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Business Valuation: What to Look for in an Expert

With an increase in M&A activity in recent months it may be wise to get a business valuation done so that if and when an opportunity arises you're ready to respond. But who should do the work for you and how in depth a report does your business need? Gilmore Jasion Mahler Partner Jeff Denning specializes in business valuation and says be aware that the IRS or a court of law will have some requirements when it comes to the valuation, and who does the work. He offers some ideas on how to go about choosing the right person for the job.

Who does a valuation for your business is one of several important questions as you begin to research the process. For more information, see GJM's video blogs How Do You Figure Out the Value of Your Business, Business Valuation: Lengthy Report or Not, and What is the Business Valuation Process. Learn more about Jeff’s expertise in business valuation and forensic accounting, and don’t forget to sign up for GJM’s free quarterly newsletter The Expert with a focus on business valuation and litigation support. Just click here for quick and easy sign up.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting services and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities

Succession Planning High Level View: 2021

GJM Sucession Planning M&A activity covid pandemic“It’s never been a better time to be an owner of a business.”

That strong statement was made by Rob Quandt, Managing Director at Windjammer Capital during a GJM webinar examining the current increased activity in mergers and acquisitions, and the importance of having a succession plan. The webinar, Succession Planning High-Level View: 2021 on March 23 brought together a panel of experts to dive into the very active M&A market. The panel, moderated by GJM Transaction Advisory Partner Greg Taylor, also shared some thoughts on what it takes to have a successful succession plan for your business.

Strong M&A Market

Quandt’s statement speaks to the current climate coming out of the economic shutdown during the pandemic. The panelists agree that many businesses looking at potential sales, mergers and acquisitions before the pandemic put those plans on hold and now they’re feeling more confident moving forward. As a result, they say, there’s an explosion of M&A activity, particularly in the middle market.

Greg Taylor GJMTaylor notes that these aren’t distressed businesses either. In fact, he says, some are healthier than they’ve been in many years.

“The companies are very strong financially,” he says. “They have very strong balance sheets. That’s also the same situation for potential buyers.”

Panelist Tom Zucker, President & Founder of EdgePoint Capital agrees, describing the M&A marketplace as “incredibly hot”. He says not only are many owners interested in selling their businesses, but they’re getting premium valuations.

Why? Here are Zucker’s thoughts:

  • There’s an abundance of capital chasing too few of potential deals
  • Tax and regulatory has some scared
  • The so-called “9/11 effect”

“Similar to the time period post 9/11, today business owners are choosing to reprioritize non-business activities ahead of corporate growth and profits. We have monikered these emotionally based decisions the “9/11 effect”. This re-examination of priorities has prompted many business owners to consider selling their business,” he says.

The “911 effect” reference Zucker makes is to the COVID-19 pandemic that, like the September 11th attacks, has some people reexamining their priorities and making major life decisions, emotional decisions, like retiring or selling their businesses.

Regarding tax impact, GJM Tax Partner Charlie Heid says there’s no question that concerns about federal tax policy are driving decisions as well. Many are concerned about potential increases in capital gains tax that could hurt them on a sale further down the road.

“Tax rates that we see today are the lowest they’ve ever been, and they’re going to go up. The question is when, how, and by how much,” says Heid.

Are You Ready to Sell?

If someone walked in the door tomorrow and wanted to talk to you about buying your business, would you be ready? And what can you do so you will be ready?

Zucker says ask yourself these questions: What would you want out of a sale: to carry on your legacy? Get the highest price? Or maybe preserve and protect the corporate structure within your family? He says you need to know what you want from a sale, be very clear about that, and communicate it well.

“The hard work is really sitting down with your advisors and your family and being very clear what you want to get accomplished… and finding a good investment banker, a good attorney, a good accountant is absolutely critical in the journey.”

Quandt echoes that, saying you need to assemble the right team of experts, and be very clear about your goals.

“There’s not really a right or wrong answer for any business,” he says. “If you’re looking to stay involved in the business, great. If you want to retire, great. But if you’re upfront about it, you and your advisors can figure out which firm is going to be the right fit for what you’re trying to accomplish.”

Panelist Ian Bund, a Senior Advisor with Plymouth Growth, says their team looks for businesses at are in the growth stage and are looking for future needs and resources.

“We’re really in the business of partnering with entrepreneurs who have a growth thesis for their business and helping execute that growth thesis towards an exit, so if you’re interested in an exit in the next 6 to 12 months, it would be unlikely that we would be of much use to you, but if you had a longer horizon, and wanted to explore the possibility of your business being self-standing for a period of time, there may be a fit with what we do,” says Bund.

Timeframe for a Sale?  

Tom Zucker says the amount of time you think you need to prepare for sale, versus the length of time you actually need may be two different things. During the panel discussion he referenced an EdgePoint white paper surveying 200 privately-held busines owners who had sold. Early on, he says, those business owners thought less than a year would be enough time. Further into the process, Zucker noted, more and more business owners said a 1-3 year timeframe seemed a more reasonable expectation.

Words of Wisdom

 

Tom Zucker EdgePointTom Zucker, EdgePoint:

“Never sell a business by yourself because there are very skilled buyers out there who will see the opportunity that might not be present to you as a business owner.”

 

 

Rob Quandt Windjammer GJM Succession PlanningRob Quandt, Windjammer:

“It’s hard to underestimate the amount of data and questions you’re going to go through… you’re going to have two jobs for six months. You’re going to have your day job running the company to achieve the premium valuation, and you’re also going to be talking to multiple buyers who are going to have a lot of questions about your business.”

 

Ian Bund Plymouth Growth GJM succession planningIan Bund, Plymouth Growth:

“It’s the relationships that we make, where we’re supporting the growth cycle of a business and getting that business prepared so that ultimately it can optimize the exit value.”

 

 

Charlie Heid GJM succession planning webinarCharlie Heid, GJM:

“Make sure you are in regular discussions with your advisors, your trusted inner circle.”

 

 

If you do decide now’s the right time to sell or to buy your business, and you’re clear on exactly what you want, turn to your trusted advisors for an open and honest conversation. To learn more about GJM's transaction advisory expertise or to connect with one of our experts, simply contact GJM to begin the conversation.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities

How Does a Paycheck Protection Program (PPP) Loan Affect Business Valuation?

How does a PPP loan affect business valuationThe COVID-19 pandemic has brought countless financial concerns for businesses across the country as many struggle to thrive, or even survive. In this GJM Q&A blog we tackle a question any business will need to answer if they've received a Paycheck Protection Program (PPP) loan and a valuation is in the cards.

Question: How does a PPP loan affect business valuation?

Answer from Jeff Denning, CPA, ABV, CFF:  

The COVID-19 pandemic has had an enormous impact on the business sector. The U.S. stock markets were initially affected in late February. Accordingly, appraisers of closely-held businesses have generally considered additional investment risks, lower projected profits, and lower growth rates in valuation engagements using ‘as of’ dates from late February to the present date. 

If your company received a loan through the Small Business Administration’s Paycheck Protection Program (PPP), an appraiser will need to take that into account when working to arrive at a value for your business. A business appraiser should separately consider any PPP loan payable balance, offset by unused cash in the PPP account, if any, as of the valuation date and the probability of a forgiveness amount. The consideration of the use of the loan proceeds should be in management’s profit and cash flow projections and then part of the appraiser’s overall probability and scenario analysis under an income approach to valuation.    

Jeff Denning is a partner with Gilmore Jasion Mahler, LTD and has 30 years of accounting experience, with a focus on providing services as an accredited business appraiser, forensic accountant, litigation consultant, and expert witness. For the past 20 years, his career has been focused on performing business valuations, accounting investigations, and damage calculations; preparing hundreds of expert reports and appraisal reports; and providing accounting and financial expert testimony.   

You’ll find more resources related to the COVID-19 pandemic’s impact on your business at GJM’s COVID-19 Resource Center.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

Technology Impact on Business Valuation

Just as with so many industries, technology is transforming the accounting industry. Gilmore Jasion Mahler CPA Jeff Denning works with many different business owners to determine the value of their businesses. He says there’s no question technology and artificial intelligence, or AI, are changing things. The real question, he says, is whether or not those changes are a good thing when it comes to trying to figure out what your business is worth.

Jeff Denning has over three decades experience as a CPA. His expertise is business valuation and forensic accounting.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.  

The 8 Steps of Business Succession Planning

Jeff Denning Business Valuation Gilmore Jasion MahlerIt’s one of those issues that you may feel you don’t have time for because you’re too busy actually running your business. But it’s an important question you need to ask yourself. What are your plans for the business once you’re out of the picture? It’s surprising how few business owners actually know the answer. Statistics show that almost half of family businesses have absolutely no succession plan.

Gilmore Jasion Mahler and Croghan Colonial Bank recently teamed up to present a business succession planning workshop for area business owners. They offered some valuable takeaways including 8 steps to ensure a successful transition to new leadership.

First and foremost, be realistic about how long it will take to sell your business. Croghan’s Paul Wannemacher says the average time to sell a business once it’s listed for sale on the market is 6-11 months. He says one should also factor in 2-3 months to close once an agreement is reached.

“Make sure you’re ready when that prospective buyer does come along,” says Wannemacher. “Create a descriptive listing of the business as well as an overview. Just like when selling your house, you need to think about “curb appeal”. You may need to resurface the parking lot, freshen the landscape or painting to make it look more attractive to a potential buyer.”

Once you’ve tended to that first impression of your business and informed your key management, here are the 8 steps to succession planning:

  1. Get a handle on the marketplace. What’s the climate in your industry, the local economy and the national and international economies? Are there potential buyers out there?  Maybe your family members, managers within the company, maybe competitors?
  2. Pull together a team of advisors. This team should include your CPA, lawyer, wealth advisor and commercial banker.
  3. Get your business ready for transition
  • Review metrics
  • Make sure your records are accurate and up to date

It’s smart to anticipate some challenges along the way as you get your business ready for transition. Some of those challenges could include:

  • Normalizing your income statement
  • Cash flow/debt service history and capacity
  • The condition of your balance sheet
  • Collateral

Who is in the pool of potential buyers?

  1. Get a valuation

Gilmore Jasion Mahler CPA Jeff Denning is an expert in business valuation. He says the first question you need to ask yourself before getting a business valuation is: what are you offering to sell?

“Are you selling all of the transferable assets of your business or a fractional interest or equity share? What about your client and customer relationships? Your contracts? What about your workforce? We’re in the midst of a critical workforce shortage,” says Denning. “Many businesses are interested in acquiring other businesses right now to acquire their workers.”

Another challenge can be landing on an asking price for your business. Denning offers these questions to ask yourself:

  • Do you have a CFO or controller to assist in this process?
  • Do you have an outside CPA with valuation experience?
  • Do you need a business broker to help assess market potential or handle the entire sale process?
  • Do you need a real estate appraiser?
  • Grade your business against other comparable businesses
  • Is the business transferable? Owner-operated? How much risk of retaining customers?
  • Put yourself in the buyer’s shoes- your advisors should help with this perspective
  1. Create a personal financial plan: What amount of sale proceeds do you need to be satisfied? Look at your living expenses, vacations and spending you anticipate, family and charity goals. Don’t discount the emotional toll of finally leaving a business you’ve nurtured and built over the years.
  2. Prepare your family for the transition: The sooner you can let family members in the business know your plans the better. You may consider family wealth transfers through trusts or partnerships.
  3. Work with prospective buyers: Some things to keep in mind as you consider bids: how will loyal managers and employees be treated? Will the new owners continue with the company, improve it, or close it down?

“The buyer may want you to stay for a period of time after the sale. Just be very clear what that continuing role might be and how long will it last,” adds Croghan Bank’s Chris Kelly.Succession Planning Chris Kelly Paul Wannemacher Croghan

  1. Structure and close the sale

“Once you’ve identified a buyer, be aware that the final stretch can be as difficult as all the other steps that led you to this… and maybe more frustrating,” says Croghan’s Paul Wannemacher. “Will the business organization change? Will there be a reorganization? Are non-compete agreements needed?”

And, what type of financing is available?

  • Seller financing (you take on all the risk)
  • Conventional bank financing
  • SBA 7(a)
  • Collateral enhancement
  • Equity investors
  • ESOP

From assessing the marketplace to closing the sale, these eight steps are meant to be a guideline as you contemplate the future of the business you’ve worked so hard to build. While it may seem daunting, many financial experts agree that perhaps the worst thing you can do in regard to succession planning is to do nothing. If you and your financial team can come up with a strategy, you can rest assured that your exit will leave your business and your employees well positioned for future success.

Jeffrey S. Denning, CPA ABV, CFF is a partner with Gilmore Jasion Mahler, LTD. He has over 30 years of accounting experience, with a focus on providing services as an accredited business appraiser, forensic accountant, litigation consultant, and expert witness.

Chris Kelly is a Vice President and Commercial Loan Officer at Croghan Colonial Bank. He has over 20 years of experience in commercial banking, providing small to medium sized privately held businesses, nonprofits and professional firms with financial solutions.

Paul Wannemacher, CPA, PFS, CFP is a Vice President and Trust Officer at Croghan Trust & Investment Management. He has over 25 years of experience in trust administration, portfolio management, tax & financial planning and business consulting.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities