EP 33: FAQ Friday for April 3, 2020

Ed Mysogland  0:03  
Please welcome please welcome welcome. This is another episode of the defenders of business value podcast, podcast where we talk about what makes a business valuable during the tips and tactics to increase your company's value that only veteran filmmakers know. And now, here's your host in misos land. Welcome to frequently asked question Friday, I'm your host at my sick land, I help business owners make sense of the value in their company so that one day they can sell it when they want, how they want and to whom they want. Each week, I answer three questions about business value or selling companies that come in from the website or social media. This is a little bit shorter of an episode, but hopefully, it will be helpful in your journey to making a saleable company. Alright, so let's get to it. The first question today is why do I need to understand business value? Well, it depends on who the audience is. And they're really the ones that need to understand the value. Now, certainly, you as the business owner need a clear understanding of what creates value in your company and how others might see it. But there's different purposes for the value valuation, you have litigation, you have state work, you have sell side work are just a couple of them. And so when we when we look at why you need to understand business value, over the 40 years, we've been doing sell side work, the buyer has to have a clear understanding of what they're acquiring, and likely anyone else that's looking at the business, whether it's a governing body or are a judge or, or another needs to recognize how value is calculated. And so, and obviously, the beauty is in the eye of the beholder. That's more on the sell side work. But when you're dealing with estate and and legal work related to business value, it's based on the principle of substitution, why would what would induce me to pick one asset over the other all things being equal. And so the reason behind why I need to understand my business valuation is, so you can continue to grow value. And that, to me, is probably the biggest reason why you need to understand it. The next question is, can I value my business myself? Well, sure, you can do anything yourself. I've made a living unwinding a lot of work that business owners have done themselves. But let me tell you, the biggest thing that I see is it's not necessarily wrong math, it's wrong inputs. And one of the most common formulas I see is that they'll calculate their earnings or what we in our world we we call sellers, discretionary earnings, which is adding to the net income, all your non cash expenses, which is depreciation, amortization interest, as well as direct officers compensation, and discretionary non recurring expenses. And so they calculate that, and that's typically where the where the biggest problem for us is, is that they just tend to add everything that they believe the next owner would not need. And that's that's a challenge, because there's a lot of things like, for example, advertising, a lot of business owners say, Well, you know, what, they don't need all the advertising we do well, unless you can quantify how much revenue came from the advertising you did. That buyer is not going to just say, Yeah, you know what, that $20,000, I'll just go ahead and add that to your cash flow just doesn't work that way. So the next thing is calculating a multiple to to the earnings. That's the next place where it's problematic. So we have to evaluate the industry, we have to evaluate the location, how long it's been in business, what the economic climate for that business is the size stability, other areas that affect risk, what are the tangible and underlying assets, any intangible assets, other risks that stem from you, perhaps being only the owner, and then obviously, if there's any kind of real estate, we have to make sure that that real estate is at a rent, that's fair market value, and then from there, you have a gross value. And, and again, as you can see, those two areas are the biggest challenges that we bump into is miscalculation of earnings, and then typic in this case, typically overstating the multiple that you would apply. So as you can imagine, most business owners are overstating the value of their company because they just don't know what the market will bear. And again, going to the market with a high price is not necessarily a bad thing. It just you don't want to scare off buyers, because, you know, they assume that you're just hoping that you'll bump into an idiot that will pay that it just doesn't happen like that anymore. There's just too much information. There's just too much accessibility to business valuation. Knowledge. So So is there a general valuation? Formula? Yep, I just gave it to you. I just don't think that it is probably in your best interest to employ it. Unless you have some guidance on on what you're applying. Okay. Let's move on to the last question. The last question is, what method of valuation do I often use? Well, as I indicated, many times, I predominantly do sell side work. And when I when I say that I do, I help businesses prepare their companies for sale. And when I do it, I'm looking at the market approach, I want to know what companies are selling for, or historically have been selling for and try to understand what caused those buyers to behave in that fashion. And then from there, I can apply what I've learned through studying completed transactions and apply it to the company I'm working with. Now, on the buy side, the buyers are not only looking at what our company is selling for like that, but also the income approach. They want to know, what are my returns? How do I get my money back? And how do I get a return that's over and above what I can get elsewhere? And as well as if they plan to own and operated? You know, how do I earn a living on top of the previous two that I mentioned? And so those are the two predominant ones. Based on the record the date of this recording, I would imagine that we'll probably be doing some asset approach, value work because of companies that don't survive this COVID-19 mess that we're in. So those are the the one that I use the most is the market approach. The second one, when we're working with buyers, on the buy side, I tend to do the income approach. And then lastly, if the lowest value tends to be asset approach, because that's the assemblage of assets. Well, that about wraps it up. But before you go, would you like to receive a weekly newsletter of curated articles that I've stumbled upon, or I'm writing about regarding business value and making a company saleable? Well, if so, go to defenders business value.com and sign up for the newsletter. Now, if you have a question that you would like answered, go to, again, the website defenders of business value.com and push the appropriate button. Or you can email me at ed at defenders of business value.com Or you can reach me at Twitter at Ed miso. Thank you so much for spending time with me. If I can ever be of help to you in any way please don't hesitate to reach out. Have a good weekend, and I'll see you next week. This was another episode of the defenders of business value podcasts are more episodes packed with strategies to increase the value of your business visit defenders to business value.com For shownotes transcripts and free tools to start you on your journey. Subscribe now so you don't miss any future episodes.