Latest / MaxValue Podcast / What the heck is a business valuation anyway? Ft. Jeff & Eric

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What the heck is a business valuation anyway? Ft. Jeff & Eric · MaxValue Podcast

• 0:00
  SPEAKER_00: How'd you get into business appraisal?
• 0:02
  SPEAKER_01: No two businesses are the same.
• 0:03
  SPEAKER_01: A lot of times we're setting various prices, and value isn't recognized when someone puts down money at that particular price.
• 0:09
  SPEAKER_00: Why couldn't I go and ask AI what the valuation of my company is?
• 0:14
  SPEAKER_02: What we're usually doing is not only coming up with an opinion, but an opinion we can do that.
• 0:18
  SPEAKER_00: But our job primarily is to just completely exclude the bad answers.
• 0:23
  SPEAKER_00: We use math, but we don't use formulas.
• 0:26
  SPEAKER_01: But if you get to that update phase, it generally can be pretty cost-effective to do updates and I can get insight into what's going on with the company on the interface.
• 0:33
  SPEAKER_00: You really need that super, super skilled and experienced person to know the difference between when it spits out something wrong and what spits out something that's you know dead on.
• 0:54
  SPEAKER_00: Welcome to Max Value, the show for business owners and their trusted advisors who are on a mission to maximize their value.
• 1:00
  SPEAKER_00: I'm your host, Ben Town.
• 1:02
  SPEAKER_00: And today we are joined by our two guests, Jeff Faust and Eric Sundheim, who are friends, colleagues, and business valuation experts.
• 1:12
  SPEAKER_00: Jeff is a partner in charge of business valuation services at Abbott Stringman Lynch CPAs.
• 1:18
  SPEAKER_00: And he likes people playing the bass and fishing for bass.
• 1:22
  SPEAKER_00: No, that's playing the bass, I think.
• 1:24
  SPEAKER_00: Eric Sundheim owns and runs Merkovis Valuations, and he's an avid surfer and a new father.
• 1:30
  SPEAKER_00: Welcome, guys.
• 1:33
  SPEAKER_00: Thanks, Ben.
• 1:34
  SPEAKER_00: Thanks, Ben.
• 1:35
  SPEAKER_00: Thanks for having us.
• 1:36
  SPEAKER_00: Absolutely.
• 1:37
  SPEAKER_00: So we're going to do something a little bit different today.
• 1:39
  SPEAKER_00: We're going to have uh uh basically three people who do similar things.
• 1:44
  SPEAKER_00: We do business appraisal and exit planning and similar, similar work.
• 1:47
  SPEAKER_00: Um, and we're just gonna be talking about business appraisal, kind of an intro for people who don't really know and possibly don't um don't have uh a background in uh valuing a business and what that means.
• 2:00
  SPEAKER_00: So, first question though, uh out to out to you both.
• 2:05
  SPEAKER_00: How did you get into business appraisal?
• 2:07
  SPEAKER_00: Jeff, why don't you take it?
• 2:09
  SPEAKER_01: Sure.
• 2:09
  SPEAKER_01: I actually started out in valuation in an ESOP company that's employee stock ownership plan, very specialized succession planning product that some companies install.
• 2:18
  SPEAKER_01: I got hired in their valuation group, geez, back in the 90s and kind of dating myself a long time ago, to really help out in valuation.
• 2:25
  SPEAKER_01: But I had to spend about a year learning ASOPs and how they work and feasibility and design before I got moved over to valuation group.
• 2:32
  SPEAKER_01: Fascinating product, and then obviously learned the art of valuation and have been doing ever since through various entities.
• 2:38
  SPEAKER_01: But that's a good summary.
• 2:41
  SPEAKER_02: Awesome.
• 2:41
  SPEAKER_02: I didn't know that.
• 2:42
  SPEAKER_02: I'm curious to hear Ben's answer too.
• 2:44
  SPEAKER_02: Uh so I fell into valuation, I'd never heard of it before I graduated, but started working for an expert witness in Washington, DC, and he had a small business and I liked how it ran.
• 2:56
  SPEAKER_02: I thought I'll do this.
• 2:59
  SPEAKER_01: It's interesting how kids go to school now.
• 3:02
  SPEAKER_01: They have valuation classes, and a lot of people that we're hiring now come out of college with that experience.
• 3:07
  SPEAKER_01: But I know when we came in the world and I mentioned the ESOP company, they did not have formal valuation.
• 3:12
  SPEAKER_01: So a lot of us did kind of fall into it or back into it.
• 3:15
  SPEAKER_01: As you mentioned, Eric, that's a that's a fair statement, but I don't think that's the case now.
• 3:18
  SPEAKER_02: No, I love when I see that on a resume, and it kind of lets me know this isn't somebody who's just kind of scattershot, they actually are interested in this field.
• 3:26
  SPEAKER_01: Yeah, they're throwing out terminology and using a lot of the terms that we like and and know, and they've run projects in college.
• 3:32
  SPEAKER_01: It's it's very cool to see that that experience now.
• 3:35
  SPEAKER_00: It it's hard to know coming out of college, uh, you know, what what it is you do want to do.
• 3:40
  SPEAKER_00: I mean, even if you get that exposure, but especially if you don't, um, yeah, most people that I've that I talked to uh to hire just have never really heard of it as its own separate practice.
• 3:52
  SPEAKER_00: You know, maybe that's a tool they use in making a deal or whatnot, but not not as a standalone.
• 3:57
  SPEAKER_00: Uh, you know, for for myself, I came at it through the CPA realm, uh, part of a CPA firm uh in San Jose, California for a long time, and just found that tax and audit weren't really my weren't really my jam.
• 4:10
  SPEAKER_00: Um didn't didn't uh they didn't light me up like some of the forensic work did.
• 4:15
  SPEAKER_00: Uh worked for a forensic expert within the company uh for for a couple of years, kind of dabbling, and then over time just decided that was the way I wanted to go and and made it my uh my full-time job.
• 4:28
  SPEAKER_00: Started the department at the uh uh at the firm I was at, uh doing just business valuations at the time, and you know, kind of grew that and actually had a chance to work with uh with our friend Jeff here uh for a little while there as well.
• 4:43
  SPEAKER_00: So it was wonderful.
• 4:45
  SPEAKER_00: All right, guys.
• 4:46
  SPEAKER_00: Um thanks.
• 4:47
  SPEAKER_00: I think maybe we'll we'll kind of keep that same format going forward.
• 4:52
  SPEAKER_00: Let's completely bottom line this thing.
• 4:55
  SPEAKER_00: Let's answer the question what is business appraisal or business valuation?
• 4:59
  SPEAKER_00: Is there a difference?
• 5:01
  SPEAKER_00: What are they?
• 5:03
  SPEAKER_01: Yeah, so I probably would say in in a high level, it's really an analysis of company to generate cash flow and the risk associated with them generating cash flow.
• 5:13
  SPEAKER_01: I mean, at its rudest sense, that is really what we do when we value businesses.
• 5:19
  SPEAKER_01: Um, there is a slight difference between terms like valuation and appraisal.
• 5:23
  SPEAKER_01: A lot of times us in industry talk about how valuation is a term you use for something you can't touch.
• 5:29
  SPEAKER_01: Well, you can touch components of a business, you can't actually touch the business itself, i.e., evaluation.
• 5:35
  SPEAKER_01: Appraisals are reserved for things you can touch, art, you know, equipment, they're physical things.
• 5:40
  SPEAKER_01: They're used interchangeably a lot because I think real estate appraisal, you can obviously touch and walk on real estate.
• 5:45
  SPEAKER_01: That's why it gets the term appraisals.
• 5:47
  SPEAKER_01: That's so common.
• 5:48
  SPEAKER_01: Everybody seems to know real estate appraisal.
• 5:51
  SPEAKER_01: So that's why it gets a lot of that term and and it's become synonymous.
• 5:55
  SPEAKER_01: I know those of us in the industry get sometimes picky on the term, but it is in a general sense similar and they're used synonymously.
• 6:02
  SPEAKER_01: But for for those of us in the industry, that is the primary difference between appraisal and valuation.
• 6:08
  SPEAKER_02: Yeah, when I say I'm an appraiser, I think people normally think real estate appraisal that doesn't work.
• 6:14
  SPEAKER_02: And when I say I'm a valuator, they say what?
• 6:17
  SPEAKER_02: So it's nobody really knows either way.
• 6:19
  SPEAKER_02: But the other distinction I heard from De Motor and is he says some people say they want a valuation and they actually want a pricing.
• 6:26
  SPEAKER_02: Absolutely.
• 6:26
  SPEAKER_01: That's a fair point.
• 6:27
  SPEAKER_01: Yeah, yeah.
• 6:28
  SPEAKER_02: That's what everybody can think of.
• 6:30
  SPEAKER_01: I hear a lot of times we're setting various prices, and value isn't recognized until someone puts down money at that particular price.
• 6:36
  SPEAKER_01: So that's an interesting way to describe it.
• 6:38
  SPEAKER_01: We're setting prices, and who knows if value is truly recognized at that point.
• 6:42
  SPEAKER_01: But that's a great way to describe it.
• 6:43
  SPEAKER_01: Yeah, I've never heard that.
• 6:45
  SPEAKER_00: Well, and I think that's that's an important point as well.
• 6:48
  SPEAKER_00: Yeah, I mean, there's you know, the practical aspects of are we setting a price at which a transaction is going to happen or that we're negotiating around, or is it something more hypothetical?
• 6:59
  SPEAKER_00: And and the answer is yes, depending on what reason we're doing a measurement of the value of a business for.
• 7:10
  SPEAKER_00: Um, yeah, sometimes uh we're we're helping to drive a deal where one of the one of the you know, the buyer or seller of a business hires us to help them out, basically, in the negotiation process.
• 7:21
  SPEAKER_00: And in other cases, it's about well, the transaction may or may not actually be happening.
• 7:27
  SPEAKER_00: I mean, there, you know, maybe somebody's gifting a piece of the company, somebody is they're arguing over the value in court, uh, and there may or may not be uh a transaction coming out of that.
• 7:37
  SPEAKER_00: So um all sorts of reasons to appraise or value a business as we're talking about.
• 7:42
  SPEAKER_00: And yeah, business appraisal really is a as a study uh about a particular business taking our experiences and solid data uh to form an opinion around what something is worth, um, which kind of leads to the I think to the second question here, which is just as a general statement, why couldn't I just go to uh go and ask AI, an LLM or something, about what the valuation of my company is, or use one of these online, you know, one-pager softwares, or you know, just pull a multiple from uh from an from a industry report or something like that.
• 8:27
  SPEAKER_00: I mean, so why do shortcuts, why couldn't I use a shortcut?
• 8:31
  SPEAKER_00: Why don't they work?
• 8:33
  SPEAKER_01: Primary reason I don't like shortcuts in this situation is no two businesses are the same.
• 8:38
  SPEAKER_01: I mean, you can get businesses that are in the exact same industry, have very, very similar revenue levels, but one business, the owner does everything.
• 8:45
  SPEAKER_01: He's the sales guy, he's the accounting manager, he's the operation manager.
• 8:49
  SPEAKER_01: They have no contracts, long-term contracts with customers.
• 8:52
  SPEAKER_01: There's a significant amount of dependence and risk on that one individual.
• 8:56
  SPEAKER_01: Or you have another one that has solid long-term contracts, diverse offerings, employees are involved in most of the offerings.
• 9:04
  SPEAKER_01: The risk profile for that client can fall dramatically, which you don't know on the surface.
• 9:09
  SPEAKER_01: So, someone just doing some random research on an industry looking for multiples aren't going to get adjusted multiples based on risk.
• 9:16
  SPEAKER_01: So that's really the biggest reasons.
• 9:18
  SPEAKER_01: You got to really look into the individual aspects of the company.
• 9:22
  SPEAKER_01: And AI can make stuff up.
• 9:23
  SPEAKER_01: I mean, AI will grab general stuff, they won't crawl into the nuances of this particular business, let alone talking about customer concentration and nuances to their customers.
• 9:33
  SPEAKER_01: There's just so many elements to the risks associated with business, it's just hard to use rules of thumb in that situation.
• 9:41
  SPEAKER_02: Well, I don't think they're mutually exclusive because I use software in our practice.
• 9:47
  SPEAKER_02: It's not an either or.
• 9:49
  SPEAKER_02: And I also use rules of thumb.
• 9:51
  SPEAKER_02: So that's not how I set my value.
• 9:53
  SPEAKER_02: But if I come up with a value, I'm gonna compare that to okay, if this is a services company and my multiple of revenue is like 0.1x, okay, well, let me consider that within the scope of you know what the rules of thumb are for these types of industries.
• 10:08
  SPEAKER_02: So we we all use software heavily in our businesses, and it's getting a skilled person to use that software, which is augmented by it.
• 10:18
  SPEAKER_02: So we were seeing that now in other professions too, where it's like, oh, we think AI is gonna replace radiologists, and there's actually more radiologists being hired, and there's more radiology being done.
• 10:29
  SPEAKER_02: Um, because it's just another tool in their toolkit to help them.
• 10:34
  SPEAKER_00: Oh, I think that's a that's a really good point.
• 10:36
  SPEAKER_00: I and frankly, I think both the answers uh that you guys gave are are uh perceptive and and correct.
• 10:43
  SPEAKER_00: I mean, obviously AI does exist, and you know, rules of thumb do exist.
• 10:48
  SPEAKER_00: And so to the extent that they can be useful, and they can be, we should use them.
• 10:53
  SPEAKER_00: Um the thing is, right, if you're uh just you know rough cutting something and you're trying to build a building, you want to make sure that you absolutely know you know how that rule of thumb is going to play out, otherwise your building is gonna collapse.
• 11:10
  SPEAKER_00: So I think that's the same thing in um use of any kind of tool, any kind of database, uh software, AI, whatever, um, within business valuation.
• 11:21
  SPEAKER_00: Look, the shortcuts are great, or the advanced tools are great.
• 11:26
  SPEAKER_00: Power tools didn't take out all uh carpenters.
• 11:31
  SPEAKER_00: Of course not.
• 11:32
  SPEAKER_00: They just made them faster.
• 11:33
  SPEAKER_00: See how you know fast a building can go up now.
• 11:36
  SPEAKER_00: So same thing.
• 11:38
  SPEAKER_00: Um, it also didn't make it much less expensive to build a building.
• 11:41
  SPEAKER_00: So I would I would throw that out there about uh about business appraisal as well.
• 11:46
  SPEAKER_00: Uh at the end of the day, the expertise doesn't go away uh or isn't becoming less necessary.
• 11:55
  SPEAKER_00: In fact, I think it's becoming even more necessary.
• 11:58
  SPEAKER_00: So we're not working on our Volkswagen Beetle here anymore.
• 12:01
  SPEAKER_00: We're working on a you know a fully electric car, different, you know, the different level of complication.
• 12:07
  SPEAKER_00: And because it's a different level of complication, you really need that super, super skilled uh and knowledgeable and experienced person to know the difference between when it spits out something wrong and what spits out something that's you know dead on, uh, and knowing the nuances in between, you gotta you gotta know it.
• 12:23
  SPEAKER_02: Yeah, that makes me think last night I was using uh ChatGPT.
• 12:27
  SPEAKER_02: I was curious about the Amish.
• 12:29
  SPEAKER_02: When they were initially founded, was the a rejection of technology, was that part of their belief?
• 12:34
  SPEAKER_02: And Chat GPT said yes, when they were founded in the 17th century, they rejected the automobile and the telephone.
• 12:44
  SPEAKER_01: Yeah, I can see them doing that in the 1700s.
• 12:48
  SPEAKER_01: That's the problem with AI, it's just gonna grab stuff and make up make up things, and yeah, that's uh that is challenging.
• 12:54
  SPEAKER_00: Well, it it'll it'll yeah, it'll get better.
• 12:56
  SPEAKER_00: Um we have to, you know, like like everybody in in the universe, we have to uh face the existing uh existing and developing tools.
• 13:08
  SPEAKER_00: All right, so I I've maybe teased it a little bit with uh one of my prior comments, but you know, when when you're on a call with a client or prospective client, you know, I'm sure I know for a fact y'all have gotten the question, you know, the this other appraiser, this other person or broker or whomever said that it it would cost, you know, say$2,000 to do evaluation.
• 13:30
  SPEAKER_00: But you said, Eric, Jeff, Ben, that it would cost a lot more.
• 13:34
  SPEAKER_00: So why does it cost a lot more if you guys do it and these other guys can do it so for for so much cheaper?
• 13:39
  SPEAKER_01: For us, we think you know, a lot of the time it's it's how much we're doing and the steps involved and the oversight and amount of data that we're thinking is going to be available to us.
• 13:49
  SPEAKER_01: It's you know, the AI comment earlier.
• 13:51
  SPEAKER_01: We as analysts like AI because it becomes another data point in a sea of data.
• 13:56
  SPEAKER_01: Sometimes owners don't like a lot of data, they want the answer.
• 13:59
  SPEAKER_01: But for us, you know, and the cost is associated with the time involved.
• 14:04
  SPEAKER_01: You know, we bill by hour, we bill for our time.
• 14:06
  SPEAKER_01: It can be very timely to go through the financials of a business and try to determine what their trends look like.
• 14:13
  SPEAKER_01: Um, well, analysts can go through, and the advantage that we have is we've got the experience, we can look at the trends, we have data that Eric mentioned, you know, we have our valuation tools, we have transaction database.
• 14:24
  SPEAKER_01: It allows us to look at the company from multiple different angles.
• 14:28
  SPEAKER_01: You can always get one method to spin sideways, but it's really hard to get a collection of methods to spin sideways.
• 14:35
  SPEAKER_01: So having us go through the process of looking at the company from a couple different angles prevents things from being wildly wrong.
• 14:43
  SPEAKER_01: You get a data point from AI or get one multiple of earnings or profits, you're not seeing the whole picture.
• 14:49
  SPEAKER_01: And so we're a lot more expensive because we dig, we really want to understand and assess business risk, as we talked about before.
• 14:57
  SPEAKER_01: That requires a very detailed conversation about a lot of their various aspects of their business.
• 15:02
  SPEAKER_01: So that's where our extra expertise comes from is being able to look, interpret all those data points, assess overall risk, and create a range that's a lot more reasonable that you could if you were to pull that number out of the sky.
• 15:14
  SPEAKER_01: That takes a lot more time than going to Chat GPT and typing in a quick sentence and getting an answer.
• 15:19
  SPEAKER_01: And therefore, our fees do reflect that cost.
• 15:21
  SPEAKER_01: But it's challenging because there are a lot of discount shops out there.
• 15:26
  SPEAKER_01: Three of us have written articles about some of them together, may or may not mention by name on this call, but there are a lot of different providers and there were banks that were giving them away for a while.
• 15:36
  SPEAKER_01: So it's tough for customers when they when they need evaluation or feel like they need evaluation is what is this thing gonna cost?
• 15:43
  SPEAKER_01: Because if you call and look at three or four or five different sources, you could get significantly different fees.
• 15:49
  SPEAKER_01: My guess is the three of us are closer because we're real business appraiser.
• 15:53
  SPEAKER_01: We go through the process and similar.
• 15:55
  SPEAKER_01: And I know we each have our individual expertise that maybe we can chat about towards the end.
• 15:59
  SPEAKER_01: What some may not realize while watching this podcast is we actually do a lot of referring back and forth amongst ourselves, even though we're competitors, because there are things that don't fit for each of us that is a better fit for our counterpart.
• 16:11
  SPEAKER_01: The three of us really cooperate a lot, you know, even though we are competitors, because we want to make sure we give the client the best services.
• 16:18
  SPEAKER_01: But our fees are going to be very similar to those low-cost providers that are out there because we provide that quality assessment and a very, very thorough assessment of the business to make sure that our range is a lot tighter than if you were to ask ChatGBT or some random person about what the range and their value might look like.
• 16:33
  SPEAKER_01: That's a long answer, but I just want to get a lot of that in there.
• 16:36
  SPEAKER_00: Yeah.
• 16:37
  SPEAKER_00: Well, I mean, there's there's really a lot to it, right?
• 16:39
  SPEAKER_00: I yeah, I I I agree.
• 16:41
  SPEAKER_00: And depending on the the usage of the information that we're providing and the conclusion and the the uh the opinion that we may have to be backing up there, um you know, one of the things that I always like to say is, hey, there's there's a range of reasonable outcomes, uh, reasonable uh conclusions.
• 17:03
  SPEAKER_00: But depending on the uh the tightness of the information, you know, the three of us might come to a very, very, very similar outcome.
• 17:13
  SPEAKER_00: Or if there's a lot of decision points, if there's a lot of things that are different, non-average about this company, we may be a little bit further.
• 17:20
  SPEAKER_00: But our job primarily is to just completely exclude the bad answers so that we're talking about a realm, a range of reasonable, potentially good answers here, and then we can have that that discussion.
• 17:34
  SPEAKER_00: Um, because you you can't have that discussion with somebody who doesn't know.
• 17:39
  SPEAKER_00: And for example, I've run into a bunch of brokers who just don't know how the mechanics of the economics work behind why somebody's offering a little lower or a little higher.
• 17:49
  SPEAKER_00: Now they're talking from and I mean from a you know mathematical uh background, uh not so much, I mean, you know, I I'm not gonna negotiate as well as a business broker on, you know, I'm being able to sell a business, nor am I license to do so.
• 18:05
  SPEAKER_00: So not not trying to cast any stones.
• 18:07
  SPEAKER_00: But for example, if I need to go in front of a uh in in front of a judge or explain to the IRS, hopefully before getting to that point, uh, we I'll be able to do so.
• 18:19
  SPEAKER_00: We'll talk to that uh that financial statement auditor or any any, you know, the two of you guys, and we have that good discussion about okay, this is why this makes sense with financial theory, valuation theory, and actual uh, you know, the actual uh market as it exists today and actual practice, because that's what is going to really differentiate what it is that we we provide compared to something that's a little bit more formulaic.
• 18:50
  SPEAKER_00: We don't we use math, but we don't use formulas, if you will.
• 18:55
  SPEAKER_00: Um there are you know there are methodologies that are math-based.
• 19:00
  SPEAKER_00: That's why, you know, as a CPA and you know, finance guys are you know, this is why we do what we do and we're uh equipped for it.
• 19:06
  SPEAKER_00: Um but at the end of the day, it's not just pulling a number out of the air and saying, well, because so-and-so said so, or this database said so.
• 19:15
  SPEAKER_00: It's a lot of interpretation to make sure that we have the right variables and then can explain it under pressure.
• 19:22
  SPEAKER_00: Uh that's that's a huge difference.
• 19:24
  SPEAKER_00: So all of my clients, we have a you know, a big review call at the end of the project to make sure that they absolutely understand.
• 19:33
  SPEAKER_00: Because what we do is sometimes complicated, theoretical not rocket science, right?
• 19:39
  SPEAKER_00: We we are we are trying to convey information in a way that makes sense to real human beings, not just to each other.
• 19:46
  SPEAKER_00: You know, we're not just trying to talk into code to each other.
• 19:49
  SPEAKER_00: And the you know, the fact is that that's not something that a low-level person can do.
• 19:57
  SPEAKER_00: And so when you when you see somebody saying, hey, I can do the same thing as these guys do, maybe they can and maybe they can't, is is really my answer.
• 20:06
  SPEAKER_00: And by the way, you know, I've we've definitely I know the three of us all have been in situations where we aren't the best fit for one reason or another, or maybe it just doesn't make sense to do a business valuation for one reason or another, and they should do the client should do something else, something lesser.
• 20:26
  SPEAKER_00: Uh, they can get that need fulfilled some other way, or they absolutely do need evaluation, but not quite yet, because they need to take another couple of steps on their litigation path, or something like that, right?
• 20:37
  SPEAKER_00: So I think having the conversation with a real knowledgeable uh valuation uh expert really is the right thing to do.
• 20:46
  SPEAKER_00: Whether or not you end up hiring them right away, they'll at least give you the lay of the land.
• 20:50
  SPEAKER_01: You know, Eric made a great comment earlier, and I totally agree with that.
• 20:53
  SPEAKER_01: Is when they call you on evaluation, what are you trying to accomplish?
• 20:56
  SPEAKER_01: Because sometimes when you start asking more questions, you find out maybe it's not, to your point, it's not time to do one.
• 21:03
  SPEAKER_01: You really got to get ready for evaluation.
• 21:05
  SPEAKER_01: It's you know, if financials aren't clean or numbers don't tick and tie, that really goes to the heart of overall risk and financials.
• 21:11
  SPEAKER_01: And there are times businesses just aren't ready to have an analyst like us start digging through their financials.
• 21:16
  SPEAKER_01: So, you know, asking questions about purpose was a great one.
• 21:18
  SPEAKER_01: That's probably the first thing that we all ask is what are you trying to do here?
• 21:21
  SPEAKER_01: And that can help kind of frame the conversation for sure.
• 21:24
  SPEAKER_01: Great point.
• 21:25
  SPEAKER_00: Everybody, I want to take a second here to share something about who we are and why we make this show.
• 21:30
  SPEAKER_00: You're probably here because either you or a client of yours is thinking about buying or selling a business, bringing in investment, or planning an eventual exit.
• 21:38
  SPEAKER_00: And that is why we call this show Max Value.
• 21:42
  SPEAKER_00: We provide you with information and insights about how to maximize the value of your business.
• 21:46
  SPEAKER_00: Our team at Town Advisory guides business owners through the crucial, often once in a lifetime opportunity to exit their business.
• 21:53
  SPEAKER_00: We use our trademarked exit builder program to help business owners prepare early, protect the value they've built, and obtain maximum.
• 22:00
  SPEAKER_00: Value through an exit.
• 22:01
  SPEAKER_00: And the secret is, our clients define what value means to them.
• 22:05
  SPEAKER_00: Taking the right steps now can make all the difference in creating a successful outcome for yourself, your family, and your work team.
• 22:11
  SPEAKER_00: If you think you're ready for the next step in understanding and increasing the value of your business, make a comment, send me a message on LinkedIn, or send me an email.
• 22:20
  SPEAKER_00: All those links are in the show notes.
• 22:22
  SPEAKER_00: Absolutely.
• 22:24
  SPEAKER_00: All right, guys.
• 22:25
  SPEAKER_00: So we've touched on all uh we've touched on things all around this idea here, but what's a common misconception that you would like to dispel about business valuation, about what we do?
• 22:40
  SPEAKER_01: I'd probably say that it's not a black box.
• 22:43
  SPEAKER_01: It's not that you feed a bunch of information and spits out an answer that we can't explain.
• 22:48
  SPEAKER_01: It's actually the complete opposite.
• 22:50
  SPEAKER_01: Yes, there's art and science to it, and there's judgment calls, but we've been talking a lot about data points and coming at the company looking at projections and analyzing financials and looking at transactions.
• 23:01
  SPEAKER_01: There's a lot of judgment calls, but we have to be able to support our judgment calls, and the worksheet should be very, very transparent.
• 23:08
  SPEAKER_01: We should be able to walk an owner through all of the various assumptions that we've made that leads to a value and conclusion.
• 23:16
  SPEAKER_01: It's not going to be, well, we fed this in and it spit out this answer.
• 23:19
  SPEAKER_01: That is never going to be how either one of us three is ever going to explain evaluation because there are specific tests and numbers and reasons why the answer is what it is.
• 23:30
  SPEAKER_01: It's absolutely not a black box.
• 23:33
  SPEAKER_01: Again, the process that we go to that we've chatted about, that all kind of leads to getting a much tighter range that we've chatted also about.
• 23:40
  SPEAKER_01: It's just not a black box.
• 23:41
  SPEAKER_01: It really is a comprehensive set of analysis that we can explain.
• 23:45
  SPEAKER_01: And Ben, you mentioned that before, too, about risk and what you know, what are we doing this for?
• 23:49
  SPEAKER_01: And sometimes we have to stand on the stand and testify exactly how we got that number.
• 23:54
  SPEAKER_01: There's just no way we would survive testimony if we said we plugged it into this black box and it spit out an answer, and then we would get thrown off the stand immediately.
• 24:01
  SPEAKER_01: So that's really the very very short testimony.
• 24:04
  SPEAKER_01: So very, very short process, that's for sure.
• 24:07
  SPEAKER_01: But I think that's the big one is this is a process.
• 24:10
  SPEAKER_01: And again, it goes to why we're not super cheap, because it is a process, and there's a lot of time that goes into it and judge and professional judgment that requires years of experience that goes into these things.
• 24:21
  SPEAKER_01: So it does take time and cost, it's just not a black box.
• 24:26
  SPEAKER_02: Yeah, that story reminds me of a client I lost.
• 24:31
  SPEAKER_02: They were very aggressive and they they wanted a lower value, lower value.
• 24:35
  SPEAKER_02: And I ended up reconnecting with the referral source on that.
• 24:38
  SPEAKER_02: So how'd things work out with them?
• 24:40
  SPEAKER_02: They said, Oh, yeah, they found another appraiser and they had kind of their own proprietary secret methodology that they used and got them where they wanted.
• 24:47
  SPEAKER_02: I was like, Oh, that's great.
• 24:48
  SPEAKER_02: The IRS loves secret methods.
• 24:50
  SPEAKER_02: So you know, it it might be good for investors if you want to give your hot take on why AI companies should be valued this way.
• 24:58
  SPEAKER_02: But what we're usually doing is not only coming up with an opinion, but an opinion we can defend.
• 25:04
  SPEAKER_02: So kind of going back to that earlier comment of like what do people need to understand about valuation is that they often don't they mix um kind of the perception of what they're they want with what they actually want.
• 25:19
  SPEAKER_02: So they may be, you know, look, it's like if I were to get uh some imaging done, and I thought I was looking at my gallbladder, but I'm actually looking at my kidney.
• 25:28
  SPEAKER_02: And not only that, I'm looking at somebody else's kidney, and I'm looking at that kidney from 10 years ago.
• 25:33
  SPEAKER_02: So it's like you, well, you don't want to value the business, you want a value of your interest in the business, which is a 30% stake.
• 25:40
  SPEAKER_02: And that's a very different thing.
• 25:42
  SPEAKER_02: And why do you want that value?
• 25:43
  SPEAKER_02: Well, we're doing a dissolution.
• 25:44
  SPEAKER_02: It's like, okay, well, what state?
• 25:46
  SPEAKER_02: What are the statues that are statutes are being incorporated?
• 25:50
  SPEAKER_02: Does that mean we take discounts for lack of control, lack of marketability?
• 25:54
  SPEAKER_02: So the term that drives me nuts is when people say we need a valuation.
• 25:59
  SPEAKER_02: Well, that's not just one thing, it depends on the context of what our definition is, what regulations we're gonna look to, case law we're gonna look to, and coming up with our value.
• 26:10
  SPEAKER_00: Yeah, I basically, you know, no notes.
• 26:13
  SPEAKER_00: So I'll go off on a little bit of a you know different direction in that, you know, people do come to us asking for something, right?
• 26:23
  SPEAKER_00: They come to us, we need a valuation.
• 26:25
  SPEAKER_00: Or, you know, I've had people say, hey, I want a fraud audit or whatever.
• 26:28
  SPEAKER_00: And that's not even a thing, um uh specifically.
• 26:32
  SPEAKER_00: But but basically, you don't always need the thing you're asking for.
• 26:39
  SPEAKER_00: And the it's it's very simple to say, you know, a valuation, as as you said, Eric, you know, that doesn't just mean one thing.
• 26:48
  SPEAKER_00: Uh there are standards to make sure that we meet the right level for any say valuation that that we uh put out there.
• 26:54
  SPEAKER_00: And of course we all meet or exceed all those standards.
• 26:58
  SPEAKER_00: However, the the the point is, you know, I'll have a you know a five million dollar construction company come to me and say, hey, you know, I need a valuation for XYZ thing and whatever.
• 27:16
  SPEAKER_00: They don't, you know, sometimes they just don't need need a valuation that'll cost them whatever it costs them, you know, 10,000, 15, 20, whatever, whatever it is, right?
• 27:25
  SPEAKER_00: A bunch of money.
• 27:26
  SPEAKER_00: And you know, really they just need to get a reasonable idea of what it what it is right now, what the value is or could be right now, you know, you know, in a range.
• 27:36
  SPEAKER_00: So I'll maybe I'll do a diagnostic that's way, way less in scope.
• 27:39
  SPEAKER_00: Um, maybe I'll just have a good conversation with them.
• 27:42
  SPEAKER_00: Sometimes that's all that's necessary.
• 27:45
  SPEAKER_00: Um and the the the issue is that I I do want to serve business owners and I want to do what's you know best for them, even though I'm independent in terms of you know my results.
• 28:00
  SPEAKER_00: You know, my my my dad's a small business owner, I've been a small business owner for a long time.
• 28:06
  SPEAKER_00: It really does affect you know my desire to be helpful to uh other small business owners.
• 28:13
  SPEAKER_00: And at the same time, small business owners also have to realize that you know, quote unquote a valuation, because it does actually mean in specific instances a certain thing, a certain standard that we have to meet.
• 28:28
  SPEAKER_00: Maybe a you know, it'll it would cost$15,000 for that small business, but then you know, that maybe that five million dollar business, but then for a$500 million business of the same type, it'd be twice as much, not 10 times as much or 100 times as much, because the the issues aren't as hard to go through.
• 28:49
  SPEAKER_00: I mean, there are probably more issues, but again, the the preparedness for evaluation would be different.
• 28:55
  SPEAKER_00: So that's really right sizing what we do for them can be very, very helpful in terms of um uh in terms of getting to the you know to the right answer.
• 29:08
  SPEAKER_00: There's no one size fits all, uh, as you both said, and that you know what what that right answer is in each of those uh circumstances is different.
• 29:18
  SPEAKER_00: Okay.
• 29:21
  SPEAKER_00: Any comments?
• 29:21
  SPEAKER_01: One of the things we were we were surprised about or is that more companies don't do annual valuations or quarterly or semi-annual valuations.
• 29:28
  SPEAKER_01: I mean, to to establish a process on valuing company and then stay consistent with that process to measure you know their performance over time kind of surprises me.
• 29:37
  SPEAKER_01: It's they'll they'll go to their investment advisor and talk about their$200,000 investment account, but they never once go to a valuation analyst to look at their major asset, the business that they own.
• 29:47
  SPEAKER_01: They'll wait until there's a trigger event.
• 29:49
  SPEAKER_01: I'm always amazed at that.
• 29:50
  SPEAKER_01: I mean, there's significant knowledge a business owner can learn from us beyond here's the range of your value.
• 29:56
  SPEAKER_01: You know, what's going on with competition and the risk associated, what we're seeing with respect to transactions, size of transaction, who's buying businesses like theirs.
• 30:05
  SPEAKER_01: There's just so many things they could get from looking at their business a little more regularly.
• 30:09
  SPEAKER_01: I'm just always surprised that businesses don't do that a little more regularly.
• 30:12
  SPEAKER_01: I know the cost, obviously, cost can be prohibitive.
• 30:15
  SPEAKER_01: You know, that's one of them, but updates are a lot cheaper.
• 30:17
  SPEAKER_01: You know, we can leverage a lot of the work from the prior year to do updates.
• 30:21
  SPEAKER_01: And if companies are doing them more consistently, it's a lot cheaper.
• 30:25
  SPEAKER_01: It does drop down the cost of each one when we're doing it more consistently.
• 30:28
  SPEAKER_01: So I do understand cost is a perspective, but if you get to that update phase, it generally can be pretty cost effective to do updates and they can get insight into what's going on in the company on an annual basis.
• 30:38
  SPEAKER_00: Well, and there can be that cost um cost savings, if you will, off of you know, the the full process.
• 30:44
  SPEAKER_00: I mean, it is the full process technically, but we're we're um and and reduce some of the cost, but it's also effort on the on the side of the client.
• 30:52
  SPEAKER_00: I mean, of course, effort on our side too, which is why it costs something.
• 30:55
  SPEAKER_00: Um but there there are you know that that that's why people don't do it every year, uh, just as a as a general statement.
• 31:03
  SPEAKER_00: We we all know that.
• 31:04
  SPEAKER_00: Um at the same time, I absolutely couldn't agree more in that you know, they're they're even just having a quick phone call with us um would have you know some benefit.
• 31:17
  SPEAKER_00: And uh at least with you know, a lot of our clients, you know, I'm I'm perfectly willing to have that you know phone call, and that does you know doesn't necessarily you know cost anything.
• 31:25
  SPEAKER_00: And um, you know, and there are things that we can do to give them you know good information, and you know, maybe that's just benchmarking, like you said, or maybe that's you know, looking at the market real quick, see what other transactions we can we we would pick up this year, that kind of thing, um, for you know, relatively little money and relatively little investment of time and effort on both sides, you know, such that they can get you know a good amount uh of of the benefit, you know, kind of 80-20 rule uh perspective.
• 31:55
  SPEAKER_02: You got high aspirations there.
• 31:57
  SPEAKER_02: I'm just trying to get them to execute a buy-sell agreement in the first place.
• 32:02
  SPEAKER_01: Yep.
• 32:03
  SPEAKER_01: Different companies at different levels.
• 32:04
  SPEAKER_01: I mean, I guess that's the fun of what we do is we not only deal with a lot of diverse businesses, but different stages too of development, you know, companies that are starting out and looking for rudimentary stuff to really late-stage companies who are doing multi-generational planning and gifting succession and you know, Aesop planning.
• 32:21
  SPEAKER_01: And you get gift for different companies and different lifecycles, that's what's fun about what we do also.
• 32:25
  SPEAKER_00: Well, speaking of that, why don't we uh because we're three guys who, I mean, truly, truly are competitors in in the local area in the in the Greater Bay Area uh of California, uh, we do very similar things, but there are some things that we don't do that are similar to each other, and you know, partly because we know each other, like each other, and trust each other's judgment, we absolutely do refer things back and forth, especially when they're better fit for the uh for the other person.
• 32:51
  SPEAKER_00: So, I mean, Jeff, start us off.
• 32:52
  SPEAKER_00: Like, what are a couple of things that you do that you're that that you're different from the average appraiser or even from us who are way above.
• 33:01
  SPEAKER_01: Yeah, I would probably say our niche is in employee stock ownership plan and succession planning, you know, businesses sharing equity with their teams doing succession planning, employee stock ownership plan or the e-sopp product is really, really specialized.
• 33:14
  SPEAKER_01: The Department of Labor or DOL has gotten very critical of appraisers over the years.
• 33:18
  SPEAKER_01: So having a deep understanding of how eSops operate to be able to ask a lot of questions about specifically about the eSOP that obviously can impact judgments in your eSop valuation is really our specialty.
• 33:30
  SPEAKER_01: Um, we don't do litigation dispute stuff, so you know we kind of stay in our wheelhouse and that kind of ownership related stuff.
• 33:37
  SPEAKER_01: Those are the type of projects that we refer out.
• 33:39
  SPEAKER_01: I think the eSop is our really our specialty.
• 33:42
  SPEAKER_02: And what about you're the only one of us, Jeff, that's part of a larger accounting firm.
• 33:46
  SPEAKER_02: How does that integration work?
• 33:48
  SPEAKER_01: That's a good question.
• 33:49
  SPEAKER_01: I was gonna point about that earlier, but that actually sometimes creates conflict of interest.
• 33:52
  SPEAKER_01: I mean, there are times that you know we have an audit group, we have a tax side, but we have to be very careful doing valuations for our audit division.
• 34:00
  SPEAKER_01: So there are times a lot of this comes up where audit group needs a valuation.
• 34:03
  SPEAKER_01: We can't do it.
• 34:04
  SPEAKER_01: You guys are my to go to guys, because we know, you know, referring to either one, the process will be similar, fees will be similar.
• 34:10
  SPEAKER_01: We know they're going to get quality work, and that's really important to us as a firm in general.
• 34:14
  SPEAKER_01: We're just not the low-cost, high-volume provider.
• 34:18
  SPEAKER_01: We want to develop long-term relationships, and that's how we service our tax audit clients.
• 34:22
  SPEAKER_01: And that really serves well when those conflicts come up is having contacts like you guys that I trust that can refer those clients to is highly valuable.
• 34:31
  SPEAKER_01: So, yeah, there's plenty of those projects that we can't we can't do.
• 34:34
  SPEAKER_01: Yeah, great question for sure.
• 34:36
  SPEAKER_02: Yeah, I differentiated myself with the clothing here.
• 34:39
  SPEAKER_02: So we I do do some expert work and you know am engaged uh in that respect.
• 34:44
  SPEAKER_02: So, you know, appearing before judges, uh getting appointed is something that some appraisers just don't want to do.
• 34:51
  SPEAKER_02: They don't have an appetite for it.
• 34:52
  SPEAKER_02: Um, my first firm, that was all we did was litigation.
• 34:55
  SPEAKER_02: I don't want to do that because the swings are just wild when that's your entire book.
• 35:00
  SPEAKER_02: Um, but I do like that.
• 35:01
  SPEAKER_02: I do like fairness opinions, which is something else a lot of appraisers won't touch.
• 35:06
  SPEAKER_02: But uh it's a good option when you need a streamlined quick solution and you don't want a conflict of interest with your investment banker also who's gonna get obviously paid a huge sum if the transaction goes through, authoring your fairness opinion.
• 35:23
  SPEAKER_00: Great.
• 35:23
  SPEAKER_00: That that's that's wonderful.
• 35:24
  SPEAKER_00: And I think you know, I'll I'll piggyback on that just just a touch.
• 35:28
  SPEAKER_00: I mean, from uh a CPA background, I really like having that independent view.
• 35:34
  SPEAKER_00: And you know, we're working for the client, the business, or whoever's uh engaged us, but at the same time, I'm not party to their bias.
• 35:45
  SPEAKER_00: You know, every every client has their own bias, uh, and we we try to keep it very professional from from that standpoint to really understand, hey, this is this is our job, independent, my license is on the line, all that stuff.
• 35:57
  SPEAKER_00: Um, although I don't like uh uh testimony in trial.
• 36:02
  SPEAKER_00: So that our uh our most professional uh member here gets gets uh gets all those uh referrals.
• 36:09
  SPEAKER_00: Um well one thing we do that that is a little different is we do uh a lot of exit planning through our exit builder program.
• 36:15
  SPEAKER_00: Um and so you know, a lot of those uh small and mid-sized companies, you know, they get that one crack at you know heading off into retirement and just want to make sure they do it right.
• 36:26
  SPEAKER_00: Um, just make sure they don't step on any of those landmines that are hidden out there in uh in that process uh so that they can, you know, have a nice retirement and not have to worry about things.
• 36:37
  SPEAKER_00: So that's that's one of the things we do.
• 36:39
  SPEAKER_00: So, real quick to wrap up, guys, um give me what you're reading right now to improve yourselves and where can people find you?
• 36:50
  SPEAKER_01: Oh, that's a great question.
• 36:51
  SPEAKER_01: What I'm reading right now is probably nothing because I just finished my NAC for recertification.
• 36:55
  SPEAKER_01: So, what some people don't know is to be a appraised, a certified appraiser and to be a qualified appraisal and do projects for IRS, we have to be certified.
• 37:04
  SPEAKER_01: That comes up every couple years, so I just finished my long recycle or my um recertification process.
• 37:09
  SPEAKER_01: So I was reading all kinds on uh just kind of current updates and evaluation, what's going on out there, what's the new, what's how does AI being handled?
• 37:17
  SPEAKER_01: And so a lot of my reading was revolved around recertification.
• 37:20
  SPEAKER_01: So that's what that's that's what I would say.
• 37:23
  SPEAKER_02: Well, I just went through another competitor, Anderson went public, so I was curious to go through their S1 and see what they said about their valuation practice.
• 37:31
  SPEAKER_02: Um, and then from a technical aspect, yeah.
• 37:33
  SPEAKER_02: When I did the use PAP update, maybe this is interesting to you guys.
• 37:37
  SPEAKER_02: It seemed like they're changing how they define client.
• 37:41
  SPEAKER_02: So um we we have different um credentialing bodies, and I'm curious if that's something you've seen as well, Ben.
• 37:53
  SPEAKER_00: I'm not entirely certain what um what you know specific change you're talking about, but I do but for AI CPA, for example, um the the CPA society where I'm credentialed through, um there is a kind of an expansion of the term client to include you know the likely users essentially of the of the you know any of our work product rather than just who writes the check, essentially.
• 38:19
  SPEAKER_01: So if we have three three different credentialing bodies, because I do NACFA, um, National Association Certified Evaluators and Analysts.
• 38:26
  SPEAKER_01: Eric does ASA, American Side of Appraisers, Ben, you do AI CPA.
• 38:31
  SPEAKER_01: All three top organizations, you know, they do great job credentialing.
• 38:34
  SPEAKER_01: We all follow Use PAP, which is uniform standards of professional appraisal practice.
• 38:39
  SPEAKER_01: All of these organizations adopt Use PAP, but each one of them also has their own standards, so it can get a little bit confusing fast.
• 38:45
  SPEAKER_01: But suffice to say, we have three different credentialing, but all very, you know, highly uh credentialed and highly respectable organizations that do do certifications.
• 38:55
  SPEAKER_01: I find that interesting too, with three of us.
• 38:56
  SPEAKER_01: That's that's cool.
• 38:58
  SPEAKER_00: And they they in in order to make sure that you know it's a it's a functional industry environment, they all try to converge, you know, pretty, pretty close together.
• 39:07
  SPEAKER_00: Um and they do.
• 39:09
  SPEAKER_00: And they're all very similar.
• 39:10
  SPEAKER_00: If you follow one set of standards, you're going to be substantially in compliance with all the other sets, generally speaking.
• 39:16
  SPEAKER_00: Yeah.
• 39:16
  SPEAKER_00: Um there may be a you know a tail here or there that you'd want to tuck in, but that's that's about it.
• 39:21
  SPEAKER_00: So that that's also why you know we we have no problem, you know, working together, you know, theoretically working oppositionally, although that doesn't really happen.
• 39:30
  SPEAKER_00: Um, although actually, no, that's not that's not totally true, Jeff.
• 39:33
  SPEAKER_00: You've uh audited uh or helped the audit team at your CPA firm uh audit me on some of my work, and you know that that's good.
• 39:42
  SPEAKER_00: I mean, you know how I work and know know how we uh work through things.
• 39:45
  SPEAKER_00: You you are perfectly, you know, comfortable beating me up on any of the assumptions we make, and you know, but we get through it together.
• 39:54
  SPEAKER_01: Absolutely.
• 39:54
  SPEAKER_01: A lot of times it's not necessarily being up just asking clarifications.
• 39:57
  SPEAKER_01: How do you guys think of this and this other thing?
• 39:59
  SPEAKER_01: And we have we get the same thing from other audit groups as well, but it is interesting when I get a chance to help the audit group audit one of you guys.
• 40:06
  SPEAKER_01: I think we all end up kind of in those seats sometimes, you know.
• 40:08
  SPEAKER_01: That's to that end, you know, being respectful to other appraisers, we all play well, but you're always gonna end up on the other side of the seat.
• 40:14
  SPEAKER_01: You'll be in the seat with one one, then you'll be on the opposing side.
• 40:17
  SPEAKER_01: It's really just I appreciate the fact that we can be kind of co-opetition, we're real competitors, but we really help each other and cooperate as well.
• 40:27
  SPEAKER_02: That's right.
• 40:28
  SPEAKER_02: I'll give you my uh monopoly advice, which is if you want to win monopoly, the way to do that is to make the most deals.
• 40:37
  SPEAKER_02: And people are worried, oh, well, you're giving them a more valuable property than you're getting.
• 40:41
  SPEAKER_02: It's like, yeah, but if I make two deals, then I have two monopolies and everyone else has one.
• 40:46
  SPEAKER_02: So I don't really worry about losing competition to one of you guys.
• 40:50
  SPEAKER_02: I mean, there's more business in the Bay Area than the three of us could do combined.
• 40:54
  SPEAKER_02: Um it's really try, though.
• 40:59
  SPEAKER_01: New Year's resolution.
• 41:01
  SPEAKER_01: Yeah, right, exactly.
• 41:02
  unknown: That's great.
• 41:04
  SPEAKER_00: Well, very good, guys.
• 41:05
  SPEAKER_00: That was that was a cool discussion.
• 41:06
  SPEAKER_00: We'll have to uh come back and uh do it again.
• 41:08
  SPEAKER_00: I really appreciate you coming on today and and joining uh Max Value Podcast.
• 41:13
  SPEAKER_00: And thanks for just thanks for being here.
• 41:16
  SPEAKER_00: It was a lot of fun.
• 41:17
  SPEAKER_00: Of course.
• 41:18
  SPEAKER_00: Thank you, Ben.
• 41:19
  SPEAKER_01: Appreciate it.
• 41:19
  SPEAKER_01: Yeah, and Eric, good team.
• 41:20
  SPEAKER_01: Thanks, thanks, guys.
• 41:22
  SPEAKER_00: Thanks, guys.
• 41:23
  SPEAKER_00: That's a wrap.
• 41:24
  SPEAKER_00: You've been listening to Max Value Podcast.
• 41:26
  SPEAKER_00: And if this episode provided any interesting information, hit that subscribe button, smash like, and drop a comment below.
• 41:33
  SPEAKER_00: I'm Ben Town with Town Advisory, and I'll catch you next time.