Transcript:
Chris Volz 00:00
Let me preface this comment with the fact that valuation and what we do, the whole concept is always forward looking. And what I mean by that is we don't go back and look at the history of a company to determine its value. We might look at that to help guide our analysis, but we're really looking about what lies ahead for that company and how are they positioned, let's say, to either capitalize or deal with what they believe is on the horizon. So that's always important to think about value in that way.
Podcast Intro Narrator 00:32
Welcome to The Sound of Automation, brought to you by Wipfli, a top 20 advisory and accounting firm.
Bryan Powrozek 00:52
Hello and welcome to the sound of automation. I'm Bryan Powrozek with Wipfli and joining me today is my colleague, Chris Bowles. Chris, thanks for, thanks for coming on. Hey, great.
Chris Volz 01:01
Great to be here, Bryan.
Bryan Powrozek 01:02
Well, today we're going to talk about what is probably one of my personal favorite topics to discuss with business owners and that is the value of their business. And I know oftentimes when business owners think of business valuation, it's a very tactical type thing, right? We're going to do some gifting or I want to get an insurance policy so I got to get a value for my business so I know what I need covered. But to me, you know, and I think, you know, from our conversation, there's much more behind it that a business owner can use to grow and strategize for their business so that's where we're going to go today. But I guess before we jump into the topic, if you want to just give yourself a quick introduction and a little bit about the work you do at Wipfli.
Chris Volz 01:51
Sure, sure. So again, my name is Chris Volz. I'm a partner with Wipfli working in our VFLT group, and that stands for valuations, forensics, litigation, and transactions. I had sort of a traditional start in public accounting working in audit and tax and eventually sort of gravitated towards valuation-related consulting. I spend most of my time these days working in mergers and acquisitions, estate and gift-related items. I also do some litigated matters. And finally, just a lot of time spent just general consulting with business owners on valuation topics.
Bryan Powrozek 02:28
Excellent. Well, Chris, thanks for that. And as I kind of talked about at the intro, you know, there's definitely some tactical reasons why an owner might want to focus on a business valuation. They need it for gifting or something else, but realistically, can you share a little about, you know, why it's important for, for business owners and business leaders to understand the value of the business beyond those kind of tactical situations?
Chris Volz 02:52
Yeah, and that's a great point, Bryan, that a lot of times there's really using it less as an endpoint, but more of really a jumping off point. And let me preface this comment with the fact that valuation, what we do, the whole concept is always forward-looking. And what I mean by that is we don't go back and look at the history of a company to determine its value. We might look at that to help guide our analysis, but we're really looking about what lies ahead for that company and how are they positioned, let's say, to either capitalize or deal with what they believe is on the horizon. So that's always important to think about value in that way. And so certainly when we're meeting with business owners, the reason why is because they're looking to the future themselves. It may be that they're contemplating some sort of change in the business, and that's really when these valuation issues come into play. Those changes might be something like an ownership change, where there may be adding or subtracting partners. They might be thinking about restructuring their business or changing their business model. Maybe it's developing new lines of business to take on, and in any of those situations, they need to understand what that impact might have on the value of their business. And in fact, we've been spending a lot of time with business owners as they work through right now is transitioning strategies. Just demographically speaking, a lot of business owners have reached that point in their careers where they're ready to take a step back and contemplate what that future holds. And so we're advising them on various valuation topics, certainly, but also understanding their company's value drivers. And what I mean by that is these are the things that are going to most directly influence the value of their company. And we might be talking about different paths or different paths that that transition may take. Perhaps it's transitioning to family members. Maybe there aren't family members, but there is a management group that's interested in taking over the business. So that's something maybe internal or absent those perhaps going to market may be the answer. But in any of those situations, they need to understand what that value is right now, and it's sort of a process of getting a level set or creating sort of a baseline expectation about value as they move forward in that decision making process.
Bryan Powrozek 05:22
Yeah, you know, and that's the thing I like about this idea and this concept because business owners face challenges all the time, right? Do I expand into this market? Do I invest in a new product? You know, where do I take this? And there's a lot of uncertainty around all of those questions. And I feel like having this idea of value kind of normalizes that for them, right? That, hey, is this something that a prospective buyer, whether, as you said, is that an internal transition? Is it a sale to family? Is it taking it out to market? But is this something that a buyer would want to purchase in the future? And maybe, you know, maybe you'd say, yeah, there's maybe minimal value, but for one reason or another, you still proceed down that path. And there's lots of decisions where that's gonna be the case. But it just, it gives you kind of a common point to come back to and evaluate various decisions again. So I think this is a great tool for business owners. So I guess with that in mind, you know, let's shift gears into a little bit of talking about, you know, some of the factors that affect the value of a business.
Chris Volz 06:30
Sure. That's obviously a very multifaceted question, of course, and it's probably easier to ask what factors don't affect business valuation. But certainly when I'm discussing this with my clients, I'm usually putting it in the context of both internal and external factors. And that's kind of how it's easier to sort of segment the discussion because those factors are going to be different, obviously. But when we talk about internal factors, what we're really talking about are things about the business that we or the business owner can control. So it might be their management team or how deep it is if they need to supplement that, their customer base and their customer relationships, how they go about solidifying loyal customers. Just maybe it's simply the products and services that they offer. And then just mundane operational things, the personnel that you have, the facilities you operate from, the status of your equipment. One area that doesn't get a lot of attention from accountants per se, business appraisers refer to as intangibles. And those are the things that obviously you don't see them because they're intangible, but they also don't appear on balance sheets quite often. And so because of that, maybe they aren't top of mind for business owners, but there are a lot of those things that exist. And it might be things like customer relationships, or key contracts that they hold with their suppliers or some of their major clients. But what we're really getting at is what intellectual properties have they developed over time. And this doesn't have to be a formal thing, like a patent. It may just be a sort of a trade secret or know-how about how they do business or the secret sauce, if you will, of what makes their business successful. And making sure that they understand what that is, because again, it does not get a lot of play in the normal context of a management team reviewing their balance sheet and reviewing their income statement. Because it's really the things behind the scenes that are contributing greatly to their success, but aren't necessarily top of mind when it comes to financial statement reviews and things like that.
Bryan Powrozek 08:47
Yeah, and really isn't to some extent that's, it's kind of the storytelling aspect of the transaction, right? Of helping them understand those, you know, kind of the way that you view the business and where, like you said, those that secret sauce is and why, you know, a prospective buyer should consider investing in that. And so when I think about taking that back to running the business before a transaction, it's, okay, this is this is what we're really good at. And this is the area we're going to focus on. And we're going to focus on serving these customers or, or delivering, you know, just in time to our customers. And now you can start building your strategies out around that so that when it gets to that point where you're, you're in a potential transaction, you can you've got a track record, you can show, hey, this is, this is what we did and why we did it. And here's what the results were.
Chris Volz 09:40
That's exactly right, Bryan. It's really what we're doing is you're kind of building the business case or the value proposition that your business provides and those areas really become the kind of the foundational building blocks for that.
Bryan Powrozek 09:54
And so as, as we all know, you know, just, uh, just going through an election cycle here where there was a lot of uncertainty, a lot of things, people didn't, didn't really understand what was going to have, how it was going to happen for all business owners, there's, there's a lot of things outside of their control though. Right? So I guess what, what are some of those factors that might play into, uh, into the value of a business?
Chris Volz 10:14
Sure. So yeah, so as we talked about, you know, we just talked about some of the internal factors. The other aspect, of course, is that external piece of it. Now, these are going to be things that more often than not are outside the control of the business owner, but that doesn't mean they can't work to understand and deal with those things. What we're really talking about are things like competition. What degree is your business impacted by competition? And that does vary, certainly by industry and geographic locations and whatnot. But also, what's the outlook for the industry itself and how mature is that industry or what are the developments that are happening in that industry and how well positioned are you with respect to that and with respect to the competition and certainly economic outlook. Many businesses tend to be cyclical in that they're really going to be following and needing to keep an eye on certain, you know, whether it's leading indicators in the economy that they know are going to directly influence their own business success. And so keeping an eye on those factors so that you're prepared for that. In some cases, even government's regulatory climate, if you happen to be in a business that's affected by that along the way. And we can get into that a little bit more in depth. But I think for now, I'll put a plug on that piece as far as the external factors that we need to be thinking about.
Bryan Powrozek 11:40
And a lot of that too is going to be, uh, you know, facts and circumstances based, right? The, the markets you serve, the industries you serve, some of these will vary and help, help influence the strategy. So, uh, so yeah, I think that it's, it's good to get a taste of what's out there, but, but maybe now let's, let's shift gears a little bit into, okay, we've laid the foundation, we understand the, the basics, you know, of what they need to, to consider how do I as a business owner or a business leader take this and, and use that information to grow my business.
Chris Volz 12:15
That's the $64,000 question, right, is how do we take this information and really use it to our advantage. And I'm going to start at a very basic level here. And to keep in mind that at its core, business value is all about cash flow and risk. And specifically, the question that we're asking is, what's that rate of return? What's that return on investment that's necessary to compensate that business owner for the risk that they undertake when they own and operate their own private business. And that helps us evaluate what those cash flows are worth. And so our core is what we're looking at is, what are the risks associated with being able to continue generating a certain level of cash flow as you go forward. So when we think about the internal factors that we talked about earlier, what we're talking about when it comes to this risk reward equation is, how can I increase cash flow? Maybe that means finding new ways to either generate or expand on my revenue streams, or it might be ways to lower my costs. In either case, I'm adding more to the bottom one, I'm increasing my cash flows. On the other side of that risk reward equation is the risk piece. And so the question I may be asking myself is, how do I decrease the risk associated with my business? And this is a key factor for me when I talk to business owners about, they ask, well, how can I improve the value of my business? Well, the question really is, how do you make the business appear solid and less risky in the eyes of a buyer? And so that could be because at the end of the day, that's what's going to matter is that a buyer or an investor is looking at that business. And what they see is a business that they can easily take over and not subject themselves to unnecessary risks. And so, you know, examples of that are how can I go about diversifying maybe my revenue streams or the markets that I operate in. And so as I gain more diversification, I'm lowering risk. Can I deepen my management bench, meaning that if I lose a particular individual, there's ample number of folks ready to step in. And so again, I'm reducing the risk that a single individual not being part of the overall equation that we've got to deepen up bench to overcome challenges like that. And something this is a little bit mundane, but it takes away a lot of risk is do we have the systems that we use in our business? Do we have that documented in some fashion? And the reason why that's important is it adds to our ability to replicate and you don't need to, you can address situations very easily, even for someone new into a position. So someone could step into a position and there's already sort of a guidebook that they can follow or a set of systems that are already documenting, here's how this is addressed. And so anything you can do to alleviate risk in the eyes of a buyer is going to have a positive influence on the value of your company. You know, when we think about moving over to external things, so these are the things that are maybe we can't control as easily, but on the other hand, we can start thinking about ways that I can deal with the external aspects of the business. And that's going to be questions like, how do I create competitive advantages for myself, given how I measure up with the competition, what are their weak spots, how can I capitalize on that? We need to ask ourselves, if we're really prepared for changes that are occurring in our industry, certainly, I think we've all gained familiarity with the sophisticated uses of artificial intelligence and AI. It's taken a step into what we think of as generative AI, and that's allowed us to really expand upon the ways that we're using technology to impact our business. And are we up to speed on where the industry is and are we positionable for it? Also what's my exposure to financial risk? If the economy were to chip course, am I in a good position to deal with that? And that becomes whether it's a question of leverage or whatnot. And honestly, really, ever since COVID, we've been dealing with a lot of economic risk factors and how businesses have dealt with those things. And now with a change in presidential administrations, there's likely to be even more change that lies ahead of us and making sure that we're staying abreast of that to make sure that we're ready to react to those changes as well as we can, given our evaluation of whether or not that particular change is going to have an impact on our particular business. And finally, if you're in a regulated industry, there's any number of factors there that we need to be cognizant of to make sure that we've either addressed them or are ready to move to address them.
Bryan Powrozek 17:28
Yeah, Chris, I think those are great points. You know, I think one of the favorite things that people who've sold business like to throw around is their multiple, right? Oh, I got this times multiple, this times multiple. And I attended a conference one time where one of the speakers was making the point that don't get fixated on those numbers because everybody is going to tell you this great story of how they sold for this huge multiple. And no one's going to talk about the low multiples. But as the business owner, kind of think about that as a stand-in for the riskiness of the business that was sold, right? And so if there's a low risk, you're probably going to get that higher multiple because the buyer knows what they're getting. They know there's going to be that recurring revenue. Whereas if your business is starting to get a little riskier, yeah, you're still potentially going to find a suitor, a buyer that's going to want to acquire that business, they're just not going to be willing to pay as much because they know there's some, there's some risk associated with it. And so they want to make sure that they can still, they can still hit their return. So that's, that was one of the stand-ins. I always kind of liked that analogy of swapping the multiple out for the risk of the business.
Chris Volz 18:39
Yeah. And I like that way of looking at things. And honestly, I always get worried when I'm talking with a business owner that has a friend, you know, who sold for X times, their EBITDA, you know, or some measure of cash flow, because there's usually very little, if any, connection to that multiple and this other business owner's business. But they do get fixated on them. And I like the way you address that by converting it over to risk. And another thing that I'll often mention is that, you know, we hear these different multiples. And it's not too far of a leap to associate them with another term that many business owners are familiar with, which is a payback period. And what that usually says is, for what period of time usually measured in years, would I need to operate this business in order to generate enough cash flow to pay myself back for what I just laid out to purchase the business in the first place. And so, you know, if a company's got a five year payback, then that means I'm going to need to operate this business and the cash flow that generates for me as the owner over the course of five years, I will have paid myself back for the investment. And to your point, that becomes really, it's a reflection of risk. Because what I'm really telling myself as a buyer is how many years into the future am I willing to rely on this business still being there and generating revenue or earnings at the level that it currently is. And I'm confident in its ability to do that. As I become less confident in the ability, then I'm probably going to be paying less. I want to get my money back in a shorter period of time, because I don't have as much confidence going forward. And conversely, the more confident I am or the less risk that's involved, I'm more willing to wait longer to get that payback. And so there's definitely a sort of a correlation in that regard. Obviously, there's other things that go into things like EBITDA multiples. But certainly, I do like that way of kind of connecting the two.
Bryan Powrozek 20:58
Excellent. Well, well, we've covered a lot of ground and I really appreciate you sharing all your insights. So I guess if you could just bottom line this for us, you know, like what's one or two things that, uh, that the business owner or the leadership team could walk away from this podcast thinking, Hey, here's, here's some things I can do to help try and drive up the value of my business.
Chris Volz 21:19
Sure. And I'm going to go back to the, you know, the sort of the internal and external way of thinking about things. But when we, when we think about the things that we can control in the company, our focus is, you know, staying vigilant on ways that we can improve those cash flows, increased revenues, lower costs, but also how do we de-risk our environment, whether that means deepening our bench or finding ways to reduce the risk that someone looking at our business would see that's on the internal side. And then externally, we just need to stay abreast of any changes that are going on in the external environment. Our goal here is one, we want to avoid being caught off guard, certainly, but ideally, what the business owner is doing is they're positioning their company to be more attractive in the marketplace, given the changes that are happening in that environment, whether it's in the economy, within their industry or with their competition.
Bryan Powrozek 22:15
Excellent. Well, Chris, I really appreciate you coming on and sharing your insights. You know, this is, as I mentioned at the outset, this is a topic that I'm personally very, very passionate about when I'm talking with business owners, and I think is, is one thing they can really focus in on to help drive results in their business. So thanks for coming on and sharing, sharing your insights.
Chris Volz 22:37
It was a pleasure, Bryan. Thanks for having me.
Podcast Outro Narrator 22:39
Thank you for tuning in. Don't forget to like us, subscribe, and share on social. To learn more about Wipfli, visit us at Wipfli.com. That's W-I-P-F-L-I dot com. Perspective changes everything.
om. Perspective changes everything.
