Many business owners are understandably extremely passionate about their business. Sometimes, they are too passionate that they fail to view their business from the buyer's perspective. When that business life cycle finally hits the break, they find themselves having seller's remorse from selling their business without maximizing its value early on. In this episode, Bob Roark is joined with co-host and CEO of Raincatcher, Marla DiCarlo, to unpack the skillsets and insights of guests—Jim Gilbert, CPA, CITP, CGMA, and Allen Harvey—that can help business owners out there to bring profits to the bottom line or increase the value as opposed to cash flow. Jim is the founder and owner of Jim Gilbert, CPA, while Allen is an independent valuation expert working for IBVA and IBVA Pros. Together, they discuss assessing your business and making adjustments from there in terms of valuation, moving from micro to macro that touches the people, processes, and systems involved. Join this great business coaching session to learn how to maximize the value of drivers of your business.

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Maximizing Your Business’ Value With Co-Host And CEO Of Raincatcher, Marla DiCarlo, And Guests, Jim Gilbert And Allen Harvey

Business Coaching

We're doing a continuation of the series with my co-host, Marla DiCarlo. She's the CEO and Cofounder of Raincatcher, a business brokerage out of Denver, Colorado. Returning as guests, we have Allen Harvey and Jim Gilbert. In the previous episode, they were going through the details of the sale of a business that they ran together in Denver. Marla's company handled that transaction. What I wanted to cover with Jim and Allen with Marla's help is to unpack the skillsets that both of these gentlemen bring to the table and their insights to the businessowner mindset and skillsets. Some of the levers and tools that they can have in place that will help them run their business. We talked about this a lot before we started. We'll start off alphabetically. Allen, if you would tell us a little bit about your business and who you serve?

I'm an independent valuation expert. I do professional certified business appraisals. We also work on calculations, which are not independent certified business appraisals. I work for IBVA and IBVA Pros is the team that we put together with some other evaluation experts. I’m teaming with a valuation expert by the name of Mike Dougan, who is a veteran appraiser in the industry We are also developing some relationships and teams with other appraisers as well. We have a team approach to our appraisal practice. That's what I do. We are at IBVA.com or IBVAPros.com.

I'm a CPA. I run a CPA consulting practice. We have three sides of our business. One side is the traditional accounting bookkeeping day-to-day, which helped many clients’ Cloud-based accounting. I've got the business side where I work on lots of CFO, controller, advisory business, and then the other side of our business, which is my passion is technology. How do you apply technology? I spent a lot of time working with my greatest love is merger and acquisition. I spent a lot of time helping my owners, both buyer and seller, be successful and how to get to those processes and achieve maximum value on whether you're buying or selling.

Marla, you and I are friends. We've talked a lot and we've had a number of episodes. Talk a little bit about what you do at Raincatcher and then we'll try to weave together while we're all on this show together.

At Raincatcher, we help entrepreneurs to sell their companies and more importantly, to maximize the full value before they sell. That's something we see owners are either aware that they're leaving money on the table or that they have options before they decide to sell their company. We're here because Jim and Allen are a big part of the affiliates that we use to help those owners make sure that they don't have seller’s remorse, maximize value.

Thank you for that. That's exactly why you're here. I think about the business owner and for many of them, it's their life's work. They're extremely passionate. They know everything about that particular service or product that they have. I think what they fail to do, or in many cases difficult to do is view their business from the buyer's perspective. There's the difference that we talked about previously between a job and a business, value drivers in the business, all of these various topics. Thinking about how do we start. What we wanted to do is goals out of here is to share with the business owner 2 or 3 things may be that they can take away from this episode, that they could deploy in their business that will bring profits to the bottom line or increase the value as opposed to cashflow. Who wants to start, Allen, Jim?

You're spot on there, Bob. What the readers here need to understand is if you're confused by, where do I start? What's my company worth? Where am I at in the process? Do I sell now? Do I sell 5 years from now, 2 years from now? There are people out there I'd recommend that find advisers. If you're a manufacturer and you're great at manufacturing, there's also the art of business and getting people or surrounding yourself with people that are great advisors, have great networks, have connections to all the facets of the business. How do we look at that? How would a buyer look at me? What are the things that are attractive to a buyer? Having somebody that can advise you and work through what I call a three-legged stool. It's people. It's process and systems. How do you look at all three of those? All three of those need to be synergistically connected. They relatively need to be equal. What are the things that people need to look at? That's a super important aspect that we want to try to impart some of our knowledge and give people a couple of steps to think about. What are the steps forward making that assessment? What does a buyer think of my business?

I'd say from a valuation perspective, an independent certified valuation would say, “This is what we believe the business is worth.” We all know that a business is worth what a willing buyer is willing to pay for it. A willing seller is willing to sell at an arms-length transaction. There are things that a business owner can focus on. There are things that are outside his control from a valuation perspective. There are drivers that are exogenously determined. They're coming from the outside. We have no control over them. We don't have any control over the macroeconomy, the micro economy. We don't have any control over COVID-19 and its economic impacts. The things we do have control over or how we run our business, the way our financials are put together in the quality of the financials and profitability. Many business owners focus on EBITDA. EBITDA is an important factor, so is free cashflow and a strong balance sheet. There are a lot of things to be looking at from a valuation perspective.

Marla, for you on your perspective, these guys are business owners that have sold. They went through the process and where you were unique as you started your business with exit in mind. Many business owners start their business with the hope of staying in business in mind and then building the business. Marla, with their perspectives and yours, any thoughts?

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What's important is, first off, I feel many business owners wait too long to get that first valuation. I don't mean to make this sound like they’re doing something wrong because I don't think they understand the process or the need to have a valuation earlier in your business. One of the first things is getting a valuation, which is different than the back of the envelope valuation. There are different types of valuations. A certified valuation is done by Allen, who is certified to be able to do that and then have a benchmark. You know where you're at so that you have something you're working towards. You bring in someone like Jim to help you with that strategic roadmap on how you're going to grow your business, scale your business the right way. That was something that Jim and Allen both did from day one with their business that we worked with them to sell back in 2019.

That was what was incredibly impressive about their business. It stood out from hundreds of businesses that we see. Jim and Allen probably don't know this, but Jason and I talk about their business with our internal team often. That’s why we're here. We want business owners to do this. From day one, they had the mindset of, “We are going to do the right things from the beginning around people, process and systems to set our business up for success.” They did that when they had a life event that triggered them needing to sell, they were still able to control that sales process. That's my pitch on why I'm here and why I'm representing working with Jim and Allen because of the importance around that. That's how a buyer looks at a business.

Allen, I have a question for you. Let's say we have the same business, same industry across the United States. Nuts and bolts maker, would there be a bell curve on the valuations of those businesses? If you had from California to New York, do they all basically solve for the same multiples? Are there variables that you observe?

There are many variables. There's a geographical location. There are local economies, different tax rates. What a business is selling for in California is not going to be the same as what it's selling for in Montana, all things being equal. There is a lot of variabilities. I'd say that as Marla pointed out, getting a benchmark for one's business is an important thing to do. It does create that starting point. You can measure anything that doesn’t get measured that you can achieve and you can measure your success going forward.

What I was thinking of is you've got some with lots of skillsets in there at the far right-hand side, the better side of the bell curve and the people that don't have the policies, procedures, and all that in place are on the lower end of the bell curve, which brings me to you Jim. You've got similar industries and businesses. You look at Allen's valuation for the business and you go, “There are that blue thing, red thing and green thing” that's obvious to you that may not be obvious to the business owner. If you're looking at one of Allen's valuations of a business and a guy goes, “I know I'm going to be exiting in X number of years.” What types of things might you look at from a valuation that's done to start trying to develop a plan to move them to the right-hand side of the bell curve?

There are multiple ways to look at the value of a company that Allen will get into. My favorite methodology, discounted cashflow, how much cash does this business produce? Buyers want to have free cashflow so they can get a return on investment. That's probably the first thing I look at is what is the free cashflow of the business? Looking at EBITDA. EBITDA is another thing. EBITDA is another factor that is a large driver. People need to focus on that. Some people look at a business and say, “It's a multiple of EBITDA and that's what I'm going to pay for it.” How much equity do I have on a balance sheet? I always tease all my clients that's their number one scorecard. What's the equity on my balance sheet? How much have I retained over the years? That's another thing we look at.

When looking at market comparables, I always say, “There's a reason why there are market comparables. Why people are doing what they're doing?” They're always saying, “Why would X company get more than I would?” It's an eternal focus on what drives value. It's all about the maximum value of people, processes and systems. A buyer wants to come in and say, “I don't want to have to pay any more than I have to because if I've got great people, great process and great systems, I've got something to work with. I've got to get return on investment. I have to get there. I've got to get a company that gives me free cashflow, gives me profitability.” That's what people are working on. If I'm going to advise my clients, I'm talking about those things first, that's the macro level before we start getting into the weeds.

Allen, on the appraisals, most of the world is familiar with the real estate appraisal. Your cops in your neighborhood are X and your house is worth whatever. For you and for the business owner, what types of appraisals should they be thinking about and what are the functions of those appraisals?

For the business, oftentimes what happens is if the business owns real estate, you want to disaggregate those. You look at the real estate separately. Real estate is held separately and the operating company is held separately as entities. We would presuppose that's the case for a business. Real estate appraisals are heavily based on comps. There is a capitalization record method that real estate appraisals will sometimes use and for commercial retail space and whatnot. On the business side, it's a bit more in-depth. We are governed by certain rules with revenue rulings from the IRS. We're governed by used app standards. We're also governed by professional associations like NAPFA, ASA and ISBA.

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Maximizing Business Value: Business owners oftentimes don't understand how much work goes into giving a proper valuation.[/caption]

These are the organizations that govern our industry. They are the ones that create the standards that we have to abide by. There are three approaches to the value. It's the main asset approach, income approach and a market approach. What Jim was mentioning a moment ago on those comps, that's a market approach. You're comparing yourself to other companies in the market, other transactions that have occurred sometimes as a public market where you'd have to make certain adjustments for a privately held company. Sometimes they're private transactions. The income approach is what Jim was referring to when he was talking about the discounted cashflow method.

That it, for many purposes, is the preferred method of valuation. It's a method that the courts have oftentimes gravitated towards in certain cases, not in marital disillusion, those are typically an excess of earning type method, which is an X asset method. Those are the approaches and each approach has methods underneath it. Each one of them has to be looked at. We're required by our professional standards to look at each of those approaches and make some professional judgments of which approach to go with or to wait for those approaches.

Marla, you have a business owner that reaches out to Raincatcher and says, “We'd like to engage you to market our company. I have this appraisal.” You go, “This is what my company is worth.” For you, as you looked through, I get an appraisal for a piece of real estate and like you guys said, “Yeah, that's nice.” It will sell for what somebody will pay for it, not what it's appraised for necessarily. For you, how do you view or use a certified appraisal when you're talking to a business owner?

It makes our job easier as a broker, if we have a certified valuation versus an opinion of value. Buyers are more inclined to accept a certified valuation. There are many different methodologies for valuing a business. Depending on the geographic location, the industry, the size of the business, they're all factors that influence the valuation. It makes our job a lot easier when we have somebody like Allen, that's endorsed. This is what the business is worth. I had a question that I wanted to ask Allen. I bet this is a question that other owners are wondering. We already know that there are different ways to value a business. We talked about the rule of thumb, using the income approach. Is there anything that helps you to put together that valuation? Anything the business owner can put together ahead of time that would help you to have a more reliable valuation to present to them.

First and foremost is a good, solid set of books that makes sense.

We all laughed when you said that because sometimes where it's like, “I understand that you didn't know what you didn't know. We need to set you up with a bookkeeper. Jim.”

A lot of our job is making sense of those books in what we call root casting them. We recast the financials to try to make them relevant to what we're doing, but also to make them coherent. Sometimes there are many missing pieces. The typical PBC are provided by client lists comes with a set of financials. We try to go back five years if they got the balance sheet, income statement, certainly statement of cashflows, if they've got it. Governing documents, we need articles, bylaws and management operating agreements, partnership agreements, buy-sell agreements, those kinds of things. That gets us started. A lot of us getting into a process. I don't want to get into the weeds too much, but we were always relying on not only those documents and income tax returns, but we are relying on the management interview. When we go to management and we ask them questions about their business, what's going on in the future, and what assumptions do you have? That's a big piece of it. We have to gauge that and make sure it passes the sniff test. It's reasonable.

That's important because businessowners oftentimes don't understand how much work goes into giving a proper valuation. It's common. Both of you have seen this, Bob, I'm sure you've seen this too of tax returns, not even close to the financials that they presented. Usually, there's an explanation and sometimes it’s that the CPA hasn’t made their adjusting entries. There's a lot of work that goes into having that conversation with the owner to get it right. They could pay for valuation that you're delivering it to them going, “We will base upon what you've told me, this is what I have.” They have to participate in the process.

Participation in the process can get hairy sometimes depending on what the circumstances are. We do valuations for solutions, for litigation purposes and for shareholder disputes. In those cases, everybody's got an agenda. In some cases, maybe a husband who owns a business and the wife is trying to get the valuation done for marital dissolution. We're not always getting cooperation on all sides to get all the accurate information. We're not auditors. We don't audit the books. We're not making any assumptions or making any comments about whether they're debt compliant, what the state of the financials are and the...