We all want to get the most for our companies in an acquisition, whether in an asset sale or a stock sale. The idea of getting premium value for our business is what many of us have in mind. But what exactly is “premium” value, and how do we achieve it? A good place to start is with a professional business valuation to see where things currently stand. But then what? Our guest on this segment has some thoughts that may help you work toward elevating your company’s value. Join us as we welcome corporate financial consultant Angela Sadang, director in the Financial Advisory Services Group at Marks Paneth LLP in New York.
Business appraisal, business valuation, it's not an art, it's not a science, I'm a firm believer that it's a hybrid of both.
- Angela Sadang
Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're looking to sell your company now or at some point in the future it's our mission to provide information and advice from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
According to Webster's Online Dictionary the word premium can be defined as a high value or a value in excess of that normally or usually expected. You can put that in quotes. And it's interesting that the word value appears in the definition isn't it? The question is how can you get a premium value for your business? Let's talk about it with our guest. Joining us on the Morgan & Westfield guest line Angela Sadang. Director in the Financial Advisory Services Group at Marks Paneth LLP in New York City. Ms. Sadang specializes in business valuation and has more than 15 years of experience providing corporate financial consulting services and performing valuations. She serves both publicly traded and closely held companies. Angela Sadang, welcome to Deal Talk. It's great to have you on the program.
Angela: Hello everyone. Yes, the Webster definition is actually very accurate. Technically, in the valuation world a premium value can mean many different things. My own definition of it is any value that's in excess of fair market value as determined by a professional appraiser. Again, premium value can be achieved by any business by creating synergies with the potential buyer and companies targeted for acquisition. You could also decrease reliance on one supplier or one customer. Diversifying the product or service lines that the company offers rather than concentrating on one particular product or service. You can update technology, equipment, and facilities. And lastly, and this I think is what's key in developing a premium for your own business is developing good management expertise and [avoid] relying on one key executive or a group of executives. This is what we call the key man syndrome where you see businesses managed by just one key person. It could either be the owner or founder of the business. His role is very hard to fill in so he or she does everything. The key person is considered key in any number of business functions and I’ve seen most small to medium sized businesses managed by one person, and this one person drives the entire company.
Jeff: Angela, it's an interesting concept that you bring up, the key man syndrome, because I wanted to ask you, and kind of jump in there real quick, to ask you how many businesses you think out of a room of a hundred represented would have that key man syndrome and be suffering from that, and you just said most. Is that something that you think keeps many businesses down and from reaching that premium value that they would like to have their company valued at?
Angela: Yes, definitely. In my experience most small to medium sized businesses are managed by one person who is typically the owner or the founder of that business. And it's an advantage definitely because the person is very knowledgeable about the business. He founded the business. He runs the day-to-day. He's very involved in all the minutia functions of the business. But that's also a disadvantage because if you want to try to sell your business, an investor would come in and see what type of management this business has and they'll see only one person. And it's like putting your eggs in one basket. You don't want to do that. You want to pay a premium but you can't. You discount it because this person can pass away, can leave the company, can become ill and can become incapacitated and can no longer manage the business. So for businesses it's wise if they want to command a premium for their company for an eventual sale to have good, diversified management in place.
Jeff: This means forming a team. Essentially, really, when you get down to it.
Angela: Having key people in each function and a good management team in place rather than being reliant on one key person who's been running the business for the past 20-30 years.
In my experience most small to medium sized businesses are managed by one person who is typically the owner or the founder of that business. And it's an advantage definitely because the person is very knowledgeable about the business.
Jeff: Angela, let me ask you a question because we get down to when you think about it. And we know that all businesses are different, and by the way, we'll touch on that in here in a few minutes. But I have some friends and certainly acquaintances that I have had the pleasure of knowing in the past who ... For example one couple I'm thinking of run a single restaurant, it’s privately owned. It is not part of a chain and it is very successful. And they've constantly got people coming into this place at all hours, it's just fantastic to watch. It's clean, it's in a nice part of town, but these folks never leave. They never take vacations, and they've told me that they've got a tag team thing. One of them will go in and they'll run the restaurant the first part of the day. The other one will work the swing shift and close up at night, late at night, 2 am. But they feel like they cannot leave because they can't trust bring somebody on that they can trust as a number two lead to watch the business while they're away, so that they could have a date night for Pete’s sakes. But the business is very successful indeed. They make money. They live in 4,000 square foot home with a view. It's just amazing. In Southern California, to do that, you've got to have some money. My question is: how can you get out of that mindset when you're used to not only working in your business but on your business at the same time? It just seems to me that for some people that would be very difficult to overcome.
Angela: Yeah, especially if it's a family business, you want to keep it within the family and you don't want to hire outside professionals who can professionally run your restaurant business. That's understandable. They can still command a premium price for their business if they show that there's a continuous, let's just say in their menu they have unique recipes or their menus change constantly. Their service is also diversified and not just dining in but they lease space out for parties and they do catering. There you can show and demonstrate to investors that you have diversified your product line and your services. But on the other hand you can't command as high a premium if the business is just run by two key people. Unless, again, they demonstrated, "Hey, we have our sons and daughters also helping us here. They'll eventually take over the business. They have college degrees and restaurant management.” If they're able to demonstrate that there is some form of passing the baton so to speak to the next generation and there are other moving parts of a business and not just management as I said. If you constantly grow your revenues by diversifying your products and services, you can command a premium for that. Having a good brand name ... if the restaurant has a good brand name, that can command a premium as well.
Jeff: I'm wondering Angela, if you could, you know, you've talked about the importance if you can, assembling a strong management team if possible. What are some other important factors that you can point to that a business owner can improve upon or add to his company in order to improve the value of his or her business?
Angela: There are many factors that can improve the value of the business. I think of paramount importance is demonstrating that you have continuous revenue growth. And how do you achieve this? You achieve this through, as I mentioned, continually innovating in your products, in your services, investing in intangible assets as well as other assets. For instance, the restaurant we were talking about, if they use obsolete equipment that's about to die down in the next year they can improve the value of the restaurant when they eventually sell by investing in updated professional kitchen equipment. It's not just intangible assets such as the brand name and your loyal customers, but also tangible assets in the form of equipment. It could be technology, furniture, which is also part of your asset line in any business. Again, diversifying your operations as another potential source of revenue. You manage costs, keep costs down, and again, it goes back to having a good management team in place that's knowledgeable, experienced in capturing business opportunities as they come and not just satisfied and sitting down, satisfied with status quo. But having a good management who has the foresight to capture any opportunities out there that can improve revenues and continually grow revenues of the business. It's all about the bottom line. When you're investing in the business it's all about, "How can we grow this from a $6,000 business to a million dollar business? How do we get there?" And there are many ways to get there. But I think key is again as I mentioned, you just got to continually improve your product or service, innovate, invest, diversify, and find ways to keep your costs down, and again, have a good management team in place to have the foresight to capture opportunities that are somewhat or related to the business.
Have a good management team in place to have the foresight to capture opportunities that are somewhat or related to the business.
Jeff: Let's say we go down the line, Angela. We want to evaluate how these improvements we are making may be in fact improving or contributing to our company's value, and we want a good idea of what our business may now be worth. We want to take and reevaluate. Maybe it's been 12 or 13 months, or whatever the case may be since we've started to implement these changes, make these improvements, spend the money necessary to kind of make these improvements to our company. Is it necessary for me to go out as a business owner and contact valuation firms such as yours or you as a valuation consultant and get the full enchilada in terms of the comprehensive valuation report? Or is there another way that I can get a good sense of what my business may be worth without spending the tens of thousands or whatever I need to spend in order to get that comprehensive valuation?
Angela: This depends on the purpose of why you want to find out your company's worth.
Angela: The best way obviously is to hire a qualified business appraiser to provide professional advice, especially if you want to find out the value of your company for transactional purposes, or for tax reporting purposes, for small business lending you want a document for the bank for charitable distribution or a pending litigation. On the other hand, if you simply want to get a ball park idea on your company's worth just to satisfy your curiosity then sure there's many industry resources. There's Bloomberg, Yahoo! Finance, you simply go to those websites and look for trading multiples of your publicly listed competitors. Check if the ballpark figure approximates what you think the value of your company is. But at best it's really a back of the envelope calculation and sanity check on what you think the value of your company is. Rules of thumb can provide insight and again, they only can go as far as satisfying your curiosity. If you really want something that your investors can hang their hat on, it's best to find a professional appraiser to value your business.
Rules of thumb can provide insight and again, they only can go as far as satisfying your curiosity. If you really want something that your investors can hang their hat on, it's best to find a professional appraiser to value your business.
Jeff: Good advice to end our first segment of Deal Talk on, Angela, thank you so much for that. It's time to reset premium value and using appraisals to your benefit. We're talking about it with Angela Sadang CFA with Marks Paneth in New York. I'm Jeff Allen. We'll be back with more on Deal Talk in a moment.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with my guest Angela Sadang, Director in the Financial Advisory Services Group at Marks Paneth LLP in New York City. We're talking about premium value, we're talking about valuations, we're talking about you as a business owner, what you need to do in order to bring that value of your business up and we've kind of touched on a number of different things. And right now we're going to get into some specific questions talking about certain aspects of valuation and what you might be able to do in order to get some estimates, or good ideas, or appraisals of certain business ideas that you have, and we're going to use that as a jumping off point. Talking about, Angela, entrepreneurs out there who have an idea of a business, or they have a concept, or maybe they've got a product idea, maybe they've got a prototype. Is it possible to get an appraisal on an idea or an evaluation of an idea in order to turn that into a reality and potentially sell that idea to a future business owner?
Angela: It is possible. There are many different buyers and entrepreneurial ideas start up and then entrepreneurial idea businesses with little or no revenues and operating losses are dependent upon private capital rather than public market. So that's the big difference. At the earlier stages most of these entrepreneurial idea businesses see financing as provided almost entirely by the founder or their friends and family. But as future success increases then there's need for more capital and venture capital has become a source of equity capital with of course a return on share for ownership in the firm. Many of the standard techniques used to estimate cash flows, growth rates, discount rates do not work in this kind of valuation because they yield unrealistic numbers. In addition, most young companies may either survive or may not survive. You have to consider that somewhere in the valuation. So I don't think the traditional valuation model is applicable to an entrepreneurial idea type of company. You cannot expect to yield reliable valuation indications. And I would use projections based on trends of similar companies or competitors, or users of those products, and users of the entrepreneurial idea. And then assess the risks. I would use a hybrid, or a modified, discounted cash flow model and relative valuation model with a consideration for discounting on whether the company can reach their goals from an entrepreneurial idea stage to, okay, we've got all these investments, how do, again, we get from A-Z. And you got to discount as to how they can meet their forecasts based on the numbers showing from the potential cash flows. So I would use a combination of, again, a discounted cash flow model and the relative valuation model, the traditional valuation model will not work here. So it is possible to put a value in an entrepreneurial idea. You're basically paying for the potential of a company. Most technology companies such as Facebook, LinkedIn, Uber, WhatsApp, all of those started with an idea and a potential.
Jeff: That's right.
Angela: Value indications come from a matrix of comparable companies or recent financial and development phase information. What your competitors’ market value would be and users of these ideas. That's also how you look at these companies. Who are the users and what industries are going to move along with this idea? Value indications can, again, come from different factors, you need to consider different factors such as potential market size, likelihood that it's going to survive. A startup company seldom generate any cash flows at the start but as an appraiser you come in and you help the company forecast cash flows based on what industries or what are the users of this idea, who are the users of this idea, and can we project from those, can we project cash flows?
A startup company seldom generate any cash flows at the start but as an appraiser you come in and you help the company forecast cash flows based on what industries or what are the users of this idea, who are the users of this idea, and can we project from those, can we project cash flows?
Jeff: In this day age, entrepreneurial ideas, ideas are born every single day. And so there's a tremendous intangibility that is attached to an idea until you kind of see it work and you see it being used by people, and being used effectively. And when you see that cash flow then that intangibility is no longer intangible, it's actually real, it's a real thing. And I think it's a very interesting conversation and one that we could probably expand on and actually do an entire show on this. Because there are a lot of inventors out there for example, Angela, who have that prototype. We've seen them on Shark Tank for example, who don't really know how to move forward. Because those three guys, or people, or gals on Shark Tank wouldn't give them their million dollars to start their company, it doesn't mean that there aren't people out there that are willing to invest in these really great ideas. I'd like though to talk a little bit about intellectual property because with the advent of the Internet some 25 years ago, whatever it's been now, intellectual property, there has never been a greater, I use the word premium again placed on intellectual property than it is today because the Internet we’re just saturated in information, logos, and service marks, and information coming from all angles both mobile and here on our workstations at our office and home. I would imagine that intellectual property, when it comes to valuations for a company, very, very important indeed, and very critical, and in some cases I would imagine that that logo represents a very significant amount of the value that is assigned to a company.
Angela: Yes, definitely. And you need a separate appraisal for intellectual property and intangible assets. We're not just talking about logos, trade names, and trademarks. Over the past 20 years as you mentioned it's become increasingly apparent that large mediums, small companies, they're now focusing on developing and maintaining intangible assets such as technology as we move from a bricks and mortar economy to one really driven more by technology. So what I've seen is most of the large companies are focusing on technology, licensing rights to IP, royalty agreements as to use of software and technology. On top of you have your trademarks, trade names, you have your customer relationships and customer list, you have secret recipes, or trade know-how, trade secrets. Yes, it's definitely of paramount importance that a company maintain and grow their value through better management and protection of these critical assets. And definitely, you need a separate appraisal for IP assets because more and more, this becomes bulk of the value of a company especially when they're thinking of a future sale or a future transaction for the company.
Jeff: Angela, believe it or not we've already come up short on time here on this edition of Deal Talk and it's been a real pleasure. Just really quickly though, any last words that you may have of advice or tips to help business owners get the most out of their companies in terms of improving their values, anything at all that you could go ahead and pass along?
Angela: Business appraisal, business valuation, it's not an art, it's not a science, I'm a firm believer that it's a hybrid of both. You can get paid for the potential of your company if, as I mentioned earlier, you take the right steps into continually improving your revenues, innovating and diversifying your product line and services. And decreasing your reliance on a key person or a key management team. For some of you, you take steps. The tactics that you use to make your company attractive in the market are largely the same ones that direct the company in a path to growth and prosperity, hopefully enhance a higher value for the business. And you need a professional appraiser to work with to just parse all these factors that can demand a high value for your business. And whether you continue to manage the business or eventually sell the business you need to find out if the value is improving or is deteriorating. My advice is yes, you have to work with a professional appraisal, especially if your aim is to do a transaction of whether it's merger, or acquisition, or a sale of an interest of the company in the future.
You take the right steps into continually improving your revenues, innovating and diversifying your product line and services.
Jeff: Angela, this has been a terrific conversation and I know that there are a number of people in our audience who've learned a great deal from it today. How can people reach you should they have any questions specific to their organizations and they might like to contact you about consulting with them and performing valuation on their companies?
Angela: I can be reached ... I work in our Manhattan office so I can be reached at 212-201-3012 Eastern Standard Time. And my email address is email@example.com.
Jeff: Angela, again, I really, really enjoyed this program and our conversation today, and hopefully we can have you back on the program in the near future.
Angela: Thank you, Jeff.
Jeff: Angela Sadang is the Director in the Financial Advisory Services Group at Marks Paneth LLP in New York.
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Deal Talk is 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 today at 888-693-7834 or visit morganandestfield.com. I'm Jeff Allen for Deal Talk, thanks again for listening. We'll talk to you again soon.