Morgan & Westfield Deal Talk
Exclusive Interview with David Bookbinder
A business appraisal can actually lift the value of your company, which would be useful, particularly when you know you want to sell your business. However, did you know that a valuation is not always necessary and — according to this segment’s guest — not always recommended when you know you are getting ready to sell your business. David Bookbinder is a valuation expert at GBQ Consulting and contributing writer to The Huffington Post. On this installment of “Deal Talk,” David explains to Jeff Allen when and why valuations may not be needed. He’ll also talk about a few things you absolutely will need in order to get the best deal for your company.
Jeff: What you absolutely need to do when you're selling your company, and one thing you may not need to do at all. If you want some insight into what is absolutely necessary when selling your business, you've come to the right place.
From our studio in Southern California, with guest experts from across the country and around the world this is Deal Talk, brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
Jeff: Hello, and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on “Deal Talk,” it's our mission to provide information and guidance 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.
What you need to do when selling your company and the one surprising thing that you may not have to bother with at all. And that's probably going to surprise you just a little bit given my guest's role and his stake with the company that he represents. His name is Mr. David Bookbinder. He's Director of Valuation Services at GBQ Partners LLC in Philadelphia. David Bookbinder, welcome to “Deal Talk,” good to have you in.
David: Hi Jeff, thanks for having me.
“The value of your business or business interest depends on what (in bold) exactly needs to be valued, why it needs to be valued, when it needs to be valued, and for whom it needs to be valued.”
Jeff: Well, we're glad you could make time for us and I hope I didn't give away all of the fund there in announcing you as the guest on the program, but I do have to ask you about something. This I kind of found interesting on the GBQ website and it talks a little bit about you. It gives your bio information. They refer to you as the rock and roll guy of finance. Where did you earn that, or how did you earn that moniker?
David: All right. The backstory there is when I joined the firm about 4 years ago, I was told that they do these clever summary bios for the website and they are unlike other firms that I've seen. So they're definitely clever and they're definitely cute. So I filled out a questionnaire knowing that a part of the answers was going to show up at a break room at the corporate headquarters. And part of the answers was going to be used to fill out that clever bio. I didn't really fully appreciate what it was going to look like until I saw the first draft. And when I saw the first draft and realized, "Now I get how they're going to use that." I changed the storyline a little bit to talk about something that we can translate into. It's a business world and it's like persistence and determination. It refers to my desire to meet a certain favorite band of mine and the lengths I went to try and persuade those who may be able to help me with that, not believe I'm a crazy person or a stalker. We actually got that done and I did get to meet them.
Jeff: And the band was?
David: The band is Rush.
Jeff: Wow, great for you. Rock and roll guy of finance is well-earned indeed. Come to find out you do some writing for Huffington Post. There's a column that appeared that I thought was very, very interesting. It caught my eye immediately. And that is the five things you need to do when you're thinking about selling your company, and the one that you don't. And it's very surprising and we're going to start with that one thing that you don't have to do right off the bat. Tell us what it is.
David: It might just be valuation, and that's what I do all day long.
Jeff: So you're not taking bread off your own plate but you have a reason for this particular response to this question, of why we need valuations and if in fact we need one when we sell our companies. Why is it that we don't necessarily need to have a valuation after all?
David: Earlier in my career if somebody would've called and said, "I'm thinking of selling my business. I need a valuation," we probably would've just gone through the process, give them the valuation deliverable, and essentially told them to have a nice life. And then one day the light bulb went off over my head and I realized that's really not adding value, it's not really helping. And I started to ask better questions about that. And one of the most important questions to ask is what's the timeline for this potential sale? Is it really imminent or several years away and you're really planning? If it is imminent, what's your comfort level in structuring and negotiating a transaction? And if there's really not that comfort level, then me giving them a valuation or anyone giving them a valuation, doesn't necessarily help them maximize the value in terms of the selling process. That's the reason why I wrote that piece, because it's a story that I hear all the time from potential clients and sometimes I have to explain to them why they don't exactly need our services in that particular time.
Jeff: Let's pretend for a moment that we have a room full of business owners. All of them are looking at selling their companies within the next three to five years. How many people in that room do you think likely based on your experience would actually need a valuation?
David: That's probably the right time to be thinking about it because then it can go through the appropriate planning process and not make it a fire drill at the back end. There's an opportunity to get it right.
Jeff: So, in fact, a valuation can certainly help you, but if you've got some time as you're saying you don't need to worry about this just yet.
David: Yeah. If you got time, that's the best time to actually be thinking about doing the valuation exercise and getting ready to entertain the process of selling. Because it is a process. You don't just wake up one morning and say, "I'm going to sell my business," and expect to get it done in the next 30 days. There's a lot to be done. And if you're going to do it right and maximize the valuation in that sale, there's things you need to take care of and time and planning helps you get there.
Jeff: We're going to talk about the five things that you will absolutely need that you need to start thinking about sooner rather than later well before the valuation and according to what you've told us, David. We're going to get to those here in just a second. But first of all, I wanted to ask you, if you were to advise a business owner or owners that they don't need a valuation, maybe that's the second to the last thing they need to think about, how do you advise them as to steps they can take before that valuation is even necessary to lift their company's value? Some value drivers that you counsel your own clients on, things to watch for, look for, and things that they can do to implement these value drivers to help bring that value up prior to the time that they actually do in fact have an appraiser come out and do a comprehensive valuation?
David: Sure, great question. You're familiar with valuation concepts, I'm sure your audience is, as well. So they probably already understand that valuation is a forward-looking exercise. It isn't a look in the rear view mirror as to what you did last year, it's more like what's happening next year and the years to come. There's got to be a really clear plan and path to growth and profitability. And you might be surprised to know how many businesses actually don't go into that deep dive on planning. A lot of them may actually have a 60-day budget, maybe they'll have a one-year budget, but if you ask them what did the business look like three years, five years from now? What are the key drivers that can impact growth and achieving profitability? What kind of capital do you need to achieve those projections? A lot of times it's deer in the headlights.
Jeff: Do you give them any kind of advice or consult with them on things that they might look to to possibly improve where they're at now in order to get to a certain milestone or something that they believe is a good indication that we're ready. We're kind of where we need to be.
David: Yes. Part of it involves the financial statements, getting the financial house in order. And a lot of privately held businesses probably have some employees, typically family members, who are on the payroll but don't necessarily contribute to the business. We all get it but it tends to reduce the bottom line. And when you're thinking about selling your business, obviously if you're thinking about an exit multiple for example, you want to apply that multiple to the largest earnings number that you possibly can, whether it's EBITDA, or new income, whatever the case may be. So you got to think about that early, and now just to correct the numbers. But it's also the messaging part of it, because if you've got somebody coming in to perform due diligence on the company, and the sellers are spending more of their time trying to explain a way the financials, and spend time developing the normalizing adjustments to get to what EBITDA really looks like, you're detracting from the value of the business by definition.
Jeff: So now what I'd like to do, we're going to change the subject just a bit because we wanted to talk to you David on this particular program about not only the thing that you don't necessarily need to do and certainly don't need to do right now in order to get your company ready to sell, but the five things you do need to do. So let's talk about them one by one. The first one on your list here on your column is hire an investment banking firm. Tell us a little bit about that.
David: So it's an investment banking firm or a business broker depending on the size of the company. The idea here is an intermediary, and two reasons. Number one, most times you'll get the valuation as a part of that sell side process. So your client will already understand the valuation and they'll get it in this exercise. But more importantly the power of the auction is really what's going to help drive maximizing the valuation of the business and the sale. It goes tremendously to their benefit when a potential buyer receives a confidential information memorandum that says, "We have a process, we have an intermediary, and oh by the way potential buyer, you're not the only one who got this, some of your competitors did, too."
Jeff: Number two on your list is consider an accounting upgrade. We just touched on accounting just a little bit a moment ago. But when you say upgrade are you talking about human capital, are you talking about software, what are we talking about here?
David: Well, it depends. A lot of times some of the smaller businesses are working with somebody's sister-in-law who's doing bookkeeping, or they're working with a friend of their family doing maybe some QuickBooks and things like that. But investors and buyers are going to want to see more structure. It's not audit certainly review from a reputable firm. So a lot of times the accounting upgrades are part of the process. It has to happen.
Jeff: Number three, get an attorney on board. Boy, we've heard this before but it really is important isn't it?
David: Yeah, and it's about getting the right one. So, the analogy I use there is if not your brother-in-law, the personal injury guy. You need somebody who's skilled and experienced in transactions and can help you draft the documents that are going to protect you and get the deal done properly.
Jeff: Number four, bring in the investment adviser.
David: Yeah. If there's really a sale on the horizon and you're likely to receive a windfall, certainly a large sum, it's probably prudent to get your financial adviser if you receive a windfall, certainly a large thumb, it's probably prudent to get your financial adviser and if you don't have one to find one to help you manage those proceeds. You've worked pretty hard throughout your career. You've now monetized it, don't blow it.
“And I can tell you horror stories where, for example, an attorney would draft the document based on the intent of the business owner. And then, when the other advisers got involved and read the documents after the deal closed, it was pretty clear that the intent was misconstrued.”
Jeff: And number five, the fifth thing that you absolutely do need. In fact to do is to choose a quarterback and to use the... we're using the sports vernacular here to really illustrate the point, but we're not talking about necessarily the owner of the business in question, we're talking about someone else who can really be a facilitator, aren't we?
David: Absolutely. And it's probably the most important piece of the puzzle. You need all of those different advisers communicating with one another whether it's telephonically or sitting around the table together. And I can tell you horror stories where, for example, an attorney would draft the document based on the intent of the business owner. And then when the other advisers got involved and read the documents after the deal closed it was pretty clear that the intent was misconstrued.
Jeff: Wow, unbelievable. David, going back to the idea of valuations, how many times are valuations actually performed prior to a sale or... Let me put it this way, is it common for us, and we've heard that from time to time when we would think that there would be a valuation that would be performed that in fact the valuation may not be necessary simply because the buyer of the company knows exactly what he or she wants and they've already done the due diligence and it's not necessary. Is this something that is becoming increasingly common, or is it actually becoming common the other way where the buyer of a business they're targeting, they've got a company kind of in their sights. They'll actually ask or demand that that sell side company does in fact have a comprehensive evaluation done.
David: I think it really depends, Jeff. It's a really good question and I think the easiest answer would be to say that if anybody on the buy side does not have their own internal staff that does that sort of thing, they'll probably be the one to retain a valuation expert to help to them make sure that they're thinking about a valuation. And in that context on the sell side if they're already committed to working with this buyer it probably be ___________ to have their own analysis done just to make sure everybody's on the same page.
Jeff: Time with David Bookbinder and we've talked about the five things you need, the one thing that you don't. And what I'd like to do is I'd like to stay on the subject on valuations, David. We're going to take a short break but when we come back I want to talk to you a little bit about the reasons that a business owner may consider the need for a valuation when maybe they don't even have a thought about selling their company at all. Maybe there are some other reasons or maybe they have their own particular motivations and agenda there. David Bookbinder is the Director of Valuation Services at GBQ Partners LLC in Philadelphia, Pennsylvania. My name is Jeff Allen. You're listening to “Deal Talk” and we'll continue our conversation when we come back right after this.
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Jeff: Jeff Allen with David Bookbinder, Director of Valuation Services at GBQ Partners LLC in Philadelphia, Pennsylvania. David, what I wanted to talk to you about in this segment of the program concerning valuations, maybe some reason that people may want to have them done. And we're not talking about necessarily, "I'm looking at a divorce soon" or something like that. We touched on a number of different things on the program in the past but really you had some keen insight on this one in your column, what is my business worth. And you talk about some reasons that would give business folks like me own our companies reason to give you a call and ask you to come on out. Let's kind of dive into those just a little bit. Are there really some principles or some objectives that people who come to you with or should have in mind as far as motivation for asking for a valuation, really good reasons.
David: Yeah, great question. Most of the reasons why people come to us for valuations, frankly, is because somebody else is telling them they need to get it done. They're typically trying to achieve some other strategic imperative whether it's gifting shares of their privately held business to their kids or their grandkids, or maybe they're granting stock options to employees, or maybe they're buying other business and they need to get the intangible assets valued. They're told by the other constituent review party, whether it's the audit from the IRS or the SCC that before we can those strategic imperatives, you need to have that thing valued. Those are the typical reasons. But to get to your question about the real value in getting a valuation. There's the planning aspect which we talked about in the last segment, if you're thinking about selling your business.
But here's another one that a lot of people don't really think too much about. And if you think about your investment portfolio, you can envision a pie chart if you will and you've got your portfolio usually allocated, large gaps, small gaps, international bond, etc., and you generated a certain return last year and you're feeling pretty good about that. Now imagine you've got a second pie chart. And then this second pie chart you're not going to lay in your ownership interest in the privately held business whether you're the owner or just a shareholder. You didn't have to know what the number is but you can probably imagine that slice of the pie, it's probably the largest slice of that second pie, which then means your whole asset allocation is out of whack. So there's an opportunity to do some planning about your asset allocation. It's about the idea of maybe taking some money off the table in some degree, reducing your exposure, and also thinking big picture about what is your exit plan.
Jeff: You have the need to not only call in some of the individual to talk about, maybe an attorney, a business adviser. But it sounds to me like that's a place where maybe a personal wealth manager might also come in handy as well.
David: Yeah, no question. They're probably the best suited to have that conversation with the business owner. So I'd put that out there for any of the wealth advisers that are listening in the audience right now, because that's one of those ways where they can really add value and help their clients.
Jeff: Ways to value a business, and kind of give us some things to think about as business owners. Most of us at some point become engaged in the numbers game. We're always thinking in terms of dollars and cents. How much I lost last month, how much I made last month, how much I lost last month, how much I made last month, how much I was able to keep how much we have coming out of the budget in the coming months. We've got a new equipment coming in. So we're always thinking about these types of things. As far as how to value our business is concerned, just another think that we need to really probably think about a little bit. If we don't have a really astute bookkeeper, or accountant on board, how should we think about this? Are there different methods that are used, that you use when you work with your clients? Does it really matter what it is you're preparing the valuation for that determines the method that you use?
David: Generally, the methods are going to be similar. If we're talking a business that's not headed for liquidation, so it's an ongoing operation. And there's two methods that are typically employed. One is what we call an ‘income-based method.’ As I've mentioned previously, valuation's a forward-looking exercise, so in that situation you'd be projecting the future operations of the business out into the future and essentially bringing the net benefit of those cash flows back to a present value to compensate for the appropriate level of risk associated with achieving that forecast.
The other method, if you've ever sold a house or bought a house you understand market approach concept. You look at what other businesses have transacted for recently. And there's two ways to think about a market approach, one is the business in its entirety and in that situation you're going to look towards comparable transactions of the sale of businesses. And the other way to think about a market approach is developing a publicly traded peer group, the idea being that your business is privately held so I can't invest in your business. But if I wanted to participate in the upside and also share the commenter downside risks. I could probably buy a portfolio stocks that trade publicly. Once you identify that peer group basket then you make certain adjustments that account for the differences between the peer group companies and the subject company. So by looking at it from those different lenses you tend to be able to triangulate evaluation.
Jeff: And you're listening to “Deal Talk,” my name is Jeff Allen. That man on the other end of the Morgan & Westfield guest line is David Bookbinder from GBQ Partners in Philadelphia. And we're talking a little bit about valuation, about the things that you absolutely need to do and think about three to five years out from selling your company the things that you don't. And we're talking about why you might need to have a valuation done. We've talked about this on our program in the past but we're kind of coming at this from a different angle. We're talking about different motivations and things like that, and the different types and methods that are used for these valuation calculations. You talk about the importance of why it really depends on the type of method that you would use. You put it in some simple terms I think that can really help people understand the principles of valuation I think a little bit more clearly and very simply, David. And I'm going to quote here from your column here on LinkedIn. He says, "The value of your business or business interest depends on what (in bold) exactly needs to be valued, why it needs to be valued, when it needs to be valued, and for whom it needs to be valued. And then you talk about some important things to consider. And one of those things, and I think a lot of people could probably understand this, is debt and how much is on the balance sheet. Why is this so important?
David: Because at the end of the day the debt on the balance sheet reduces the amount of equity that's available. So you can think about it in the context of your home, again, when you think about the value of your house and you subtract the value of the mortgage that's what's left over. I don't know if you're familiar with the TV show Shark Tank but if you watch the entrepreneurs when they do their pitches, if the sharks ever ask a question about debt and the entrepreneur says yes, they all sigh, and that's because every dollar of debt is going to decrease the equity value.
Jeff: Yeah, you bet, and that's understandable. You talk again here about another item to keep in mind that we've also discussed I think on the program in the past but it's one that bears repeating really because a lot of times a business owner may have a valuation, maybe it's comprehensive, maybe it's something that's simplified and they think, "Okay, I'm done for a while, I had my valuation three, four years ago, why do I need another one, everything has been essentially the same. We've operated the same profits and revenues on trajectory. There hasn't been a tremendous amount of growth but it's been steady, we've been able to manage and keep our expenses and our debts contained. Why is it important to revisit and to have another valuation done from time to time David?
David: Great question, because while the business may be operating at a steady state environment, markets change. So what your valuation was four years ago probably isn't relevant today necessarily. So key things to be thinking about when you talk about the methodologies I just referred to multiples change. Supply and demand in the marketplace and trading multiples for public company ebb and flow based on economic cycles. So if for example you may have been valued at, just to pick to a number out of the air, 4x EBITDA four years ago, that number could be higher or lower in the current situation. Similarly, when you think about the discounted cash flow method or the income method that I alluded to, that forward-looking model where you bring the cash flows back and a risk rate that's appropriate, part of that risk rate includes market-based factors including interest rates.
Jeff: David, as we're running out of time here, I wanted to just find out if you have any last words for our listeners today concerning valuations, concerning their need prior to sale, and just helping business owners in kind of a general way with maybe some key takeaways today, whether they're from our discussion or maybe these are just some parting words of advice that you may have in order to help business owners really focus on improving the values of their companies what would you tell them to do?
David: Yeah, that's a great question. I'm going to go a little bit off the grid here and talk about something we've probably hadn't talked about directly. That's relationship buy-sell agreements. I've seen a lot of harsh stories pertaining to buy-sell agreements, well-intended where people may have built-in things and they say we agree that book value is the right value for the business, although there's a lot of reasons why book value isn't the same as fair market value, so that's a bad metric. Then others may say things with the intent of being a little more scientific and precise and say we agree again for example five times EBITDA is the value of the business. But in reality that may not be a right multiple of that particular point in time when you need to enforce the buy-sell. And how do you define EBITDA? So it's unclear. The best advice I would give is if you're going to have a buy-sell agreement it's probably a good idea, think about building in an agreement there's going to be a valuation done periodically so that everybody understands exactly what's what.
Jeff: David Bookbinder, we have now officially ran out of time and before we go, you have an opportunity to give out your contact information if there is someone in our audience who would like to reach out to you, you're part of the country. No matter where they are they have a specific question or they need your help, how can reach you?
David: They can find us on the web at gbq.com. They can reach me at dbookbinder@gbq.com, and my phone is 215-568-2306.
“It goes tremendously to their [sellers] benefit when a potential buyer receives a confidential information memorandum that says, ‘We have a process, we have an intermediary, and oh, by the way potential buyer. You're not the only one who got this, some of your competitors did, too.’”
Jeff: And don't forget to get the guy's autograph. Maybe he can fax it or email it to you, whatever it is the technology that you use. Don't forget, you're in touch almost greatness. The man did meet Rush after all, that is why they call him the rock and roll guy of finance. David Bookbinder, it's been a real pleasure sir. Thank you so much for taking the time out of your schedule.
David: It's my pleasure. Thanks so much for having me.
Jeff: There you go, tell a friend about Deal Talk and about David Bookbinder's visit on our program. In addition to Morgan & Westfield you can find us on iTunes, Stitcher, and Libsyn. “Deal Talk” has been brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Thanks so much for listening. We'll talk to you again soon.
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