In this high-value episode, Dave Bookbinder, Executive Director of Haefele Flanagan, shares you as a founder or business owner should think about the value and sale of your business.
You will discover:
– When you should start thinking about the value of your business
– When you should have have someone else do a valuation on your business
– How a coach can help you through the process of a sale
Episode Transcript
Scott Ritzheimer
Hello, hello and welcome. Welcome once again to the secrets of the high demand coach podcast and I am here today with Dave Bookbinder. Now. Dave is a corporate finance executive who focuses on business and intellectual property valuations. He’s known as a collaborative advisor and has served 1000s of client companies of all sizes and in all industries. Dave is widely recognized for his team’s excellence in valuation consulting and was personally recognized by the smart CEO magazine with an award for executive management. He’s also a two time recipient of the Morris groaner award for entrepreneurship and he is here with us today, Dave Asprey, excited to have you here, welcome to the show. Before we get into this, this whole world of valuations, I’d love to just eke out a little bit of color to this story for us, what were you doing before getting into business valuations? And how did you ultimately decide to make the leap?
Dave Bookbinder
Yeah, so first of all, thanks for having me on the program. It’s a pleasure to be here with you today, Scott. So I didn’t actually grow up thinking, Boy, I want to be a business valuation consultant. Somewhere along the way, I actually thought I wanted to be a money manager. And as I was going through graduate school, learning about corporate finance, I got lucky and landed a position in an investment banking role where I started out in valuation, and learned that valuation really is the core in any kind of corporate finance function. If you don’t understand valuation, you really should, it’s critical. So I got to work my way up through the some of the sexier stuff, you know, mergers and acquisitions by side sell side, raising capital, asset securitization, and somewhere along the way, realize that valuation was really the most intellectually gratifying for me. So went committed to that got some professional designations, and I’ve had the opportunity to launch and leads and valuation practices for some very well known brands.
Scott Ritzheimer
That’s fantastic. So I want to dive right in. Because a question that I think we kind of all know the answer to, but we don’t really live the answer to it. So I’m wondering if you could help us, when should a founder start thinking about the value of their business?
Dave Bookbinder
Day one, honestly, and this isn’t a self serving statement. I recently attended an event where there was a group of panelists on their investment banker and a couple of business owners who had successful exits. And they all said the same thing. And one takeaway that I got from it was that you may not be for sale, but you can always be bought. And the message behind that statement, really, is that look, stuff happens. Yes, you hope that you’re going to have an exit somewhere down the road, it’s going to be on your timeline on your terms and conditions. But sometimes life gets in the way, and people get sick people die. partners get into a dispute and and things go sideways. So it’s always prudent to know what you’re worth. It’s also a great way to make better decisions, whether you’re thinking about making investment people and capital, raising debt, if you don’t know what your business is worse, you’re really missing out. Really big component.
Scott Ritzheimer
Yeah. So I tend to hear that a lot, particularly from folks in the industry, but I tend to not see that a lot. So why do you think there’s that disconnect between founders who, who are actively thinking about it on day one, and, and founders who should be thinking about it on day one?
Dave Bookbinder
Yeah, so look, everybody’s different. But from my experience, they’ve said this, you can find where I’ve been quoted, and I’ve written about it. I don’t think anybody really wakes up tomorrow and says, I want to know what my business is worth, and wait for it. And they’re willing to spend, you know, 10 or 20 grand to get the answer. Usually, what happens in valuation is that someone’s trying to achieve another objective Scott. So for example, maybe they’re trying to grant stock options to executives, or attract employees, maybe they’re looking to buy a business, sell a business, they’re doing some other thing, maybe it’s even gift shares to their kids. And in the process of trying to do that other thing it’s usually their accountant or lawyer that says, Hey, before you do that, go get your business valued. So there’s a lot of folks that tend to walk around thinking naively that their business is worth X because they’ve attended a cocktail party and somebody’s brother in law who does something sort of kinda in investment banking said you’re worth eight times EBIT dot and they may not even know what EBIT dot means and you know, eight times EBIT dot probably isn’t the right number anyway. So long winded way of getting to that it’s the classic relying on the back of the napkin method, rather than being little more precise and doing it. I will tell you this, the way I help my clients is sometimes they don’t necessarily need to but our calls a full blown valuation report, you know, the under Page documented, detailed deliverable. Sometimes they just need some information. It could be just some schedules and a good conversation to help them understand how they compare to their peers.
Scott Ritzheimer
And that was gonna bring me to my next conversation is a great segue, actually, and that’s this idea of when you should have someone else do your evaluation because you’re right. There’s the brother in law, there’s the CEO who sold a business recently there’s what you heard, you know, From some random show somewhere, we tend to have these kind of colloquial valuations. But when should you actually go out and have someone do evaluation for your business?
Dave Bookbinder
Well, I would say this if you’re if you need evaluation, or if you’re curious to have evaluation, don’t do it yourself. You’re unless you really are trained in corporate finance and understand the nuances of it. And even in that scenario, you still have the emotional investment that you’ve gotten your business. And sometimes it’s hard to be objective. I can tell you I’ve literally reviewed 1000s of appraisals valuations that were done by client companies. And some of that would just make you laugh, because they don’t understand the true methodologies. They don’t understand. In some instances, math, there was one particular business this one stands out forever, in my mind is a great RF story. Company was not EBIT da positive, right? They were losing money. And they happened to be in an industry where, generally speaking, the public peer group also was losing money. So they developed a negative EBIT da multiple, and they applied it to their negative EBIT da And through the magic of mathematics. They were like a billion dollar business. So yeah.
Scott Ritzheimer
It’s helpful to lose money faster than the competition, right?
Dave Bookbinder
Oh, my God. So yeah, you don’t just multiply negative by negative and get a positive. It’s not how it works. Are you it? Yeah, I’m fearful. We don’t know. Hey, yeah, go ahead. And you have yourself for a client, you got a full representing you as a how it goes?
Scott Ritzheimer
Yes. So why is it then I think I’ve at least seen this particularly in the world of founders. But why is it that they have a tendency to over inflate the value their business? And what challenges does that cause later in the process?
Dave Bookbinder
Yeah, that’s a wonderful question and actually wrote an article not too long ago, 10 business mistakes that business owners make when designing their businesses. So if anybody looks to go a little bit deeper, they can certainly check that out on my LinkedIn profile. But I think the reason why most founders, overvalue their business is the emotional piece, it’s the lack of objectivity. They’re fully invested committed, it’s their baby, right, and totally understandable. And sometimes they may have an overly optimistic view of markets and opportunities. And that’s generally where things tend to go wrong. Consequences for that can be really great. It’s going to number one, it’s gonna impact your decision making in a negative way, because you may take on more debt, for example, than you otherwise should, because you’re really not as valuable as perhaps you think you are. And there’s a bunch of other planning decisions and forecasting decisions that would be impacted by just the fact that you’re working with numbers.
Scott Ritzheimer
So making this kind of practical for folks, whether they’re selling or not, right, we’ve clearly articulated, you’ve got to know right, even coming back to just your ability to make sound decisions for your business, or based on having a realistic understanding of what your business is worth, what, what are two or three changes, strategies, maybe even mindset shifts that that founders and others could start making today, that would help them with their business valuation when the time comes?
Dave Bookbinder
Yeah, so this is one that comes up a lot. When you’re talking about founders and small businesses in general, a lot of times they’re running their businesses to avoid paying taxes, you know, they’re they’re managing the income statement. Sometimes they’ve got family members on the payroll that, frankly, don’t work at the business, and I totally get it right your to your business, do what you want with it, as long as it’s within the bounds of the legal framework, go for it, right. But when you’re managing your business to Pay Zero Taxes, what you’re essentially doing is you’re minimizing profits. So when you’re ultimately looking to raise capital, look, for an investor, look for a partner. showing zero profits is not exactly the best way to demonstrate and articulate the value of your company. So then you get into the world of normalizing adjustments. And it’s a lot easier to have the numbers right in the first place, rather than trying to explain them away. Especially as you’re entering into a transaction, if you’re even thinking about it, if you’re thinking about anything that’s even beyond friends and family, if you’re looking for any kind of institutional money, you got to have claimed financial statements.
Scott Ritzheimer
Yeah. And so what is it in financial statements? Because sometimes, for folks, you know, a lot of founders didn’t become founders because they had an MBA, and just the idea of financial statements can be a little overwhelming. What are some key areas or even key documents that they should be paying attention to? If they’re thinking that they might be looking for investment or a sale in the future?
Dave Bookbinder
Well, here’s the good news. They don’t have to go it alone. They don’t have to do it themselves. There are advisors out there that can help them whether it’s with bookkeeping, just to get a framework of some kind of financial data, is working with a small client recently really didn’t have that in place, but he found someone who can help them frankly, QuickBooks, and he was able to get me income statements and balance sheets pretty easily. As you’re starting to move towards raising capital, then you’re probably going to need something that’s a little bit more sophisticated, looking towards maybe a reviewed statement, and as you get much larger, eventually you’ll grow up and you’re going to wind up needing an audit. But it’s important that as a business owner, that you understand the key metrics and obviously, sales, what’s what’s the trajectory? What’s the trend? And why, why is usually the biggest question, why are things going the way they are? What are your margins, what’s the profitability look like? Valuation helps you come in and compare your profitability to your peers, so you get a good understanding of where you are relative to others. So you’re not just operating in a vacuum?
Scott Ritzheimer
Yeah, you brought up another point that I was actually wanting to ask, and that is, how can we tying these two ideas together? How can folks use benchmarking to make better decisions as a leadership team?
Dave Bookbinder
Yeah, so a great example, I had a client not too long ago, we did some valuation work for them. And the biggest aha moment for them was when I was explained to them what the guideline companies looked like. And just as a real quick primer. In valuing a business, one of the methodologies we use is a market based approach. And if it’s a privately held company, the theory is I can’t buy shares in your privately held business. But if I want to participate in the industry, and the the upside potential and the commensurate downside risk, I can put together a basket of publicly traded stocks that participate in your space. Each of these stocks has a boatload of metrics attached to them in terms of gross margins and valuation multiples. And this particular client was blown away to understand where they stood in terms of growth and profitability relative to this peer group, which gave them kind of a roadmap for how they should start thinking about managing their business better, because, frankly, their margins weren’t quite as good as their peers. Yeah, and again, operating in the vacuum thinking, you know, chugging along without any point of comparison, they think they’re doing just fine. But that was a wake up call to let them know that you could do a whole lot better.
Scott Ritzheimer
Yeah. Yeah. So one of the other things that I’ve seen happen, and this goes back to your point you made earlier about you may not be for sale, but you can always be bought and and that is when that that offer letter kind of comes out of the blue, something you weren’t expecting something that was unsolicited. What are some things that an owner should do to process an offer like that, especially when they weren’t expecting it?
Dave Bookbinder
First of all, take a deep breath and congratulate yourself for a job well done, that someone has noticed that you are a value to them, and then they’re interested in acquiring. After you get past that moment, it could be shock could be fear, be gratitude, and any of those emotions I’ve seen in owners. That’s when you start to get some consultants, your advisors, your accountants, your valuation people, your lawyers, and get them involved in the conversation with you and start to analyze. Does it make sense, from an economic perspective? Is the valuation fair? Is it reasonable? Is it something that you as a business owner are ready to do? I’ve seen the movie so many times where founders get these unsolicited offers, and they’re fearful of accepting it because they don’t know what they’re going to do with the rest of their life. That’s something that you know, good coaching can help them understand because there’s ways to then manage the proceeds of the sale and find other things to do with your life. But that initial fear of oh my god, what am I going to do tends to immobilize but get you surround yourself with good people put together a good team, appoint somebody to be the quarterback and let them all be working on your best behalf.
Scott Ritzheimer
Yeah. And that’s such a great point that at the end, this idea of a quarterback because one of the things that that feels so overwhelming is like, how am I really going to do like, how do I know if it’s a good attorney or not? How do I know if it’s a good CPA or not? How do I know if I should follow the attorneys advice or the CPAs advice when they conflict? So how do you what is that quarterback called? Is that typical title? Is it a particular person? And how do you go about finding a good one?
Dave Bookbinder
Yeah, it’s usually a particular person. And I wrote an article some time ago about this very issue. Thinking about selling your business, here’s five things you need and when you don’t, and the one you don’t in this particular article was valuation. And it’s a story that happens to me a lot where somebody calls me and says, Hey, I’m thinking of starting my business and I need evaluation at that particular moment in time, I can’t help them extra, I could give them a good valuation that’s supported and documented and so forth. But where they are in that process right now. The rubber meets the road with the for sale sign on the front lawn, so to speak. So what I recommended there was making sure make sure you’re surrounding yourself with when you talk about a good attorney. I would specifically say not your brother in law, the personal injury attorney, you want somebody who’s familiar with documenting transactions, who’s been through a number of deals, ideally in your space, and can help make sure that the Terms of the deal if it happens to coincide with what you’re trying to achieve, for a business perspective, a good accountant, sometimes you have to move up the food chain, so to speak, you may start off with a bookkeeper. And then you’re going to graduate to a size where you’re going to need to go outside and get professional help. And there are smaller accounting firms all the way up to the big four largest ones in the world. And hopefully, you’ll grow to that size where you ultimately need to hire one of those big four. But until you do, you want to make sure that you’re working with an accounting firm that has an appropriate level of sophistication for what you’re trying to do. wealth managers, they’re registered investment advisors that are trained, and they’re bound to do what’s best for you. They don’t work on a commission basis, they’ve got your best interests at heart. It’s about finding people that you know, and trust, I would say interview several in each of those categories, make sure you’ve got the ones that have the good credentials and claws. But make sure you’ve got a good personality fit to and then designate someone to to manage this process so that you’ve got the lawyer, the accountant, the banker, the wealth manager, all of them talking to each other because it doesn’t do you any good. If everybody’s operating independently. Everybody needs to understand and work together on behalf.
Scott Ritzheimer
Yeah, yeah. I love that. Love that idea. So, wonder if you can kind of put a bow on some of this for us this question I like to ask all my guests, and it’s what is the biggest secret you wish wasn’t a secret at all? What’s that one thing that you wish everybody watching or listening today knew?
Dave Bookbinder
As it pertains to valuation, the one thing I wish everybody understood was valuation is really a forward looking exercise. Business owners, entrepreneurs, founders, they all tend to focus a lot of time on that magical EBIT da multiple, which is really based on what you’ve done historically. But the magic truly happens what in the future? investors and buyers? Yes, they want to know what you’ve done in the past. But if you’ve ever watched Shark Tank, you always hear the sharks asking, What are you gonna do next year? What are you gonna do next year. So it does matter. And anything that you can do to mitigate the risk in your business is going to increase your value, because the math is that when buyers looking at your business, they’re doing a present value calculation, you’re looking at the economic benefits of your company out into the future, and they’re bringing them back to today’s dollars at a risk rate. So anything that you can do to tighten up your business processes, procedures, and financials that will de risk your business will lower that discount rate and increase your value. That’s the math.
Scott Ritzheimer
Yeah, yeah. Fantastic. All right. So I’m going to shift gears a little bit, and then we’ll make sure folks know how they can get in touch with you. So take off your consultant advisor hat for a moment, put on the CEO, CEO hat, if you will, of Dave Inc. Or are your team there? What’s the next stage of growth look like for you and your team and what challenge we have to overcome to get there?
Dave Bookbinder
Yeah, so my firm is Haefele Flanagan. Again, we’re an accounting firm, just outside of Philadelphia. And we work with the people that we’re talking to right here. We’re serving entrepreneurs and founders all day, every day from an accounting standpoint, valuation, we also do business coaching. And we’re working with a lot of clients and helping them to understand all the nuances of exits. So that not only consists of the execution piece, which is the end of the game, but there’s a lot of coaching component. I know this show, this show is dedicated to a lot of coaches. Coaching is so critical here because a lot of business owners have to get through that emotional piece that I talked about earlier, to get to that mental spot where not only is the business ready for sale, but they’re personally ready for sale. So that’s the big challenge we see right now on the horizon. In terms of how people can get a hold of me. You can find me on LinkedIn. I’m Dave Bookbinder
, I’ve written a couple of books called: The New ROI Return and Individuals, and The New ROI Going Behind the Numbers. You can check those out wherever you get your books, you can find newroi.com I also host a business podcast called Behind The Numbers. It’s available wherever you stream and the firm that I just mentioned Haefele Flanagan, our website is hfco.com.
Scott Ritzheimer
Fantastic. Well, they thank you so much for being here. Just an honor and privilege having you on the show. And for those of you watching and listening today. You know that your time and attention means the world to us. I hope you got as much out of this conversation as I know I did and I cannot wait to see you next time. Take care.
Contact Dave Bookbinder
Dave Bookbinder is a corporate finance executive focusing on business and intellectual property valuation. Known as a collaborative adviser, Dave has served thousands of client companies of all sizes and industries. Dave holds a Bachelor’s degree in Economics from Temple University and a Master’s degree in Finance from Drexel University. Various independent organizations have recognized Dave’s teams for excellence in Valuation Consulting. Dave was also personally recognized by SmartCEO Magazine with an award for Executive Management, and he is also a two-time recipient of the Morris Groner Award for Entrepreneurship.
Want to learn more about Dave Bookbinder’s work at Haefele Flanagan? Check out their website at https://hfco.com/ and get a copy of one of his books or listen to his podcast all at newroi.com
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