“Off the Wall” Podcast

Small Business Valuations | How To Get It Right

Mar 10, 2022 Business Exit Planning

Business owners: listen to this episode! Valuation expert Chris Anderson, Managing Director at Intrinsic, shares his expertise on valuing closely-held businesses for sale, succession planning, and gift and estate tax planning. He explains what a valuation is based on—and why what you think your business is worth may be different than reality. We then dive into when you need a valuation and what the process and end product look like. And listen to the end for Chris’s take on how you should assess a valuation expert you’re considering hiring.

“Typically, value comes down to three things: profitability, growth and risk associated with that profitability and that growth.”– Chris Anderson

About Chris: https://www.intrinsicfirm.com/team-member/chris-anderson/

Follow Chris on LinkedIn: https://www.linkedin.com/chris-anderson

Learn more about Monument Wealth Management at: www.monumentwealthmanagement.com

Important Disclosures: https://monumentwealthmanagement.com/disclosures

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Transcript:

David B. Armstrong (Host):

Welcome back, everybody, to Off the Wall podcast. It’s Jessica and I today. And before we get going with our guest, Chris Anderson, just wanted to quickly say, if you’re enjoying this podcast, if you wouldn’t mind going over and giving us a review on any of the players, Spotify has a new rating system where you can just leave a star, and that would be really helpful. If you’re over on Apple, if you could just write something and leave a review. Five stars always preferable but do what you think. And then finally, if you’re really enjoying these things, if you don’t mind heading over to Google and typing in Monument Wealth Management and finding our Google Review page and leaving us a review there, that is also very helpful, and we really appreciated that. Okay. With that, Jessica, let’s go ahead and introduce Chris.

Jessica Gibbs (Co-Host):

Yeah. So, if you are a business owner, this is the episode for you. We have an awesome guest on today, Chris Anderson. He is the managing director of Intrinsic, a valuation and transaction advisory firm. Chris is actually the leader of intrinsic gift and estate tax valuation practice, and so he’s an expert in valuations for gifts in estate tax planning and succession planning, but also an expert in closely held businesses in general. So welcome, Chris, to the pod.

Chris Anderson (Guest):

Thanks for having me. Excited to be here.

David B. Armstrong (Host):

It’s going to be a good one.

Jessica Gibbs (Co-Host):

We’re going to get to. When do you need a business valuation? But I think kind of the most pressing thing that any business owner needs to know if they’re approaching this conversation is what is a valuation based on.

Chris Anderson (Guest):

Yeah, It’s part art, it’s part science. It’s based on a few things. It’s based on historical performance of the company. So when we dive in the data, that’s like where we start. It’s how’s the company been doing for the last 3 to 5 years? So we’ll start with the PNL, the income statement, and then we’ll look at the balance sheet and kind of sus out the health of the business at that point. But really what it comes down to is the historical performance of the company is an indicator for the future performance of the company. Typically, value comes down to three things: profitability, growth and risk associated with that profitability and that growth. So we really focus on what’s next for the business, how is profitability going to change? And we’ll compare that to the historical performance and see how things are changing. Growth, revenue growth, margin growth, where is the company going in the near future? And then it really boils down to what’s the risk associated with that profitability and that growth, because we see a lot of companies that they forecast these hockey stick growth and it’s just they’ve never hit projections. They do a budget every year, they’ve never hit them. So obviously there’s a lot of risk associated with that. So in a nutshell, valuation is really focused around profitability, growth and risk.

Jessica Gibbs (Co-Host):

Yeah, I think that’s important to understand because I mean, we’ll talk about this more, but you know, obviously everyone, particularly for closely held businesses, that business is your baby, right? You know, you grew it. You created it, potentially. So, understanding kind of where your blind spots are going into a valuation. I really like how you framed that profitability growth, but also risk. That’s what’s going to also drive what your business is valued at. I think going into valuations with your eyes open as far as what your blind spots are, what you’re going to have to look at, these are good, important things that that’s why I wanted to start the conversation here.

Chris Anderson (Guest):

Yeah, absolutely. And I think, you know, the market moves as well. The only thing a business owner can control is their business. They can’t control the market. The market ebbs and flows, industries ebb and flow. New industries are going up, but they could also go down dramatically. So I think that the business owner always needs to remember that they control their business, but they really can’t control the market.

Jessica Gibbs (Co-Host):

Right? Yeah, you can control your cash flow, but what someone wants to offer you.

Chris Anderson (Guest):

Yeah, yeah, yeah. And how you’re operating within your industry and the general market, you can control that. But as far as like the greater forces which we’re seeing in the market right now, that we have no control over that.

David B. Armstrong (Host):

Right. So an example of that can be a business owner could do a really great job controlling their actual business. But just because their friend with a similar business got some sort of valuation six months ago doesn’t mean that you’re going to get fat or better because the market conditions could have completely changed in the past six months.

Chris Anderson (Guest):

Oh, absolutely. So the general economy, the general market, that industry or specifically the local market. So we see a lot where they are part of industry groups, industry trade associations. They go to conferences, they’ve got a pulse on the industry, in the market they’re operating in. And they hear from, you know, their peer group in Oklahoma City that, you know, they sold for eight times EBITDA. Well, we don’t know what the purpose of that deal was. Maybe it was a strategic acquisition by a private equity group. They wanted to get in Oklahoma City. They wanted to get into a specific area. And we just don’t know understand what the transaction metrics were and why they sold for that price. So. Business owners often get a number in their head because they heard about it five years ago, ten years ago, even six months ago. But to your point, Dave, it could change. It could change pretty quickly.

David B. Armstrong (Host):

Yes. Is it a decent analogy to use for a listener who’s just kind of starting to understand the valuation process that that could be very similar to saying, well, I’ve got a four bedroom, three and a half bath house in Northern Virginia and I’ve got a four bedroom, three and a half bath. In Des Moines, Iowa. Those valuations for those two houses are going to be the same because the local market is a bit different.

Chris Anderson (Guest):

Absolutely. And I’d take it even one step further in saying, you know, maybe the ladder has foundation issues versus, you know, it’s now we’re getting into, okay, why did they really buy it? They had a good customer base and maybe the subject company does not. But yeah, I think that’s a perfect analogy.

Jessica Gibbs (Co-Host):

Well, let’s unpack that situation potentially where you’ve gone through the valuation process and you’re trying to reconcile that your business isn’t worth as much as you thought it was. That seems like that would be that’s kind of common situations. Is that true?

Chris Anderson (Guest):

Yeah, absolutely. I think going back to your point, just gone like it’s their baby, right? They they’ve worked on it for years. They think they’re the best. We all think we’re the best. And that maybe they’ve had good success, good cash flow. It’s provided a really good wealth creation tool for their family for many years, and they’re looking to continue that. And maybe that wealth creation is an exit event. A lot of the times, going back to comparing yourself to another company, you can have two identical businesses in the same industry doing essentially the same thing, but you kind of peel back the onion a little bit. You say Company A has a diverse customer base. None of the customers take up more than 10% of the revenue and their contracts in place. So they know there’s some those relationships are solid. They’re going to be there for a number of years. Company B, maybe one customer is 50% of their revenue and there’s no contract in place. It’s a handshake deal. 50% of their revenue could be gone overnight, essentially. So now we’re taking a step back and we’re saying, okay, company A and B, which one would you rather buy? Company A, because it’s a diverse group of customers and they have contracts surrounding those customers. Company B does not. So maybe Company B actually has better cash flow, better margins, but there may not be a market for that business and no one may buy that business because there’s no they don’t know what they’re getting, essentially because they know 50% of that revenue base could walk out the door.

David B. Armstrong (Host):

Could you apply the same sort of risk to not only revenue but say, like input suppliers?

Chris Anderson (Guest):

Yeah, absolutely. Especially now, like supplier risk is a huge issue right now is in a lot of industry is can I even get products out the door. And that usually kind of fleshes out and like actual timing of cash flow. But yes, supplier risk is pretty significant right now. And that would go in a working capital like the dollars it takes for you to derive that next dollar of revenue is called working capital. So you need inventory, you need cash, you need accounts receivable to do that and supply receipts certainly feeds and all of that.

Jessica Gibbs (Co-Host):

Is it also true that who you’re planning to sell to can also kind of drive the value?

Chris Anderson (Guest):

Absolutely. I think we’ve seen that a lot in the last I don’t know, after the first wave of COVID, essentially all the deal volume picked up again and private equity groups are raising a lot of capital. They were trying to deploy that capital. And so you’ve got what’s called a financial buyer that would be like me or you trying to go get a loan to go buy a business and rent it ourselves. And then you’ve got what’s called a strategic buyer, which is they see synergy in what they’re doing in that business. So they can basically take their company, kind of tuck it in and maybe make it more profitable. So a strategic buyer, for example, private equity group has less risk. They know how to operate the business. They can improve margins, improve operations, improve processes to the point where they’re just willing to pay more for a business. So in today’s situation, we just see private equity groups paying way more than anyone else can because they have less risk. Essentially, a private equity group just has a lower risk profile than you or I trying to buy a business.

Jessica Gibbs (Co-Host):

Yeah. Versus if you identified someone within your company, like an internal successor or a family member or another executive within the company that you want to sell your share to, they just can’t afford the same amount as a private equity firm.

Chris Anderson (Guest):

Absolutely. And then but kind of going back to our initial discussion on like marketability and like but maybe that’s the only option, right? Maybe the only option is an internal buyer because you don’t have the procedures or processes or the customer base to support a strategic acquisition. So going back to, you know, are businesses worth more than what business owners think? A lot of the times they are, because they’re not looking at it from the right perspective. The buyer matters. So that strategic buyer who’s willing to pay more, they hear those numbers, but maybe their business just can’t sell to a strategic buyer and that that internal buyer is a great option for them.

David B. Armstrong (Host):

So people will take a lower price in order to enact a transaction that facilitates the person who they want to buy rather than the person who’s paying the most amount of money.

Chris Anderson (Guest):

For a few reasons, because a lot of the times it is a family run business. They have kids that don’t want to be in the business. And they can’t sell to them. So what’s the next option? It’s current management typically, and maybe it’s kind of, not a reward, but it’s, you know, that person that management team has been in there for a long time and it’s the best option to sell to them. They’ve done a lot of work in the family-owned business and they deserve to perhaps have a shot at buying it for sure.

David B. Armstrong (Host):

Right. What is going to prompt the need for a business valuation? What sort of things do you see where people are like, okay, I need a valuation because X, what are some examples of X?

Chris Anderson (Guest):

Great question. It’s usually no matter what, it’s transactional. So in my business, a lot of it is gift and estate planning. So they’re saying I’m trying to get part of this asset out of my estate so I can avoid paying estate tax on it. So they will gift a piece of their operating business to a trust and it’s out of their estate. So that’s in it’s as of a certain date and they say as of X date, I am effectively transferring 5% of my business to this family trust for my children. So that’s out of my estate. Still a transactional type event.

Jessica Gibbs (Co-Host):

And you need to know what the dollar value is of that 5% for the purposes of filing your gift tax form. So yes, that’s where you’re coming into play, is actually putting the dollar amount on the 5% transferred.

Chris Anderson (Guest):

Correct, Yes, absolutely. So ultimately, my valuation report is tied to the tax return for a gift, the gift tax return. And I’ll work with attorneys, CPAs and the client to do that valuation for that specific purpose. Another scenario is they’re looking to sell. They don’t know when, and they’re just trying to understand the value of it. They’ve never done a valuation. It’s just been in the family for years and they really don’t know how much it’s worth. So we always encourage clients to get a valuation every year, every other year, just for their own knowledge of what’s going on.

Jessica Gibbs (Co-Host):

Even if sale plans aren’t on the horizon anytime soon?

Chris Anderson (Guest):

Yes, and I think especially for if it’s not on the horizon, that’s the best time to start, because as you’ve probably seen, a lot of family owned businesses, they don’t have the cleanest financial statements because they run a lot of things that most business owners wouldn’t run through the income statement or have on the balance sheet, whether that’s vehicles, whether it’s, you know, country club memberships, you know, things that a buyer doesn’t look at. So a reason for doing that is to identify those items and then say, hey, if you’re trying to sell this in 3 to 5 years, let’s get it out of the financial statements now and take a look at it, kind of a clean income statement balance sheet. And it’s just it’s a great way to understand the health of the business. And we can provide feedback because we one thing we do is we look at other companies, other transactions in the market, and we have a lot of clients who say, Oh, I didn’t know that my margins were below industry norms. So maybe their response to that is we increase prices. I had a client a couple of years ago was in the food space and they were they were. So it was a condiment and they were so focused on price. We’re the cheapest, but people love us. And they did. It was a it was kind of like a cult following. And we looked at their income statement and their margins were really low compared to their industry peers who they have just as good a brand as that, maybe even better. And we ultimately said, hey, you know, the real way to increase values here is just to increase prices. And they did. And two years down the road, more in line with the industry. And it was this is an extreme scenario but the value basically doubled. Their prices didn’t double, but they cleaned up a few things, but margins really increased.

Jessica Gibbs (Co-Host):

I want to circle back to what you were saying before as far as gifting shares of a business, But I want to continue on this thought of, okay, you just talked about you own a business and you’re not yourself. Let’s kind of fast forward and you are starting to think about a sale. So how long before you sell your business should you be getting a valuation or how long before you even start thinking about selling your business should you be getting a valuation?

Chris Anderson (Guest):

We recommend like three years is great. It’s close enough to a transaction date to where, you know, you’re not paying a bunch of fees for valuation that you don’t think that you may not need. But, you know, part of the due diligence process is gathering financial statements. Well, if we’re doing if we’ve done valuations the prior three years, we’ve already done that. So it kind of helps the transaction process along. So you’re kind of used to dealing with advisors from a data gathering standpoint. So it helps there. It also just helps to understand like where the market’s at. So going back to we can’t control the market. Okay. We’ve kind of seen a trend of multiples go up a revenue multiple or need, but are multiple now may be a good time to sell because we haven’t you know, maybe they’ve increased significantly from the prior three years. So it’s a good, it just provides a lot of good data to make decisions. And I always encourage my clients to, you know, think of it in two ways. No matter what. If you’re getting valuations and you’re making improvements, you’re in a great position to sell. But at the end of it, if you don’t want to sell, you just have a better business. It’s just a better company and maybe you’re going to push that down the road and you want to expand or get into other areas. We can do a lot for our clients from just a strategic planning perspective.

David B. Armstrong (Host):

See, I don’t even know what I’m doing this weekend. So tell me what happens to the business owner that doesn’t have three years to get a valuation? Business owner says, you know what? I’m done. I’m out. So how much of a disadvantage are they at if they come right away and say, I want a valuation because I want to sell? And what’s a realistic timeframe for somebody?

Chris Anderson (Guest):

It’s a great, great question because. So we’re 14 years removed from the recession, right? So we had all these family owned businesses that couldn’t sell in 2008, 2009, 2010 because the economy was way down. So they had to kind of catch their breath and some of them had to start over. And so now we’re ten years beyond that. They’re starting over point. And that 55-year-old business owner is now almost 70. And they do, Dave, they throw their hands up in the air and they say, I’m out. I’m done. I can’t do it anymore. I got to get out. So, they’re not necessarily at a disadvantage because they still want out. Like, that’s the end goal. It’s just potential buyers may not look at them the same as someone who has their financial statements in an orderly position for the last three years. And it’s hard to quantify that. We don’t know. But maybe they just haven’t done the things the last three years to de-risk their business.

David B. Armstrong (Host):

Gotcha. Okay.

Jessica Gibbs (Co-Host):

And when I raise my hand as the financial planner here, I mean, I love the idea of getting a valuation early just so that as you’re going through your own personal financial planning process, you know, developing scenarios, looking at what your options are on the personal side, you can start to map out. You’re like, okay, what if we sell the business for this dollar amount? Does this allow me to accomplish all these other goals that I have? What if I can accomplish everything I want with even less than what my business has? So, like, you know, if someone comes to me with an offer for less, I know I’ll still be okay. Or if they come for an offer for more, hey, that’s gravy. You know, I love this from a financial planning standpoint because it helps you just make strategic decisions on the personal side, if you have a better sense of and a realistic sense, I should say, of what your business may sell for.

Chris Anderson (Guest):

I totally agree. And I think the most often advisor that’s left out at preliminary discussions are wealth planners, like they should have a seat at the table, always. And a lot of the respects they’re there the quarterback for the client, like they see them more. They talk to them every single year. We don’t do that like a lawyer, a banker, valuation expert, like the deal team. They don’t talk to them every year. You guys know so much more about the client than we do. And to your point, we need to know what dollars makes sense for the client to, like, live the lifestyle they want to, and it’s often missed. And earlier, the better. Absolutely. Earlier, the better.

Jessica Gibbs (Co-Host):

It’s definitely a common pitfall we see despite constantly trying to bring it up. I mean, people I think, are very focused on the deal and they get sucked into talking to the deal team and they kind of forget, Oh yeah, all this money is going to be for me personally and what am I going to do with it?

Chris Anderson (Guest):

And yeah, ultimately dollars are going to come to me and I need to figure out what to what to do with them or even if it’s enough.

Jessica Gibbs (Co-Host):

Yeah, right. So I want to circle back. We were talking before about when you need a valuation and you mentioned transferring shares of the business to an irrevocable trust is an instance where you and you know, valuation. I think also similar vein as if you’re gifting shares in the business to your kids. But I think you kind of touched on this earlier, right? Family dynamics are always at play. If you’re looking at gifting to children, you know, can you talk a little bit about fairness and equity in that process, kind of from what you’ve seen from your experience?

Chris Anderson (Guest):

Yeah, absolutely. So a lot of the times they are family owned businesses. Some of the kids work in the business. Maybe they should. Maybe they shouldn’t be working in the business, but they do. And there’s other kids that don’t work in the business. They’re doing their own thing. They’ve got other careers. They’re just not interested. What’s fair is not always equal. So we look at all of the assets and say, what makes sense? So when we’re gifting assets to kids will often gift the actual operating business to the kids that are working in the business. And again, maybe that’s not prorad, it’s not equal amongst the kids working in the business for a number of reasons. One’s, you know, more senior, they’ve got more expertise. They’re going to be the CEO someday. They’ve been working at it longer versus other kids who haven’t. And a lot of the times, family owned businesses, they own other assets. Perhaps they own the real estate that the office the manufacturing facility runs their business from. So we’ll gift that asset to the kids that don’t work in the business just for cash flow, for income purposes. But they don’t have any decision making capabilities for the main operating business. So those family dynamics are really important in this, and it’s really important for everyone to understand where are the values coming from. Where are the cash flows coming from and what makes sense for the family. Because a lot of companies just want to continue on. They want their legacy. They built this business and they want to pass it on generation to generation. But the statistics are abhorrent for moving it to the second generation. Even worse for the third, there are very few businesses that make it in the third generation because people are just not aligned.

Jessica Gibbs (Co-Host):

You mean on like the strategic vision or product of the business or.

Chris Anderson (Guest):

They never talk about any of this. They never they never go through the valuation process and say it just gets to a point where mom or dad is too old and they haven’t done any planning to transition it to the next generation. And so, it really starts with the company and saying like, okay, I need to train my son or daughter to run this business. It definitely starts with that. But a lot of the times there’s infighting amongst children and parents about what is fair and equal. So if we can get in there and say your goals are met by gifting you this asset, and the family business and the other children’s goals are met by gifting you the operating business, everyone feels, you know, they could take a deep breath and say like, this makes sense. But there’s just there’s a lot of family run companies that don’t. They never go through that process.

David B. Armstrong (Host):

Kind of like Kendall and Roman Roy on succession.

Chris Anderson (Guest):

Exactly. Yeah. That’s exactly. Yeah. Slightly less drama, but. Yeah, well.

David B. Armstrong (Host):

Yeah, exactly. Most people don’t want their lives to be a TV show. But yeah, it’s interesting because I feel like what you just said is a little bit of a derivative of something that we see too, which is sometimes people just don’t want their kids to know a whole lot of details about things. For whatever reason, it probably permeates into the privately owned businesses as well, just not really sharing a lot of information. Sometimes it’s they just don’t want their kids to know how much it’s worth. They feel like it’s going to impact their motivation and our experience with that, I’m sure yours is pretty similar to that is more communication is key in addressing the issues rather than waiting until the very end. Then you’ve got a problem on your hands and nobody knows anything.

Chris Anderson (Guest):

Oh, absolutely. It could go as deep as the actual product they’re making it. Going back to my story about the condiment business. Father was very old son that was managing the company was probably in his sixties. They’re the only two people that knew the actual formula for the product, and they drove to work together every day. So if they’re in an accident, the company may be gone. So. So we de-risk that to risk? Yeah. Yeah. Back to the risk. I mean, Dad didn’t want anyone to know anything and didn’t want anyone to know look at financial statements. Understand the health of the business. And it really hurt them. It ultimately worked out. We got it to where half the formula was with one law firm, the other half was with the other. And if something happened, they would come together and the business would continue on. But yeah, I mean, that’s an extreme example. But it certainly happens where people just don’t want to share information. We see a lot of activity at the end of the year because they go have Thanksgiving dinner with their family. They either argue or talk about the business and what’s next. And then there’s like a rush to do something. And then, you know, Christmas, it’s it kind of happens all over again.

David B. Armstrong (Host):

How often do you see something where you uncover in the financials, something that’s a total shock for the rest of the family? I’m going to make up an example like but you know, Dad always did the books and control really tightly controlled the business. And then all of a sudden the kids find out that dad has, you know, $3 million of debt on the balance sheet, that nobody knew about it. And the business isn’t worth as much as everybody thought. How often do you see some crazy things like that?

Chris Anderson (Guest):

I mean, every day we see family run businesses, their financial statements. They have something that’s a lot of the times, its expenses, like what they’re actually running through the business. I had a client that had 19 country club memberships going through the company income statement. You can only golf with 14 clubs in your bag. And he had 19 country club memberships. So we decided we’re going to get that down to 14. But his family didn’t know like the extent of the cash outflow and so they were they were struggling with, well, we just can’t make investments in the business to like get that next hurdle, like just get this thing going. Well, I mean, close to $800,000 a year in non-necessary expenses really hurt that business. So we see we see a lot of debt. To your point on, it’s just they’ve had a revolver, a line of credit, They’ve had debt for years and they just haven’t really paid it down. And we see a lot of expenses related to the next thing, like what they’re working on next when it’s maybe just not their core competency and it’s just almost like a hobby to try to do something different. And it never really works out. And it’s just this non-recurring expense that adds no value to the business. But yeah, we see a lot of interesting, interesting things on financial statements.

Jessica Gibbs (Co-Host):

Let’s dig into the nuts and bolts. Can you please talk about, you know, what is the valuation process like really look like? How long does that process take? And what should the end product look like?

Chris Anderson (Guest):

Yeah, absolutely. So, it starts with gathering information. And I think people sometimes look at our information requests and they say, oh, this is a lot like this is going to take some time. We don’t have everything on here. Well, you most likely have tax returns, financial statements, basic financial information, and all the other things we ask for, like management presentations, strategic presentations, forecasts. Like those are great to have, but maybe they don’t prepare them. And we’re not asking for clients to actually create documents. We just want to look at documents that they used to run their business. So that’s the starting point. And then we look, we do historical financial statement analysis and we’ll look at the market. So, we’ll look at similar companies in their industry, whether they’re public or private, and we’ll look at transactions in their industry, whether they’re public or private. So, we will usually create a forecast if they don’t have a forecast. And we’ll that’s one way we can derive a value for their businesses is forecast their cash flows and using a discount rate, which is a measure of risk to those cash flows, we’ll take the net present value of those cash flows as of the valuation date. So bringing all those cash flows to a value as of today. And then the next method is called the market approach, and that’s comparing your business to the market, your revenue metrics, your EBITDA, which is a measure of profitability to the market. So, we’ll look at transactions and we’ll look at similar companies and say, okay, most of the companies in this industry are trading at seven times EBITDA and we’ll apply a seven times multiple to that company’s EBITDA. And that’s the way we value the business. Depending on the industry, some are revenue multiples, some are EBITDA multiples, and then we’ll look at transactions and essentially do the same thing. We have private databases that we use that will go and say, here are all the transactions in your industry or even look at location and say, you know, based on this data set, seven X makes sense, or maybe recently it should be a little higher, a little lower, and we’ll do that. So those are the three main areas we look at is the company’s cash flow. That’s what they can control. And then we look at the market from a similar company in a similar transaction perspective. And, you know, hopefully it doesn’t always work out like this. They’re all kind of in the ballpark and will establish a range of values based on those three methods. A lot of the times we need to reconcile and say, okay, why is the market so high now, but your cash flows are much lower. And you know, why would it make sense that your company is worth less than what the market is paying? Well, maybe your margins are less and they just, you know, you’ll never get the cash flow that the industry is showing. And we think about it that way and we reconcile that at the end. And we will conclude on a value as of a certain date. So one number, which is kind of the difficult thing we do, is in reality there’s a range of values for everything. But we need to pick one number as of a certain date, especially for gift tax planning, because it just needs to show one number on the tax return.

David B. Armstrong (Host):

So clarify for me, because you said there are three different ways and you said cash flow market metrics. What was the third?

Chris Anderson (Guest):

So those are the two main methodologies, income, which is the cash flow approach and then the market. Within the market, we’ll look at similar companies, headline companies and transactions. So I kind of look at, you know, the three main like actual numbers that are produced. Yeah.

David B. Armstrong (Host):

Okay. Gotcha. Yeah. And then so does somebody get when it’s all said and done, does somebody get a piece of paper? Do you just call them up and say like, hey, based on averaging these three ways together, your company’s worth X or do they get a big binder that’s 75 pages long with every single assumption that you made, like give somebody an idea of what they’re getting.

Chris Anderson (Guest):

So for gift planning. So if it’s being attached to the tax return, there are certain report writing standards that we have to adhere to. And it is a 100 plus page document that goes through all of those report writing requirements that say this. We went through the right procedures to value this company. We did all of our due diligence and it’s very academic, more time intensive, because our ultimate audience in that that scenario is the IRS. Like we don’t we don’t want them to look at it and pick it up and say like, you know, they didn’t do this right. We’re going to go talk to them. And then it triggers an audit. So we have certain report writing requirements that we have to adhere to, and that’s usually results in a very long report. If we’re doing transaction planning, it can be a little less involved. It can be the maybe a 25 page report. We call it a calculation of value saying. We’ve done all of the quantitative analysis, the same thing we would do for a gift in the state tax planning report. We just don’t need all of the boilerplate information that the client already knows, because at that point, the client is our audience, not the IRS. We don’t need to educate the client on their own business, essentially. And the report is much more condensed and it really just hammers the things we’re talking about, like profitability, growth trends and the risk associated with the business. So, it certainly varies. I mean, I think attorneys are used to seeing 100 plus page reports. The client, when they get it, they’re totally overwhelmed and they’re just more like, we trust you. And they look at the number they either like or they don’t and they move on.

David B. Armstrong (Host):

How often do they come back to you after that? Let’s just say in the transaction report, it’s kind of easier to make it to associate with. How often does somebody come back to and say like, okay, you kind of gave us this range, but what do you think we should listed for how many people are coming to you and then finally asking you like, okay, but what should we really sell it for?

Chris Anderson (Guest):

It’s a tough question to answer. It’s really based on like how the transaction unfolds because you don’t want to lead, right? Like if it’s a marketed deal, you basically present your business, your metrics, and this is used in your back pocket as far as negotiating, saying, you know, you offered 10 million, I think it’s worth 12, Here are the reasons why. And then you can go back to the report and point to those reasons. So, you know, it’s not something you would like push across the table and say, like, I’ve got this magic number, you have to pay me that. But it’s really useful in negotiating and saying I’ve got, you know, really good evidence on why I think it’s seven times EBITDA.

Jessica Gibbs (Co-Host):

Last question, Chris. So, I think it’s really come across really clearly how important it is to get your valuation right. For a variety of reasons. So how should a business owner assess a valuation expert? You know, what should they look for? What questions should they ask before they start an engagement with an expert?

Chris Anderson (Guest):

I think it’s really important just to find somebody you want to work with. At the end of the day, like this is a very important step for any client, whether it be you’re transferring an interest to your children to trust or you’re going to sell the business or you’re trying to make really good decisions on it, like you’re going to be talking to this person pretty frequently. And when it comes down to it, I think intrinsic and we’re good because we take the extra step to understand where the client’s coming from and ask the next question rather than like, here’s just a data gathering document, send us all the data, we’re going to spit this valuation out at you. We want to interview them. We want to have conversations with them to understand the pain points of the business and just to dig a little further. So I think if I was interviewing a valuation firm, it was it would be those people who are asking the next question, like, what do you think about your business? Like what keeps you up at night and really digs into the nuance of their business? Because at the end of the day, I’m a valuation expert, I’m an industry expert, but I am never their company expert. They know their company better than any advisor ever will. And so it’s really that person or that firm who takes the extra step just to understand them a little bit more. And then obviously has the, you know, the credentials, the history, the background for the specific purpose. So, at Intrinsic, we’ve got everyone we can do almost all types of valuation work, and there’s some valuation firms that are focused on manufacturing and they’re focused on health care. So it’s really important to understand what they’re good at. I love it when a client asks me like, what are you good at? What do you do day in, day out? Because it can be in the valuation space. It can be a little vague, but at Intrinsic is broken up into very specific areas where we have expertise in which I think it’s nice and it easily communicates to clients to say, We do this every single day, this is what we’re good at.

David B. Armstrong (Host):

That’s great. Thanks, Chris. This is Chris Anderson with Intrinsic. Chris, give you the last few seconds here to tell people how they can find you, what your website is. Are you on social media? Where can they read more about you?

Chris Anderson (Guest):

Yeah, we just launched a new website which is very, very helpful for us.

David B. Armstrong (Host):

What’s that website address?

Chris Anderson (Guest):

Www.intrinsicfirm.com and it’s a great website. We spend a lot of time getting it up to speed, so please, please check it out. And it has my bio, all of our leadership bios, every one of the firms bio. So please reach out that’s got all our contact information, and I’m just always happy to have a conversation with someone just to hear what they’re going through. Love chatting with business owners. That’s the best part of my job is working with great advisors and great business owners.

David B. Armstrong (Host):

Yeah, we share some mutual people in common who are very happy with all the work that you’ve done. So, thanks for all of that and thanks for your time today because it’s been really informative. And Jessica, do you have any last questions or.

Jessica Gibbs (Co-Host):

I’ll have one last comment for our listeners. Okay. Business owners do not forget your personal plan.

Chris Anderson (Guest):

Do not forget it’s the biggest asset on your balance sheet.

David B. Armstrong (Host):

Right? There you go. Yeah. And do it three years early. Not at the last minute. Don’t call you up on Friday afternoon. Try to give you a three-year runway.

Chris Anderson (Guest):

But if you do, we’re still here.

David B. Armstrong (Host):

Great. Well Chris Anderson with Intrinsic his website is intrinsicfirm.com. It’s brand-new website that just launched. So with that, we’ll go ahead and wrap up this episode of Off the Wall. And on behalf of Jessica and I, Chris, thank you so much for your time and for being a guest on the pod.

Chris Anderson (Guest):

Thanks for having me.

About "Off The Wall"

OFF THE WALL is a podcast for business professionals and high-net-worth investors who want to build wealth with purpose. A little bit Wall Street, a little bit off-the-wall; it’s your go-to for straightforward, unfiltered wealth advice on topics that founders, business owners, and executives care about.

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