand that country's laws. You have to talk to a specialist in those particular areas.
But also I would say that it's incumbent on organizations to understand and to find sources of legal risk. Usually that can be found in contracts, in regulations that are applicable to their industry, to any litigation that has happened in the past, or potential litigations, as well as any changes that the company is thinking of making. And then those sources of legal risk, of course the attorney definitely will be the partner with the business person to find where those risks are and if they cannot be eliminated then mitigate those risks. But as you've highlighted earlier the communication is crucial, otherwise there's just no way to make a proper decision.
Jeff: Well, Virginia with that said and on that note we're going to have to leave things here, but I'd like to let our listeners know where you might be reached in case they have any questions. They might want to sit in on one of your classes or perhaps sign up through UCI extension for your classes perhaps, or just maybe contact you about possibly consulting with them in their particular needs. How can they reach you?
Virginia: Sure. I am one of SBA SCORE’s mentors and I am going to be giving a workshop in January so stay tuned for that. It should be appearing on SCORE's website. The best way is by email. It's firstname.lastname@example.org. And I always laugh when I give my name because I know it has too many vowels in it. The classes that I teach at UCI extension are a great way. I'm also recently become an adjunct professor at Concordia University Irvine for their MBA program. And it's very interesting because the courses that I teach are catered toward professional business people. So take out the legalese and you present the areas of legal consideration for the professional business person. So that's the way I approach my classes. And providing and arming the students and those in attendance with that information will make you a sharper business person in the end.
You identify, you have to arm yourself with the necessary information, that's the bottom line. And by arming yourself with the necessary information that also includes with whom you consult in finding those experts.
Jeff: There you go. And obviously as you just pointed out by taking the legalese out of it you're making it more clear for average folks to kind of understand, and then they can better apply these principles to their own situations and their own companies. Virginia Suveiu it's been a delight to have you on the program today and we hope to have you back on again in the near future. I hope that you’ll entertain that idea and thank you again for joining us.
Virginia: Of course, it was a pleasure, and I look forward to future conversations. It's been wonderful.
Jeff: Virginia Suveiu has been my guest. She's an attorney and also teaches at UCI's extension. And if you need further information on Virginia we'll be happy to pass that along. Simply check out this podcast again and again at morganandwestfield.com.
Deal Talk has been presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield today at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts make sure to join us again here on Deal Talk. I'm Jeff Allen, thanks again for listening and we'll talk to you again soon.
Jeff: This is kind of a place where you can just fill us in. Give us a brief rundown of your history, of your firm, what you folks do there and who you serve.
Scott: Sounds good. We are a general practice CPA firm and we're made up of attorneys, masters in tax, CPAs, bookkeepers, CPPs which are known as Certified Payroll Professionals, and our whole concept here Jeff is to wrap around business clients who provide all the necessary services they need. Many of our clients use all of our services, many just one or two of them.
Jeff: This is a really good jumping off point I think really to start our conversation today ,Scott. Of all the services that a reputable CPA or CPA firm like yours can provide their clients, are there three or four in particular that you may believe that are probably the most important in helping a business owner to preserve or even improve the value of his or her business? What are those examples?
Scott: That's a great question, Jeff, and it's interesting. Going back to the stereotypical role of the CPA, let's start with our foundation which would be the financial statement preparation and the tax return prep. It's kind of what most people think of when they hear the decimation of a CPA. And it is the cornerstone to what we do, but we are so much more than that in this day and age. One of the things that has occurred over the last decade or so is there are so many more services that are available that we can receive extra training in and extra certification in. For example, you can be a valuation specialist where with additional education, testing, and annual CE hours we can assist business owners to determine what does my company really worth before I even go to the market to find out is this the next logical step? So we've got now three things laid down in our foundation. We've got the tax, we've got the accounting, we've got valuation, but one of the key things is also just general business consulting to be that sounding board for our clients, to be that voice of reason or that reality check, or that sanity check. So when they come up with an idea we may have already done that idea five, or six, or seven times, perhaps even that year. We can educate our clients as to what works, what doesn't work, and pitfalls to avoid. So I think we've grown in my profession from doing the basic accounting and tax work to becoming more of that advisor that they call and check with just to get some general business knowledge. Because he may have one, or two, or three businesses, a typical CPA firm several thousand businesses that we worked with.
We can educate our clients as to what works, what doesn't work, and pitfalls to avoid.
Jeff: Really, really good points. And it's true, I think we're all hung-up in the attitude we'll call our CPA that one or two times during the course of the year particularly around tax season and we're going to need to bring them in. We need to have that visit with them. And we tend to have kind of that narrow kind of view of just how important they are and of the types of services they provide. So I think it's really important that we pointed some of those things out, Scott, that you talked about just there. Ways that you are getting more involved with the clients to provide really value-added services that are all about not just preserving your long-term relationship with them but truly helping small business owners along the way with the operation of their businesses, helping advise them on ways that they can save money, preserve the value of their businesses, and maybe even improve the values at the same time. Let me dig in a little bit here with respect to from your perspective and having dealt with so many business owners throughout your career, what are some of the most common issues that you found in clients’ businesses during the sell-side due diligence process now I'm talking about that you knew might not just impact the value of their company but also possibly prevent the sale of their business. This is a show that is really geared toward those people who eventually have plans of selling their business. So I'd just kind of be interested to get your take on that.
Scott: When you’re selling a business it’s like any foundation to a well-built structure. That foundation does not start three or four, five, or even six months before you want to sell. It actually starts years before that, laying the foundation with the proper financial data. Jeff, I don't think I've never been involved in a sale where an educated buyer doesn't ask for at a minimum three years’ worth of financial statements and three years’ worth of tax returns at a minimum. We know going back to our basic math when we were in elementary school to draw a line I need really to have three points to determine whether that line's going up or down and what direction it's moving in. And that's why many times we get those three years’ worth of financial statements to lay the foundation so you can have a business owner that does become sale minded and he's coming off his best year ever, but when in fact when you look at the financial statements we've got accumulated losses because of previous four, five, or six years he has not made any money. So it's important to find out always being working with that trusted adviser, that CPA to be getting that financial statements prep for that potential sale. One of the problems we ran into in the accounting business with our clients is it's a double-edged sword. One of my jobs to make sure they pay the minimum amount of tax, the other is to make sure that the value of their business is as high as possible. And those things really are in conflict with one another constantly. So we've got to be very mindful of the fact that if we do have that sale that is potentially coming up in one, two, or three years, that we talk early and often to begin putting that foundation down for that sophisticated buyer and his advisory team to look at. One of the things I always like to avoid is presenting financial statements that actually cause more problems than they solve.
Jeff: Boy, and how, and you can just imagine the issues that that could ... You're talking about truly detrimental. And then what happens is it makes your job that much more challenging. You've got certainly the people on board, Scott, to be able to take on those types of challenges. But it could prolong the process. And the one thing that I'd like to get from you and I'm sure that you've talked to so many people and you can kind of see through your conversations and interviewing some of these clients, and going through the Q&A process, you can get a sense probably of those business owners who have it maybe a little bit more together and have kind of a stronger understanding of their own books than maybe some of the other guys who maybe they're just a little bit more hands-on involved in their business. They're trying to pay their bills, they're trying to run their business lean and mean. They don't have big staff so they find that they're working both in their business and they're working on their business. So maybe they don't have a bookkeeper, or they don't have a local accountant on staff there to be able to help them with their books. Is it true that in many cases the owners of a business just don't have a strong enough sense of their own numbers? They don't talk enough to the people that they have in-house that are supposed to be working on these things with them?
Scott: I couldn't agree more with you, Jeff. So often you have a business owner that may be good at what it is that he does. Whether he is an engineer, or whether he is a personnel, a programmer, and they're very competent in their field. But when you get into the numbers which really represents that business to the outside world, no matter how good a programmer he is or how talented of an engineer he is, but those financial statements represent us to the outside world, they have a basic lack of understanding between the most simple of documents. What is a balance sheet, what are my assets, my liabilities, my equity, how does a P&L work and how does it portray me to the outside world? And it’s possibly because they're working with an accountant, a bookkeeper, a CPA, that just doesn't take the time to explain to them or to educate them on how these documents really work.
One of the things I always like to avoid is presenting financial statements that actually cause more problems than they solve.
Jeff: We're talking with Scott Shields. Scott Shields is a CPA himself and founding partner of Shields Blice and Company CPAs. You have two offices in Ohio, is that correct, Scott?
Scott: That's correct, we do. We have an office right outside of Akron, in Fairlawn, Ohio. And we're also located in the cultural center of the universe, North Camden, Ohio.
Jeff: Very, very good. Let me ask you Scott. If you are advising people just for educational purposes today, what the most important criteria to consider when shopping for a CPA, or what questions should I as a business owner be asking if I'm interviewing CPA candidates for the first time? Share your view on the most important criteria you believe that are critical when shopping or hiring your CPA.
Scott: Education I think comes first for me, Jeff. I think that CPAs traditionally have been afraid to educate their clients, because they were afraid that that client would do their own tax return. I don't think that's correct at all. If they wanted to be a tax prepared they'd already be a tax prepare. So education is number one. Don't just tell me about the numbers. Explain to me why they are the way they are and what my options are. I always tell people our job is in education, advising, and giving you what we recommend you should do, but obviously the client always has the ultimate say in the decision making process. Number one is how is that person sitting across the table communicating to you. My industry which is a tremendous industry and I've been in it for over 30 years and I love it does many times attract the type of individual that are not good communicators. So number one on my list Jeff, communication. Are you understanding what that individual is saying, is he speaking in a level that is your layman's terms can you understand? Or is he talking about everything from debits, to credits, to other types of tax jargon that may be more impressive when you're talking with a CPA, or maybe going right over that individual’s head.
Number one is communication. Number two is I think that many of your listeners should ask for references. It's interesting because what person in their right mind would give you a reference that's not going to be good? That's what people think on the surface. But as a business owner, when you were interviewing on the telephone, those references you can begin to dig in to dig into things. How often does he meet with you? Does he really meet with you or is everything relegated to a staff and I never see that guy again? How technology competent is he? Is the individual well-known in the community? Is he involved with his church? All those types of questions you can get from talking with those references and get a better answer than from the CPA himself who obviously has a product to sell and wants to bring on a new client. So I think going down the road also with the references. Get three or four references, some individual, some businesses, some in your own industry, some in other industries, and then press those people. Ask the hard questions. Once again, they're going to be open, upfront, and honest with you, and they're going to give you great information. And perhaps you can read between the lines as to what that CPA's real strength and weaknesses are, and can they really help me position my business so that I can present it to the outside in the form of a potential sale.
Jeff: Your business is important to you, it's not only your family's lifeline, your livelihood, but it is also your employee's livelihood and lifeline in many cases, take it as seriously as you would hiring a employee, a key member of your staff. There's no reason as Scott just pointed out, you shouldn't ask for references. This is someone for Pete's sake who's going to have their eyeballs on your financial statements. They're going to have access to some really important information there, your money. And so you need to make sure that you ask the right questions, and one of those questions should be can I see some references? Give me three or four references, whatever the case may be. Final question before we go to our break here, Scott, if I'm considering selling my business when should I get you involved in that process?
Scott: I guess the short answer, Jeff, is as early as possible. Don't bring me in after you've identified a potential buyer. I could be involved way before that. When the first inkling crosses your mind that, wow, I need to begin to plan for my exit strategy, pick up the phone and call me. That's when the process starts.
Ask the hard questions. Once again, they're going to be open, upfront, and honest with you, and they're going to give you great information.
Jeff: I think that's a very short and simple answer and it's to the point and it makes perfect sense. Why your CPA should be one of your most important business resources. I'm Jeff Allen. I'll be back with Scott Shields when Deal Talk gets back after this.
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Jeff: Welcome back to Deal Talk. I'm Jeff Allen with my guest Scott Shields, and he is founding partner at Shields Blice and Company CPAs, and he himself of course a CPA. Scott, I want to thank you so much for joining us today. We're having a really engaging, I think a thought provoking conversation about how useful your CPA can truly be to you. Scott, recently I had found a survey online from a company called the Sleeter Group, and this was published on cpapracticeadvisor.com. They gave a number of interesting stats and statistics involving CPAs and business owners, and kind of the relationship between the two. Seventy-six percent of business owners polled in this survey by the Sleeter Group said that they didn't believe that their CPA was proactive enough in helping them. How can CPAs be proactive in helping their clients? If you can give us some examples that would really help to kind of clarify I think.
Scott: I don't doubt that poll for one second, Jeff. I run into that all the time. When I'm dealing with new clients one of the first things I ask is how often do you meet with your CPA? And you'd be surprised or aghast at the number of times they say, “When I sign my tax returns.” And to me it's just unbelievable. It needs to be an ongoing process. I tell people all the time. When you're going to buy a new vehicle for your business, I don't care if it's a Ford, Chevy, or a Maserati, my job is to tell you what the options are for that vehicle. Should you buy it, should you lease it, should the company buy it, should the company lease it, should you buy it or lease it, and then turn around and lease it back to the company. All those types of things need to be done early. I find out many times from clients that don't communicate well after the fact that something has happened and I can't help them with good tax saving ideas.
Number one is meeting on a regular basis. Also, many business owners are afraid to call their CPA because they're afraid to get that bill in the mail for that 11-minute phone call and get a bill for $50. They're afraid. One of the things I tell my clients all the time is you will never get a bill from me if you only take five, six, or eight minutes of my time. Most of the CPAs with that great experience can answer the vast majority of all the questions right off the top of our head, most of my phone calls after the typical pleasantries about the weather, and the family, and the fact that Browns lost their opener, and we're not going to go down that road Jeff. It's two or three minutes to get into the actual conversation.
Jeff: It just seems to me in this day and age it is more important than ever to find someone - I don't care whether you're a CPA or the local dry cleaner, Scott - someone who can really appreciate the value of customer service. It seems so basic. And in one time it seemed that it was pretty much inherent in our regular, everyday relationships that we had with the Maytag repairman, the milkman, the postman. Years ago you have these visions of what it was like back in the 50's, the old black and white images of how things used to be when businesses seemed to care a lot about you. But it's interesting, as I was reading some blogs, along with the Sleeter Group survey over the last several days in preparing for our talk today. It was interesting what I was finding about, and this goes back to what you're talking about, about how CPAs tend to duck in or show up during that once or two time per year period. They go in for a signature, they go in, and that's it to send their bill in. Sometimes they have their clients duped into thinking that they're doing a good job. "I'm not hearing from them or I'm not seeing them so everything must be okay." What you say is really, really refreshing. And what it does too, it takes that mistaken belief that many business owners may have that their CPA is a necessary evil when in fact there's no evil here at all. There's no adversarial relationship or reason to believe that there needs to be some kind of adversarial or relationship where it's a necessary evil and they're going to take your money. In fact, your industry has grown such that it provides such a tremendous wealth of services for the well-being of the business and the business owner because there are other things that you do also to ... I know that you can provide to the business owners personally as far as advising on retirement and other things like that. And that's for another show. But what I would like to ask you then as part and parcel to this portion of our conversation, most of us I think would like to work with the same people forever if we could. We love to have these long-term relationships whether or not we play a game of golf with someone or not, or go out to coffee with them, it all depends on just how you are individually. But how do we really know when our accountants are doing a good job for us and our business? I just told you, I gave you a loose example of that idea that, "I haven't heard from the guy or the girl for a while so I'm assuming everything is fine." But how do we really know when you are doing a good job for us and our business?
Scott: I think that is a great question, Jeff, and you almost have, it begs, how do you really know? And one of the things is go out and interview another CPA. You may be thrilled with your existing professional, go out and interview another one and take that guy's product, take the tax return he did for you last year and say, “I'm thinking about changing CPA's. I'm not unhappy. Tell me what you would do differently,” and then let's find out, many times we find and even in the medical profession, many times you get a patient that presents the same symptoms but you get two different answers. Which is amazing to me. I'm never offended. If you want to take my product down and show it to another CPA, go right ahead, because what we do is terrific, quality ,business advising, and good solid tax work. And then find out what he would differently. And when I do this, when people bring me in and I try to win a new client and I review their prior tax return, which I always requested that they bring at the first meeting because I want to see the direction they're coming from. Because I go over that with them line by line. And one of the things that clients say to me all the time is, "Oh my god, this literally is the first time a CPA has ever gone through my tax return line by line with me. Most of the time it is, ‘Sign here. Have a nice day."
If you want to take my product down and show it to another CPA, go right ahead, because what we do is terrific, quality ,business advising, and good solid tax work.
Jeff: Yeah, and as you can see, the difference that that can make and being able to share that time in close proximity, sitting down, going through line by line, that shows a real caring relationship there, and one that is really meant for the long-term I think. It certainly breeds a long-term trust. You need to be able to trust anyone that you do business with, because your business like I said, it is in fact your livelihood, and in many cases your children's livelihood particularly if you want to leave a legacy and you want to leave something lasting behind for them. I may be asking you to be somewhat redundant here, Scott, but is there anything that our CPAs really can do for us as advisors, or in terms of providing value added services. We may have touched on a couple of these things that maybe most business owners are just not aware of that their CPAs could probably do for them if only they'd ask. If you can you could feel free to cite examples at your own firm, maybe some things that you do differently that other firms don't.
Scott: Let's set aside the standard services of accounting, tax, payroll, bookkeeping, let's set those things aside right now. One of the things that my industry has been getting involved with more lately is the investment advisory service where we're picking up additional licensure and education so that we can advise clients. And we do that all the time. We have three CNPs on our firm. And one of the things they do many times is a reality check. You may be thrilled with your insurance guy, you may be thrilled with your investment advisor. But many times there is a product they're looking to sell and you just want an outside opinion. Do I really need $35 million worth of life insurance, those types of questions. And we can then educate you because we're paid for our opinion not to sell the product. From the investment standpoint absolutely a great place to go. Also, and you brought this up earlier, Jeff, is the succession planner, does my client have young kids, are they in college, are they getting out of college, are they going to be taking over the business? Let's form a plan to begin to get them educated from the bottom up. Sweeping a broom in the warehouse before they start signing checks and order people about to get them so they can take over that business. And one of the things that CPAs do very well is work on and provide a written succession plan on how to do that.
So we want to talk to our clients. I want to know what they're going through, what's going on in their lives so we can say, "Do you know that we can help you with this?" And I always hate to sound like a commercial because it sounds like, "Did you know I can sell you this,” which is not always the case. It's more along the lines of educate and inform and to help these clients find the way to their preferred outcome.
Jeff: When you think of it too, not only the education being important but if you have essentially a go-to resource, one place where you can go and you can have all of these services provided for you because you've got a number of different people all under the same roof who know what you're up against or what your challenges are with regard to your business or know where your business stands. They understand what your retirement goals are, they understand what your family's financial goals are, all of these things can be tied together in such a way that you have a well-coordinated effort. It seems to me, Scott, that would make dealing with a company, a CPA that provides all those services, very, very appealing.
Scott: It is, it's very convenient, and I hate to use things like one-stop shop or things along those lines. I like to describe it more as a wraparound service. Even if you don't want that service you can use that service as a reference or as an advisor for somebody else providing that service just to make sure that they're providing the best service available at a reasonable price. We get asked all the time to quote a payroll or to quote a service, when in fact I know that individual is out shopping. That's okay, we all do that. Just keep the relationship with your existing professional fresh and relevant.
Jeff: Very, very good points. Scott, we are just about out of time. We've had a very good conversation today and I really do appreciate you for everything that you've contributed. I was wondering if you might leave us though before we go with some key takeaways from our conversation today. If our listeners walk away from this conversation with just maybe three things that they need to remember today, whether we've talked about them or not, if you could share just a few things you think people need to know.
Scott: Number one on my list, Jeff, and I've said this a couple of times already this afternoon is communication. Does your CPA communicate with you? Not talk down to you, not throw facts at you, does he communicate? Just like our mothers said when we were seven years old, there's a difference between hearing and listening: is he listening? He may be hearing what you're saying but is he listening to what you're saying? And can he shift gears or provide additional services to meet those needs? And then lastly should be flexible, to be available, to return my phone calls, all those types of things so that I know that the individual questions or the individual concerns that I have are getting met in a timely manner.
Let's form a plan to begin to get them educated from the bottom up.
Jeff: And no doubt we could extend that list of probably 10 things Scott but we don't have a lot of time to do that now. That having been said there are those people who may have questions for you, they like what they've heard here, and they'd like to get in touch with you to find out more about how you can help them in their business, how can they reach you?
Scott: The best way to go about that Jeff is obviously the email. And I can be reached at email@example.com. And you'll also find us on the web with our internet site as well.
Jeff: Very, very good. That's Scott Shields there. Scott, thank you so much. We are out of time. We're going to have to leave it there and we're looking forward already to having you back on in the future. I hope that you'll agree to that.
Scott: Absolutely, Jeff, I look forward to coming back.
Jeff: Scott Shield, CPA and founder of Shields Blice and Company.
Deal Talk has been presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts make sure to join us again here on Deal Talk. I'm Jeff Allen, thanks again for listening. We'll talk again soon.
Jeff: Before we get started Russ I'd like to just take a moment. Give us a brief but wide angled view or description of Gettry Marcus, what your company is all about and who you serve?
Russell: Sure. We're an 85 person CPA firm in the New York metro area. We've been named for several years now among the top 200 firms by IPA publication. Full service accounting firm; we do audit, tax, a lot of consulting work. We have specialty areas. We work in the real estate area. We have a health care group that does a lot of consulting work for medical practices. And I work in the group where we do business valuations and forensic accounting work.
Jeff: Russ, it sounds like your firm really is a full-service firm that really can be a one stop type of company for any number of needs that a business owner might have. And I think it's fair to say also too based on our conversations before that we had before the program that you help companies of all sizes and all industries. Is that right?
Russ: Yes, that's right. Speaking on the valuation side which is my specialty area, the kind of businesses that we do valuation work for are all kinds of industries, wholesale, retail, manufacturing. I've done valuations of companies that are in their start-up phase and haven't yet sold a single product, they just had a prototype. As well as companies with $700 million in revenue that were well-established including one recent case where they're actually in the, believe it or not, 11th generation. I've been a CPA for over, it's hard to say, but over 35 years now. And I've been doing valuation work since the mid 90s. Although it was part of my CPA practice so it wasn’t a full-time thing for me. Probably half of my time is spent in valuations up until 2008 when I joined Gettry Marcus. And one of the reasons I joined Gettry Marcus is because we have a very active, thriving valuation practice where I was able to offload my CPA work to my partners and dedicate myself just to valuation work as well. Over the years I've written 10 or 12 articles that have appeared in peer reviewed publications on valuation topics. And made presentations around the country. It's really as I hope you can tell a subject that I really love talking about and doing. I consider myself very fortunate.
I joined Gettry Marcus because we have a very active, thriving valuation practice where I was able to offload my CPA work to my partners and dedicate myself just to valuation work as well.
Jeff: Russ, again, thank you so much for being with us. We're going to talk about some things that may be of interest for the first time to some small business owners who might be listening to Deal Talk today. It may also be perhaps a refresher for some of our other listeners. But let's go ahead and get right into it. You have been around a while and you had a chance to work with so many companies in your line of work, in your industry, across a broad spectrum of industries I should say. Every company is different, but at the same time it seems that there are certain causes that really kind of tend to stand out that many companies have in common with each other. For declining or less than optimal valuations on their end, what are some of the most common but correctable causes for declining values that you have seen in your career?
Russell: Certainly there are a lot of factors that are not in the business owner's control that can't be overcome necessarily. But valuation really comes down to two things. Any financial asset valuation comes down to two things, which is return measured by cash, and the risk of achieving that return. So the valuation of any business is very, very closely tied to the amount of cash flow it generates and the riskiness of achieving those cash flows. So the things that are within the business owner’s capability to modify as far as cash flow is concerned or efficiencies of operation, profitability, pricing the product properly maximizing the operational aspect. But from the business standpoint what a lot of business owners don't see, they're unable to visualize is risk can be present in a lot of different ways. With small businesses that kind of risk is often in the form of lack of depth of management where there's an autocratic owner that hasn't really begun to pass responsibility on to his or her managers, his or her next level of operational team. And when a potential buyer sees that, they see a company that may be difficult to step into without a lot of disruption. I've seen a number of cases where an autocratic owner that was suddenly through health issues or other problems suddenly unable to have the services that person and that kind of company goes through very, very difficult and sometimes very lengthy period of disruption before they can get back on their feet again. Risk can also be measured in terms of competition for a similar product. There's nothing that differentiates your product or service that it's easily challenged by competitors, and that's also a significant risk. Other risks are having reliance on a particular customer, particular vendor, or even within a certain industry. So if a company sells most of its products, to let's say the automotive industry and has not been able to adapt to sell those products or other industries that may not be subject of the same vagaries of the automotive industry, that's another element of risk. These things are areas that the business owner can affect, although many of them as you can imagine take a lot of time and planning in order to improve but it can be done.
Jeff: Really, what you're doing as an owner really, and you talked about it a second ago, really through no fault of his or her own could be leaving a lot of money on the table because they're paying too much attention to perhaps this segment of the marketplace or this particular client or groups of clients without really taking time to broaden their perspective. And part of that really is because owners, many of them never really seem to get over this it seems to me, Russ, are spending so much time working in their business as opposed to on their business, isn't that true?
Russell: Yeah, that's a very good point and it's a very easy trap to fall into, to be very involved in the day-to-day operations and not step back and see the business as an outsider would, again, with risk and return as the primary focal point so you're exactly right.
Any financial asset valuation comes down to two things, which is return measured by cash, and the risk of achieving that return.
Jeff: We're going to talk about some other things that might be of interest to our listeners today Russ, including the types of sales that are out there. We're going to that a little bit later in the show. But I'd like to get back to the idea of how to fix things. And if I'm a business owner and I come to you and I'll say, “Russ Glazer, I really want to sell my business. I'd like to get out ideally in maybe three or five years.”You've come back to me with all of these things that you've uncovered in your research and providing me with your valuation, the appraisal of my company. What can I do quickly to fix some of these things so that I can have you come back and then reappraise my company, and so I can list it maybe in the shorter rather than the longer term. Have you had any examples of companies that you've worked with who came to you with that question? They had these issues, they wanted to fix, they wanted to address, they wanted to get them taken care of right away and see all of a sudden these amazing improvements to their value and get out as quickly as they possibly could?
Russell: We’ve seen situations like that. The problem is that it's very difficult to affect a quick change, and even if you can a savvy buyer would much rather see a longer track record that he can hang his hat on of reliable high returns, or reliable high efficiency, whatever the case may be. That minimizes their own due diligence work. Buyers spend an awful amount of time and energy on due diligence efforts. And if they see a quick fix they'll look at almost everything with a skeptical eye because they know the company's being, I would called it a window dress that's actually for sale as oppose to being a solid track record of company improvement. Companies go through ups and downs all the time of course, but a quick fix ... Several examples might be letting some staff go to reduce payroll costs but of course the buyer, if they do the due diligence will recognize that they have to replace these people so they’re going to be very skeptical about the short term results. Another area where a company sometimes tried to window dress is in delaying the acquisition of fixed assets, capital improvements and replacing the fixed assets. They may let those assets deteriorate to the point where they're barely able to run on chewing gum and duct tape. They improve cash flow on the short-term but again, a buyer doing his or her due diligence will recognize that not a lot of money is going into improving the infrastructure of the company, and would see through that. A company can take steps for a quick fix but if there's any real significance to the transaction where the buyer's going to do proper due diligence that will probably get smoked out pretty soon.
Jeff: I think Russell Glazer, wouldn't you say that business sellers, owners who are looking forward to getting out and selling their business may not give enough credit to those buyers out there for being as savvy as they actually are.
Russell: Yeah. Sometimes they think they can, I wouldn't say fast talk necessarily the buyer, but put out some explanations that may not carry the day once they begin to be scrutinized.
Buyers spend an awful amount of time and energy on due diligence efforts. And if they see a quick fix they'll look at almost everything with a skeptical eye because they know the company's being
Jeff: Would you suggest that loosening up credit policies to maximize revenue before I sell my business, would that be one of those quick fix types of things that you would not recommend?
Russell: That would be an example, unless of course the credit policy has been overly strict over time and has scared away, let's say some potential customers. If the credit policy was too restrictive and it's loosened to something that's more common in the industry that could be a beneficial maneuver. Again, it would take time for that to play out into a lengthy track record, but that's something that could be explained to the buyer, and the buyer would have to make their own assessment as to whether that's going to generate X dollars more revenue or not. But if it's already a fairly common credit practice that's now being loosened beyond caution just to window dress, then that will come out in the wash as well.
Jeff: How soon should a company, whether they're interested in selling or not, how soon should they have their first business valuation or appraisal?
Russell: It depends because there are a number of reasons to have an appraisal other than an ultimate sale of the entire business. If a business owner has other partners or shareholders in the business that are older that might be looking to retire soon, or that are younger, that might want a higher percentage of ownership. But there's key managers that may want to be invested in the business to either give to or share sales to. Those are a number of reasons that a valuation will be very, very useful long before there's any contemplation of actually selling the business. Certainly estate or gift tax planning of any of the owners would be another example of situations where a valuation would be very important or critical even though a sale of the business is not on the horizon at all.
Those are a number of reasons that a valuation will be very, very useful long before there's any contemplation of actually selling the business
Jeff: What about for tax planning purposes and also to domestic types of reasons, for example, if there's a divorce of one of the owners or the owner of a company?
Russell: That's a great example, which is why not so much for divorce situations, although it can be helpful there but more so where there's multiple owners with differing objectives in terms of their age, or their particular wealth status. Let's say one owner has other sources of income and isn't as reliant on the business in question for their income. Where there’s differing objectives it may be wise to have a valuation done periodically so that the parties know in advance if I choose to retire, if I want to try to buy my partner out, if all of a sudden my health deteriorates, rather than it being a mystery what that person's percentage of interest might be worth, it's a figure that's known pretty closely from year to year so the parties can plan better, they can have the proper amount of insurance to cover a death, for example, in a cross purchase type of buy-sell agreement. So again, there's a whole host of reasons why knowing, I wouldn't say in real-time but certainly within a year or so of the last valuation, what the company's worth would be very valuable to measure.
Jeff: We're talking about valuation and giving you some things to think about before listing your business for sale, with our guest Russell T. Glazer, partner with Gettry Marcus CPA, P.C. My name is Jeff Allen, you're listening to Deal Talk and we'll be back in 60 seconds.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with my guest Russell T. Glazer, a New York-based CPA with the firm Gettry Marcus CPA, P.C. in New York. Let's jump over to the types of sales that there are out there Russ. I think that sometimes people don't really give much thought to this, and particularly if they're not really interested in selling their business right away. But sometimes different life events during the course of a business may necessitate a change in mindset with respect to the kind of sale that a business needs. I was hoping that maybe we'd go through some of these types of sales, know which type of sale, and how to know which type of sale might be most financially advantageous to a business.
Russell: Sure. There are two types of sales. There's an asset sale and a stock sale. In an asset sale the acquiring company purchases just certain assets of the company. Typically it's the productive assets meaning any machine and equipment, good will, customer list, things of that nature that are needed to operate the business from day-to-day. Typically in an asset sale the seller retains -- we have the cash at the transaction date. It's the seller's responsibility to collect the receivables and to pay the trade payables. So the buyer's only acquiring certain assets, and the buyer of course has to put in working capital to replace the cash receivables and the payables that the seller is retaining. The most significant aspect of that is that in that case the seller, since you're selling the assets, retains the stock ownership of the business corporation, or an interest in the partnership, or single member LLC as the case may be. The seller is still the owner of that entity, which means if there's any pending lawsuits, or a lawsuit that's not even on the horizon yet, for a hazardous waste issue, or a slip and fall issue, or an employee wrongful termination, any sort of legal issue that connects to the ownership of the company. So the seller is selling the assets but retaining that risk. And that's why that's often a desirable way for the buyer to go because the buyer doesn't want responsibility for those types of issues that may have happened years earlier, for which they have no recourse that they own the stock. For that reason the seller would rather sell the stock typically, obviously also in that case the buyer buys the shares of the corporation which includes every single asset and every single liability on the books at the time of the transaction. In terms of, you phrase your question in terms of when would the parties want a particular type: there's other factors that come into play. One of which is the tax aspect of these transactions. And depending on the nature of it the sale of certain assets would be taxed as capital gain. The sale of other assets may be taxed as ordinary income. So there's a whole range of considerations to be made and usually winds up being the result of a negotiation because there's often competing objectives. The buyer wants certain assets that they could depreciate over time. Or they may want certain assets that they can write off right away depending on their own financial situation. Whereas what the buyer wants may cause the seller to pay more tax than they wish to as ordinary gain instead of capital gain. So it becomes a pull and a push to negotiate what the final numbers are. So what the particular parties want is nice going in but as a practical matter winds up being some negotiated middle ground.
So there's a whole range of considerations to be made and usually winds up being the result of a negotiation because there's often competing objectives
Jeff: Does knowing the type of sale of businesses interested in, does that help determine the methodology you use in appraising the business or is it generally speaking the other way around?
Russell: The methodology I would use would be to value the business and how the deal is put together is a separate thing. So the methodologies that we use generally fall into, there's three approaches to value but for an operating company, one that's expected to continue with the long term, it’s not in liquidation or anything of that nature, generally speaking in that situation the asset approach which is the value of individual hard assets would be much less relevant because the company is expected to continue going forward. So the two approaches that remain are the income approach, which is basically computing the present value today of future cash flows that the company is going to generate. Again, cash is king so it's very cash flow oriented. And that's where the risk as we discussed earlier, the risk of achieving those cash flows comes into play in terms of what discount rate to use in order to present value those cash flows. So that's the income approach. Under the market approach the value is estimated by reference to other similar assets that have sold for certain prices. So if we had a company that was a manufacturer, these databases do exist, then we can find transactions of other manufacturers of the same type of product that sold for let's say 30 percent of revenues, or two times EBITDA. EBITDA is a measure of cash flow. Then with certain adjustments to adjust the comparable company, the subject company to these transactions that a pricing multiple is derived and a value for the subject company would be estimated based on those pricing multiples. So the procedures that we go through and the data that we use would be the same regardless of the ultimate type of transaction.
Jeff: With all of that said, and keep in mind, we're just simply for the purpose of this discussion, we're talking predominantly numbers. How will I know when my business is really ready for sale, Russ? Because I've told you, I'm interested in selling my business three - five years out. Is there going to be a certain level of confidence that I'm going to have after you or another appraiser has visited me where he's going to be able to say, "I think we've done as much as we can do here, or there's a lot more you can do before we go ahead and list this thing before we go ahead and turn it around."
Russell: Again, it depends. You want to have, as I said before, an adequate track record. You want to be able to supply the due diligence and be able to answer the questions that come up. We're involved in a situation now where a company had not planned to sell but was approached about a year or so ago, and actually said no thank you, but I guess the offer's got a little bit sweeter. And now we’re in the process of supporting the seller to put the best foot forward for the due diligence effort that the buyer's putting together. And in this case the subject company's books and records aren't the best. Without going to any great detail, some of the very key numbers aren't quite as repeatable, let's say. They aren't as supportable as the buyer's due diligence team would like. So we're trying to interface with those two efforts to explain the circumstances to let's say back into supporting numbers that the buyer can feel comfortable with. It's hard to say when it's ready necessarily if the buyer believes that there's still improvements to be made in either increasing return or reducing risk that maybe it's not ready yet. But other things as you say, other likely events such as health issues and matrimonial issues may force the person's hand. But one thing I want to point out as well is that one thing the seller has to keep in mind is having a realistic expectation of the value of the business. We've seen a number of situations where because the business owner has created his business from a small operation in their garage and has missed every child’s little league game, and dance recital, but somehow the business is worth much, much more than can be justified by the present value of future cash flows. Those expectations have to be managed so that the seller has realistic expectation of what sort of offers are realistic and not just reject offers out of hand that seem too low. The seller has to understand that the buyer is looking at this through the prism of what's the present value of future cash flows, nothing more, nothing less.
The seller has to understand that the buyer is looking at this through the prism of what's the present value of future cash flows, nothing more, nothing less.
Jeff: Russ Glazer, as we close things down on this edition of Deal Talk, final thoughts, i.e. take-aways from our discussion today, recommendations for business owners who are looking to improve the valuations of their companies. Just really quickly, any quick bullets that you can provide?
Russell: I think by and large, I think long-term companies that they understate revenues let's say, or run a lot of personal perks, expenses through the business. There's obviously benefits to that, but we won't go into the propriety of it. But there's all these benefits to that until it comes time to sell because now the buyer, you got to tell the buyer, "I paid for my kids' college education through the business, and we take all our vacations through the business. Therefore the profit is higher than the books show.” That's not going to fly very well with the buyer who needs to be convinced that that's the case, number one, and may say, "It's just not worth the due diligence effort I'm going to pay my due diligence team an awful lot of money to try and track down numbers. I'm not even going to bother. Let me go find some other potential target where I have more faith that the numbers I'm being presented with are what I can expect going forward.”
Jeff: If anybody out there listening to this edition of Deal Talk you've stirred an interest and they'd like to get in touch with you for more information, how can they reach you, Russ?
Russell: Gettry Marcus, we're in Long Island as well as New York City. Our phone number’s there are 516-364-3390. My direct extension is 208 and I'll be happy to speak with anybody either with general questions, to a point of course, or for the more serious about valuation of course I welcome that at any time.
I think long-term companies that they understate revenues
Jeff: Russell Glazer, we sure do appreciate all the time that you've given us today. We appreciate the insight and the input, and we hope to have you back on Deal Talk again in the future.
Russell: Thank you so much. I'd be very happy to be there.
Jeff: Thank you so much. That's Russ Glazer, CPA with Gettry Marcus CPA, P.C. in New York. He's been our guest and we appreciate him very much.
Deal Talk has been presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts make sure to join us again here on Deal Talk. I'm Jeff Allen. Thanks again for listening. We'll talk to you again soon.
Jeff: What I'd like to start to do is maybe, have you tell us Walter, if I may call you Walter, a little bit about your company, what it is that you do sir?
Walter: Thank you Jeff. My company is based in Curacao, which is a small island in the Dutch Caribbean area, in the South Caribbean, just north of Venezuela. The Curacao Financial Group is active in the fields of business valuations, value improvement programs, and specifically capital raising. And our primary markets are the Caribbean Islands and the northern countries of South America.
Jeff: Very good sir. You work with clients who have businesses with brick and mortar locations and customers really across the globe. Maybe you've had some past experiences with these types of businesses that you can kind of talk to us just a little bit about. For those business owners who are looking to sell their global business, how complicated is the valuation process compared to a company that simply does business domestically or locally?
Walter: Jeff, indeed, it could be a little bit more complicated and I'll explain to you why. An important part of a good business valuation is the research into the economy and the industry the specific business operates in. In that sense it can be more complicated to analyze a company with customers around the globe. Because you will have to define which market, for instance which countries or which regions of the world the company sells its products, what the economic outlook is for those markets, etc. Of course, this will normally be a little bit less complicated for a company that does its business only domestically. I've got an example of a company that was once my client. It's active in the hedgefundadministration industry. Basically it has clients in Latin America, Asia, and Europe. If you want to value this business properly you will have to really look into the markets in which the clients are in to really have an understanding of what those economies in those regions are going to do in the next upcoming years. That will have an impact on the valuation at stake.
In that sense it can be more complicated to analyze a company with customers around the globe. Because you will have to define which market, for instance which countries or which regions of the world the company sells its products, what the economic outlook is for those markets, etc. Of course, this will normally be a little bit less complicated for a company that does its business only domestically
Jeff: That really does require an ample amount of research and due diligence. This is not something that happens overnight. Obviously, someone has a global business. They need to realize that it can often be a deliberate process in order to get all of the information necessary to proper value that organization. Let's suppose that I also have a global business but this is a little bit different. Inthis day and age so many people conduct business online. Let's say I have my businesses strictly online. I don't have any manufacturing facilities. In fact, I don't produce any physical products and all I provide is information for sale, documentation, downloadable, digital files. We're all familiar with those, PDF's and so forth. And maybe I do revenue anywhere from a million to $5 million a year simply selling downloadable information, no inventory. Is evaluation for my simple business necessarily a simple process or not if I don't have those brick and mortar locations and it's all done online? Explain if this is difficult, is it simple, tell me about that.
Walter: The fact that it's simply online and that it's only about downloadable information, it's not really a critical factor by itself, let's say to conclude in advance if this is going to be a simple or difficult evaluation. Although the setup of this business may look simple at first sight, you don't know yet how popular demand will remain for, let's say it’s downloadable information. And therefore you really have to analyze thoroughly in what life cycle this company is or thespecific part of the industry thatthis company is in. And that can also have a great impact on the evaluation. You have to really do thorough research into the industry and the company itself, and the products that it sells to really get a good understanding if this is a straightforward evaluation approach or that there are signs that this business may already be over the hill, that the product is already getting a little bit obsolete and then this might result in a valuation that might be less easy to perform. And the outcome of it may also be a disappointment for the owner.
Jeff: We're talking with Walter Blijleven. He's the co-founder of Curacao Financial Group and you're listening to Deal Talk. My name is Jeff Allen. Thank you so much once again for punching in and listening today. Mr. Blijleven in the valuation process what are some commonly found red flags that indicate signs of trouble that may drastically impact the value that you've assigned to a business?
Walter: Well, the first ones that come to mind maybe to start with of course, deteriorating economic climate in the markets where the company operates in. Second is the fact that the business may be operating in a mature industry. For instance the manual typewriting industry was once flourishing at a certain time. Let's say these instruments became obsolete and therefore the value of those companies decreased dramatically. What also is very important red flag would be in the intensity of competition or substitutes that attack the revenue that was made in the past and will not be made any more in the near future. What I'm also very sensitive for is let's say the stability of the company itself, for instance if there's a high turnover of key personnel. Normally that would be a red flag to me because if key personnel come and go too fast, it might indicate there's something wrong with the company.
What also is very important red flag would be in the intensity of competition or substitutes that attack the revenue that was made in the past and will not be made any more in the near future
Jeff: When you see these red flags popup, Mr. Blijleven, is this one of those things where you sit down and you see a bunch of them. Let's say you kind of get the sense that this is going to be problematic. This is a real concern. Do you at that point have to sit down with your client and say, "Hey, listen. These are the things that I found. We need to discuss these items one by one." How important is the communication midway through the process to let them know that the value that you're going to assign potentially to their company is not going to be anywhere near what they expect?
Walter: Of course, this is very important if you want to really manage their expectations. So if after your initial work you already noticed that this is not going to be a success story going forward. Definitely I will sit down with the owner and I will explain to him why I come to these preliminary conclusions, and of course I want to hear his feedback on it because in my opinion it's better that he hears from me, and he hears it from me from the start, than let's say I make an evaluation that's too optimistic and then later maybe once he tries to sell his company or something like that nobody would even get near this value that I gave at a certain point in time. So first of all I would be a bad professional if I would make a too optimistic valuation. But second of all it is my personal style to be really straight forward and be very open to my clients of what is positive and what is negative. And if there are too many factors that are negative or to be called red flags, well, he has to be aware. Because as of that moment he might start repairing those red flags or try to change the course of his business in the upcoming period.
Jeff: Have you seen that often when you sit down with a client? You talk about these types of issues that come up. Are you able to basically give them some kind of assurance that they have time to work on these issues, to correct the problems so that you can come back, revisit this in another year, or two years, or whatever the case may be, so that they can take and hopefully increase the value of their company to a level that they're a little bit more comfortable with?
Walter: Of course. It depends a little bit on the red flag that I've seen and if some let's say it could be like maybe repaired so to speak rather quickly; with others, maybe, let’s say if there's a bad company culture and that bad company culture let's say is resulting in a high turnover of key employees. That culture doesn't change overnight within a company, so that might be a little bit more complicated to fix so to speak. In general, a business valuation depends a little bit on the objective. You do have business valuation that are let's say, part of a legal procedure that you just have to be the neutral evaluator that really execute the evaluation and explains to the owner what are the pros and the cons, and come up with an amount. But if you do like an evaluation that is like part of an upcoming selling now or within three to five years, of course, then it might be very interesting for the client to hear also the ideas from you not only giving the value of this company as of today, but also what it could do in the upcoming three to five years or even the shorter period to make his company more valuable and what are his major, or key, action items that he has to address then.
That culture doesn't change overnight within a company, so that might be a little bit more complicated to fix so to speak. In general, a business valuation depends a little bit on the objective
Jeff: Walter Blijleven, the co-founder of Curacao Financial Group is my guest today on Deal Talk. What I'd like to find out now from you Walter is what are some of the most important things that any business owner can do to help prepare for their company's valuation process. There area number of people who would be listening to this program right now and they are making considerations for the future. They're making some determinations about when they're going to sell or how soon, and about the need to get an appraiser to help them place a value on their business. What is it that they can do right now to help prepare their company for that process?
Walter: The first thing that comes to my mind is to me it's still very important that a company has audited financial statements that preferably go back at least three years. If the owner so far decided not to invest in audited financial statements for one reason or another, to me, and I've seen this quite often, it is a set back from the start to start with financial statements that are not audited or not even reviewed and maybe only compiled by an outside accountant, or not even by an outside accountant. It makes a false start to me. So in any case if you're really serious about selling your company, and you have that in mind for the upcoming three to five years, make sure to audit your numbers right away.
Jeff: I think that's really important key to distinguish. We're talking about audited numbers. We're not talking about internal audits, we're talking about independently audited figures from a third party source, is that correct?
Walter: That is completely correct.
Jeff: Let's talk about now some issues. We'd kind of started our discussion talking about international businesses or global businesses and how valuing those business maybe a little bit different, and some of the things that you need to think about, and some of the things that a business owner needs to be concerned about when they're having their business appraised. What are some issues that may come up, Walter Blijleven, that I may face? If I'm a business owner and I want to sell my company, and maybe I'm getting some interest from buyers who are offshore. Maybe they're from overseas or they're across the border and they're interested, they're looking atmy business. What are some issues that may come up when selling mybusiness to an international buyer?
Walter: I would say that in general an international transaction or a transaction that might occur in the near future is more complicated since there are more and there are different legal text and cultural issues to be dealt with, and even sometimes language differences could also result in additional complications. On the other end I have to say in the past decades more and more cross border transaction has taken place. The world has changed, it has become a global village and buyers and sellers out of different countries or region speak more and more the international language of business. So it's maybe less wearisome than it would've been like let's say decades ago. In my experience, what would really help is to hire the right advisers who have experience in executing international transactions because ifboth parties, let's say the seller and the buyer, do have the right advisers,theydo speak the common language then all these complications on the legal text or cultural aspects would be reduced tremendously.
So in any case if you're really serious about selling your company, and you have that in mind for the upcoming three to five years, make sure to audit your numbers right away.
Jeff: If I wanted to buy a business... We're kind of switching gears a little bit. Let's kind of look at things from the buyer's perspective now, Walter, if wemay. I'm looking to buy a business. How can I secure funding for that purchase? I mean, do I have to go through a bank, particularly if it's an international purchase? Or are there other means of funding that purchase?
Walter: Of course, you don't have to go through a bank. It really depends on your own situation. A bank could provide you with part of the funding. But in my experience, normally a bank will never fund a transaction for the full 100 percent. In my experience, that is in the market that we are active in, so that is the Caribbean markets and part of the South America, a bank will require at least 30 or 40 percent equity to fund a transaction amount. So therefore it's good to consider other sources of funds available like private investors, even a rich uncle or private equity funds. It also really depends on your own reputation and track record, your own network, if you have a lot of assets personally that could be used in a certain transaction or secure a certain transaction as well. And also what I would like to mention here is that the bankability of your business that you’re going to buy is a very important aspect. If you are considering to buy a company that your bank or your funders don't really believe in, they will remain hesitant to support you. But if you are about to purchase a company that is very positive and it has a great future ahead of it then of course it will be easier to attract different kind of funds. So to better prepare yourself, the more you’ll improve you ask to get financing from third parties. That's basically the bottom line of it. Of course traditionally going to the bank is the most common source of funding and it's still very viable ones, but it's not the only one.
Jeff: Let's say then, again, I'm the buyer and I understand that a company is coming up. It doesn't have to be an international company, it can be one right down the street. And this is something that I'm very interested in. I've been watching it. Maybe I have even done business there, and I understand the company is going to be listed soon and put up for sale byits owner. But there is the valuation process that needs to take place first. How long might I wait for that? As the buyer, someone who is looking at company A to buy that company and make an offer. How long will I have to wait first of all, Walter, for your company, or any appraiser for that matter to do its work and to put together a value for that?
Walter: What you are asking now is I as a potential buyer engage an evaluator to make a calculation about the business you have an eye on, is that correct?
So therefore it's good to consider other sources of funds available like private investors, even a rich uncle or private equity funds. It also really depends on your own reputation and track record, your own network, if you have a lot of assets personally that could be used in a certain transaction or secure a certain transaction as well
Jeff: What I'm thinking of is let's say I've got plenty of time. Maybe I already own a business and I got my own work I'm doing. But I see a company I'm interested in buying. And I learn that the owner of that company is contracted the services of Curacao Financial Group or another business valuation company. How long does it take your company, or might it take your company, to go through the process from start to finish of placing a value on that company before it goes on for sale?
Walter: That could go rather quickly depending of course on the quality of the homework being done by the owner that wants to sell. Again, as I mentioned earlier in this conversation, if he has been preparing for an upcoming exit for some years most likely he knows already what is, let's say critical for a good exit. So if he indeed already worked with an outside auditor to have his financial statements audited. And if he has all kinds of material already and information collected thathe knows what is necessary for a good valuation. In other words if he already has all the information handy when I or the Curacao Financial Group or any other valuator comes in then basically the process can go pretty quickly. Of course there are other items to be addressed. I have to make an assessment of the industry and economy, etc. But these things could go rather quickly and I'm always telling that a good business valuation, mighttake inbetween 60-100 hours to really make a good report and good analysis. But for instance if this company did its homework well, you might need less hours and you might go quicker through the process. I hope this answer your question.
Jeff: It does, yes. I think the thing to note here, the thing that's really important, is that all companies are different. And the extent of the work required could also be different too depending on how well someone keeps their books or just any number of other things. The number of locations, people, size, and revenue. All of these things are come into play. As long as you're not in a big hurry and you're willing to work through the process, you'll be able to get through that without too much trouble, without too much pain. It just really all kind of depends. There are a number of variables there. One of the things that I know often happens, Walter, at least I've heard of this sort of thing happening, and maybe you can talk a little bit about it, is that oftentimes a buyer and a seller will each have a company appraised. Obviously the seller is interested in having their business appraised and maybe it's just part of an annual process that they have as part of a business plan to have their company appraised on a regular basis and to have that value current, and always have that up to date. But there may be a buyer also who comes in and bring their own appraiser in and has the business valued for the purpose of maybe buying it. So, have you seen this happen? Does it occur often? And when you have seen it happen is there often a significant difference between the appraisals of the buyer and the seller of a given business?
Walter: Of course I've seen this happening and you really have to understand of course that once both sides use their own appraiser in a certain way those appraisers could be, although not maybe professionally the right thing but they could be a little biased, from the sellers perspective, let's say to really highlight the pros of the company and from the buyer's perspective maybe to highlight the cons of the company in order already to position well for the negotiations that may follow. More from the theoretical point of view I would say that if both appraisers, let's say are member of the same association that does business valuations, for instance I'm a member of the National Association of Certified Valuation Analysts, it shouldn’t be that the differences are too big because most appraisers will have to work along the same professional standards, will have to do the same kind of homework. And all these professional standards do have the intention to minimize the risk that an evaluation is being biased by personal preferences or by too subjective approach of the valuation. Yes, it could happen. It depends a little bit of the agenda. Let's say that parties are entering into a certain kind of process because they may already look into the negotiations that come. But if both appraisers are really professional then at least when the discussions come up they should be able to find each other on really neutral ground and they should be able to have professional discussions of maybe the different choices they make in evaluation or the different parameters they use to come up with a discounted value, etc. It really depends a little bit on the context in which seller and buyer are dealing with each other and how professional and how neutral the evaluators involved are performing their duties.
Jeff: Understood. We're getting ready to wrap things up here, Walter, as we're starting to run out of time here. But let me ask you one final question. If there is anything in particular from our discussion today or anything at all based on your experience as a professional business valuation expert, what would you tell someone who is looking to sell their business or looking to have their business appraised for the first time. What kind of advice can you give a business owner today?
Walter: Assuming that the owner already is having his business the main advice I could give is start preparing in time. You will be much more successful in selling your business if you have a plan and that plan is already in place, let's say three to five years before your desired exit moment. That would be my key takeaway for a business owner. If you are considering starting up a business and are not currently having a business I would advise that before you start a business already think about how you would like to exit that business at a certain point in time because it might already have an impact on how you start up this new business. That's basically my answer to this question.
If you are considering starting up a business and are not currently having a business I would advise that before you start a business already think about how you would like to exit that business at a certain point in time because it might already have an impact on how you start up this new business.
Jeff: Walter, there are a number of people I'm sure that have questions, whether they're in Curacao with you or they're listening someplace else. Where can they reach you if they have any questions for you or your team. How can they reach out to you?
Walter: Well, we do have a brand new website which is www.curacaofinancialgroup.com and of course we could be reached through my personal phone number which is an international number, 5999-737-2025.
Jeff: There you have it. Walter Blijleven, we're going to need to leave it there. Thank you so much for joining all of us here today and for bringing your knowledge and your insight that you shared with us today on Deal Talk. It was a pleasure to have you.
Walter: Thank you Jeff, it was my pleasure.
Jeff: Thanks again to Walter Blijleven, co-founder of Curacao Financial Group for joining us today on Deal Talk presented by Morgan & Westfield, a nationwide leader in business sales and appraisals.
If you'd like more information about buying or selling a business call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. I'm Jeff Allen, we'll talk to you again.
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