Appraiser Selection and The Shark Tank Effect

Appraiser Selection and The Shark Tank Effect


Appraiser Selection and The Shark Tank Effect

Today, you just get Ed in this solo show. Ed’s been getting a lot of questions lately about business valuations. Circumstances with the pandemic are changing, there are more divorces happening now, and the economy is a little different than we’ve seen in a while. So, Ed takes this episode to share some realistic business valuation tips with you. He also shares how he often sees the Shark Tank Effect on business valuations, and it doesn’t always help the business owner.

Enjoy this solo episode with Ed!

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Show Notes

So on today’s show, you just get me and the reason being is that I have been asked a number of times how to select an appraiser. And under these circumstances when the economy is the way it is, we’ve got this pandemic going on. A lot of businesses are closing – a lot of divorces are happening or getting filed for and there’s value impairment and people want to calculate, you know, just what’s the ramifications to my business. So regardless of whether you use someone like our firm or anyone else, I want to give you the tips that you need to be aware of how to select the best appraiser for your situation. 

So an appraiser is an advisor and they’re no different. Not all of them are created equal. I’ve been blessed to work in a business brokerage and I’ve had countless opportunities to see how buyers really behave toward their investment. When I say investment, some buyers are buying jobs, others are buying investments where we have to calculate those returns not necessarily how much income am I going to be able to extract from business. But view it as in some cases, someone is taking their retirement income and putting it into the business, so we have to evaluate returns. 

So having said that, you know, I’ve been able to apply, a lot of what we’ve seen from buyers into my appraisals. So when you’re working with an appraiser, you simply need to know what area they spend their most time in. Like, for example, I do a lot of buying and selling work. I help buyers and sellers understand value. If you’re in litigation, and I’ve got a good buddy that lives, eat and breathe, litigation. They live to get into the courtroom and start talking about cap rates and slicing and dicing different discount rates and how it applies to the business and so on and so forth. 

I’m more into happy ending work. So that’s what that’s what I do. But my point to you is that the appraiser may not be as much of a resource if they don’t regularly work within the confines of what you need, for example, someone that’s into litigation or divorce, you need somebody that that spends a lot of time in the courtroom.

So now, like I said, I’ve worked with buyers and sellers for over 20 years. And I’ve found that it’s not so much the valuation knowledge about the experiences surrounding the circumstances of evaluation. For example, I had a situation where I did a valuation for a chain of franchise food operations. So the dad came to me and he had, I think, 12 or 13, franchise operations, and he had five kids. And so what we did was we evaluated each of the businesses within the portfolio, and we had all of the kids in and they were given an option to buy at the appraised price. 

So we went around the conference room table, and each of them got the option to essentially buy or in this case, inherit that particular business. And so every business member was included in the process. And the level of the father’s transparency, and his insistence of the inclusion of those who would benefit was instrumental in maintaining the family stability following his death. 

So the point of the story is that the valuation was a component in a considerably larger picture, which in this case was the family stability and in continuity after his death. So I’ve told this story, and I’ve shared that framework to many accountants, attorneys and business owners that they plan. If you do have children in the business, or that you’re considering bringing into the business, you know, they need to understand the value and understand the value to you. 

So now, how do you work with an appraiser? Well, the first thing you need to do is that you absolutely need to understand you need guidance on value is money. well spent. If you have someone that can have an objective look on your business. So assuming that you that’s what you do, where do you find that appraiser? Alright, so the first place we need to look is at their designations. 

So there are a few designations that are signs, your potential advisor has obtained the knowledge to perform this kind of work. So you have the certified valuation analyst, you have the accredited senior appraiser, you have the certified business appraiser and you have a credit and business valuation. Those are the four primary designations that you’ll see a lot of people have, and you’ll see many appraisers that have multiple ones, and yours truly has a couple of them. So the interesting thing is that most of these appraisal associations don’t necessarily play nice with one another. And I can explain why we’re all kind of pulling from the same body of knowledge but the takeaway is that I need you to understand that there needs to be some sort of advanced knowledge in the field for which you’re hiring. 

Alright, so if they don’t have an understanding of valuation, that’s probably a sign that you may want to do further due diligence for your particular engagement. So, I always get asked the question, what about my CPA? Well, the CPA organization as a whole, they have their own designation, that’s the accredited and business valuation. And so, you do want them to have had that specialized knowledge to do the work so many accounts that have shown up or many business hours for which their accountant has done some analysis have shown up and, typically the business is way overstated in value. And not to say that, you know, some come in on the money but some haven’t. I always turn around and say, you know, go sell to your accountant. He or she will have the highest offer. So yeah, like I said, you need somebody that has the background in valuation, you know, the designation specialized knowledge for that. 

So having said that, once you establish that they have pursued some additional knowledge and experience in that just business valuation. Now, let’s drill deep a little a little further. And not all appraisers are created equal either. Now, over the course of my career, you know, we’ve seen that some appraisers are just better at certain kinds of projects. Over the course of my career, I have now come to the conclusion that I have enough experience to understand when I don’t have enough experience, and that’s one of the things you need to be aware of is that there are specializations within business valuation. And so as you look at your business, here’s how you need to recognize that you need a second set of eyes. So those businesses that have large intellectual property, and if you have patents, if you have source codes and things to that effect, you definitely need someone with specialized knowledge in intellectual property. 

Next is those businesses that have a large asset basis. And when I say large asset basis, I mean that the value of the equipment may exceed the value of the business itself. And when I say that, the business itself I’m referring to the income and market approach. So like I said, the asset, the underlying assets, as an assemblage would be the highest value. Next is SaaS businesses. So that’s a whole different animal. And a couple weeks back, we had the folks from Empire Flippers on the show. And we talked a lot about online businesses. And you know, it’s a different animal than your typical bricks and mortar. The next one is when you have several direct or indirect shareholders, so different classes of stock and different and different shareholders that have different levels of interest in the business. 

Those are just three areas that you certainly want to have an appraiser with specialized knowledge. So the next question is, where do I find this industry specialist? Well, you obviously can Google. All you have to do is put in business valuation and then insert your industry and use quotes. You can also contact your industry association and ask if there’s anyone who does appraisal work within the CPA association. Now, you definitely want to be careful about what you say. You certainly don’t want to position it as “I’m thinking of selling my company, I need a business valuation.” Rather you would say, you know, “I’m doing some estate planning. And my accountant said I needed to get a business valuation for our financial planning. So do you have anyone that you would recommend?” Lastly, you can contact the associations – you have the American Institute of Certified Public Accountants, you have the American Society of Appraisers, you have the International Society of Business Appraisers and lastly, you have the National Association of Certified Valuators and Analysts. 

So I hope those recommendations will lead you to the appraiser that will help you the most. If for whatever reason, I can point you in that direction, if I can be of any assistance, certainly let me know. 

Right now the next thing I wanted to talk about is what I’m calling the “Shark Tank effect”. So everybody probably has watched or at least has heard about Shark Tank. So basically, business owners have a business or an idea that they pitched the Sharks about why it makes sense to invest in their business. The Sharks then evaluate the merits of the opportunity and decide whether or not it’s worth their investment, and their time, and then they subsequently make an offer. 

So I call it the Shark Tank effect, because as of late, I’m getting a number of people that are showing up that believe that their business is Shark Tank values, because of the nature of the business or the market that they serve. And so it’s really interesting these days, because, you know, aside from just the pandemic that we’ve got going on, it is remarkable that we’re hearing about people expecting premiums, especially under the circumstances that I’m getting ready to describe. 

So back to the Shark Tank. So when a Shark invests in this business, they’re not only evaluating its history, but also by association, what that shark can add through its network through ancillary businesses, in the Shark’s portfolio, their marketing channels, their coaching, and their access to capital. 

So I don’t know any sharks personally, but I do know that an investor’s time is worth far more than his or her check – that part I do know. And so what does this have to do with business valuation? Well, remember that the value of an investment is the present value, the future benefits. 

So there’s a book that I always recommend. It’s called Time Really is Money by Rob Slee. And he has value wrongs. And the highest wrong is the $5 million per hour wrong. You can put the Sharks of Shark Tank in that category. So by virtue of their name being associated with the investment or potential investment, it becomes more valuable. It’s not, it has little to do with the business owner. And you can see this sometimes when when business owners just come on the show, they’re not really looking for a deal, but rather they’re just looking for the exposure to have interacted with the Sharks and they have exposure to millions that watch each week. 

And so what does this have to do with you or have to do with the business or as I’m referring to? So you have to be realistic in your valuation. Most likely one of the Sharks or another buyer like that with too much money is probably not going to be bidding on your company. So hanging your hat on or hanging your business value or the liquidity of your business, in finding the needle in the haystack buyer will just about guarantee to disappoint you. Now, I hope I’m wrong, but I typically am not in situations like this. 

So the easiest litmus test and I always ask this of business owners that are upset with my business value is, you know the most about this business, you know everything about it from its inception till now, would you pay for this? Would you pay the amount you’re asking? And nine times out of 10, they say, “no way”. And so I’m sitting here, and I sit and pause for a second and let that sink in. And so it finally dawns on me that if they who know the business better than anyone, and the risk is probably less for them won’t pay the price they’re asking, why would anyone else?

And so there’s an overwhelming amount of information about valuing and selling businesses these days, there is no shortage of content that’s being thrown at anyone that has an internet connection and access to Google. So the reason I share that is that people aren’t making that many poor financial decisions on buying companies because there is that much information out there. And so, of the companies that sold you know, www.bizbuysell.com, and I’ve talked about this on the podcast before. I mean, it’s one of the largest marketplaces that are used for promoting business sales of those companies that sold, sale prices these days are only about 15% of asking price, which is, especially in business valuation, a fairly close tolerance. 

Because as we know, risk is dependent upon the buyer and different buyers have different risk tolerances. So Shark Tank is a wonderful venue for entrepreneurs to have the opportunity to be coached by the world’s elite investors and has empowered many into entrepreneurship. But if you’re looking for an irrational buyer to behave toward buying your company is not only not likely going to happen, and I would strongly encourage you to consider reevaluating your exit strategy.

 

And as always, if I can help in any way, drop me a note, I’m more than happy to point you in the right direction. Or if I can help, I’ll certainly do it. Thanks so much for listening. We’ll see you next time.