Brand Pro Blog

This blog is compiled from the Ignite Your Business^® Podcast in which GREENCREST CEO and Chief Strategy Officer Kelly Borth interviewed Mike Ella, Director of Family Wealth Consulting at Key Private Bank. This blog is Part 2 and continues the conversation about understanding the value drivers of your business.

Kelly Borth: This week on the Ignite Your Business^® Podcast we’re talking about understanding the value drivers of your business. I’m Kelly Borth, Chief Strategy Officer and CEO of GREENCREST. With me today is Mike Ella, Director of Family Wealth Consulting at Key Private Bank.

Kelly Borth: There’s a difference between tangible and intangible assets. Where do they fit into the business value equation and what about sales and EBITDA as business value drivers? Can you also define EBITDA for our listeners?

Michael Ella: EBITDA is Earnings Before Interest Taxes and Depreciation and Amortization. EBITDA in the simplest terms is a vehicle to allow investors, buyers, to be able to analyze businesses on an even playing field. It’s comparing apples to apples. Therefore, interest is added back because generally what happens is the third-party debt in a company is paid off by the owner when they exit the business, and then the buyer will assume their own third-party debt.

Kelly Borth: So it’s the financial snapshot.

Michael Ella: This is the financial snapshot, and there are some businesses that don’t have interest. To compare apples to apples we add interest back, and the debt structure is  going to change after the transaction. Then you talk about taxes. We add them back when we’re talking about federal taxes and state taxes because there’s so many different entities. There’s tax, there are entities that are taxed as an entity for a C Corp. Then, there are entities like an S Corp where the owners are taxed personally. There are differences in how that taxing entity is taxed, and how it shows up in the financial statements. When using book financial statements to come up with a value for the company, we add that back in. When the buyer is going to come in and buy the business, whatever entity they put for that company, we don’t know what’s going to happen: They might start a new one, they might integrate in into another one, or they might just keep it the same if they buy the stock. So, the taxes get added back to be on an even playing field. Depreciation and amortization are non-cash items, so we add those back because really EBITDA’s trying to get to a true cash flow of the business.

Kelly Borth: How much of the value of the business is relative to sales and EBITDA versus these intangibles?

Michael Ella: A multiple is applied to that EBITDA generally speaking to come up with a value. When we talk about service businesses, when we talk about technology businesses, that’s a little bit different. But, if you think of an average multiple of six, I look at the tangible asset value of being one to two of that six, so 30 percent on the high end, where the intangible assets is really making up that three to four. So, you’re talking 60, 70 percent of the value is coming from that. When you’re trying to get to a premium level of six as an average, the other one to two terms you’re potentially getting from a multiple is all coming from the intangible assets. What I’d recommend if someone’s going down this path, is to focus on the tangible side. That’s where you can really drive a significant amount of value.

Kelly Borth: When selling a business, how far in advance should business owners be aware of the gaps in its value drivers? What’s the first step in identifying those gaps, and how long does it take to close the gaps to grow the value of the business?

Michael Ella: Typically we like get the owners to start thinking about this at least 2-5 years in advance, the reason being it takes a lot of time to put in place strategies that are more complex. You need to have them in place in advance for them to be as effective. So, we generally say three to five years is when to get engaged. Our timeline, where we talk about doing 90-day sprints, we pick priority items that we work on for those 90 days. if we had another couple years, we’d be able to use that full time period to be able to drive that value. Where it changes as you talk about the value gap is the fact that an owner whose business is worth $15 million at once, needs $20 million to retire and go into the post-transition lifestyle. Having a year to be able to do that probably is not likely. Where that year should be focused on is protecting that $15 million value. If you have a wide value gap, what we’re probably going to recommend to is that you push out that time frame of when you’re looking to transition the business. Or we have to change how you’re going to live after the transaction. That second part typically doesn’t go over well with too many people. So we try and get the owners thinking about this three, four, five years in advance. If you go through this process for that period of time, then really the value should be optimized as much as possible. Knowing your value and recalculating every single year is helpful. If you talk to people back in 2007 or 2006 who had high valuation, come to 2008 or 2009 when nothing else has changed in their business, that value has dropped. The mergers and acquisitions market has been very, very strong so if someone’s looking to try and do a transaction, now is a great time to do it. Eventually it’s going to go down again. We don’t know when it’s going to happen, but that’s why planning and doing the analysis and knowing what value you need to potentially retire or knowing your value gap is half the battle.

Kelly Borth: Be prepared in order to sell your business at the optimum time.

Michael Ella: Absolutely, because you never know when that time is going to be. Trying to time the market is a bad, bad idea. No one can predict what’s going to happen on the market. Buyers doing their due diligence have certain goals they need to make, and they need to invest in some of these companies, especially private equity. When we talk about the assessments, and analyzing the business, the personal life, and the financial life there’s really two components to that. You have an attractiveness standpoint and you have a regular standpoint. The business can be attractive to an outsider, say a business in health care. Health care is extremely hot right now; investors really want to get into that space. So I can have an attractive company that someone comes and knocks on my door and says, “I want to buy your business.” But as they go through the diligence process, the merger and acquisition process, there are things that could come along from a readiness standpoint that might mean that business isn’t really ready to try and transition, so the buyer is going to back out from that offer that they gave. Where we can add additional value is making sure if you get a strong offer, that transaction actually closes. But if it doesn’t close, the process doesn’t change. Our value optimization process is still to continue to grow your business.

Kelly Borth: Somebody told me that the best strategy you can have is to be prepared. I think that’s great advice for our listeners. Thank you so much for sharing your insights, Mike, on understanding the value drivers of your business.

Interested in an analysis of your business’s value drivers?  Contact GREENCREST to inquire about an assessment.

To listen to the whole conversation on value drivers, tune in to GREENCREST’s conversation with Mike Ella at the Ignite Your Business^® Podcast.

This blog is compiled from the Ignite Your Business™ Podcast in which GREENCREST CEO and Chief Strategy Officer Kelly Borth interviewed Mike Ella, Director of Family Wealth Consulting at Key Private Bank, about understanding the value drivers of your business. This blog is Part 1 of the podcast interview.

Kelly Borth: This week on the Ignite Your Business™ Podcast we’re talking about understanding the value drivers of your business. I’m Kelly Borth, Chief Strategy Officer and CEO of GREENCREST. With me today is Mike Ella, Director of Family Wealth Consulting at Key Private Bank. Please share with our listeners your background and how you came to work at Key Private Bank.

Michael Ella: I was and still am a CPA. I have an accounting background and am really focused in on the accounting or auditing side, compliance. We were working for our clients who were getting loans from banks and really kind of diving into what a business really has and what makes it tick. Over the last five or six years, I really got into mergers and acquisitions, so helping clients buy businesses. We went through negotiations, diligence, and helping them close transactions. Also we worked on the sales side from an investment banking standpoint, where we’d actually go out and market the companies for sale, build up marketing plans, find buyers that would be interested in buying the companies and take them through the auction process and hopefully close the transaction at the end. What I’m focused on now at Key Bank is the value optimization component: building a strategy today to help clients maximize the value of a company when they go to transition the business or if they’re just looking to build the business from a strategy standpoint. We integrate all of those different kinds of services in my background to the services we offer our clients now.

Kelly Borth: Thank you for sharing that. In reading your profile on LinkedIn you made an interesting comment that “business owners get exposed to a variety of viewpoints related to growing and transitioning their business, and that it leaves many of them not knowing what to do, so they do nothing. Which of course, is not the right answer. How does your team take the stress out of this process for business owners?

Michael Ella: I always look back at things that I’ve struggled with in my personal life or at work. It’s always things you don’t understand.  What most people do is go to the things they know well. For owners, that’s running their business. They really understand it, they get it, they’ve been doing it for a long period of time. What they don’t understand necessarily is how to transition a business or how to build the value? And we’re not talking necessarily about the value in the owner’s perspective, but it’s from an outsider’s perspective. You’re eventually going to want to transition that value to your family or someone else, maybe your employees through an ESOP. The first step is educating them on it, because if you don’t know anything about it, then it’s likely you’re not going to do it without understanding the benefit. When we first get to know clients or start meeting prospective clients, we educate them on what value optimization is and how it can be beneficial to them. A lot of the times it’s getting them to see why doing nothing can be detrimental to their personal life, to their business, to their employees and to their family. People are counting on the owners and what they do with the business. Either to them or their employees, keeping that business going is key for them having a successful career. Education’s the key, getting them to understand that it’s a comprehensive plan. It takes time to implement. When you take the time to implement it, that’s what really takes the stress out. Take the time to de-risk, which is bad terminology but it’s the one that we use to say that de-risking isn’t necessarily from an owner’s perspective, but an outsider’s perspective.

Kelly Borth: What exactly is a value advisor and what are value optimized strategies? How does your team help owners understand their current business value gap and how to close that gap so they can live life during business ownership and post-business ownership?

Michael Ella: A value advisor is someone who takes a holistic view of an owner’s personal life, their business life, and their financial life to make sure that they build a plan or maximize the value of the plan for the business owners. It’s not necessarily looking at it in a siloed approach but being able to understand where value can be created through partnering with other advisors. We take a holistic view of their business, personal and financial life to be able to really maximize the value of their company. We like the term five stages of value maturity. It’s an easy diagram to see the progression of how a business and a business owner could go through the five stages: identify, protect, build, harvest, and manage value. Showing it in a process is how we differentiate ourselves, because it’s easy to talk about it, but putting it down on paper and seeing the process you go through, implementing 90-day sprints, is really important for owners to be able to visualize. Because when you talk abstractly, it’s challenging for them to understand that. It’s challenging for anybody to see something abstractly because you start thinking about it in your own terms. If you see a diagram in a process you can see how it’s going to look integrated over a next two, three, four or five years.

Kelly Borth: I’m sure that visualization makes a big difference.

Michael Ella: Yeah, absolutely. I think how it processes a little bit differently when you talk about value is there’s two types of assets. You have tangible assets and intangible assets. When you talk about value and get a valuation done, typically you’re getting a number or range of value. We go one step further. We look at tangible asset value such as your building, cash flow, and your computers/equipment — things you can touch and feel in the business. That’s not really where all the value is coming from, it’s the intangible assets —your customers, people, employees, structural capital, systems and processes, social capital and culture. When you look at transitioning the wealth and maximizing value, being able to maximize your intangible asset value is really what our five-stage process of value maturity is focused around. It’s how we go through and track that value gap. If I’m a business owner and I think my business is worth $15 million, I need to take $20 million to retire and live the lifestyle post-transaction from what I’m living today. We go in and show them, here’s where you are currently, here’s the value of your intangible assets today and tangible assets, here’s a plan for how we can build it from $15 million to $20 million. Let’s make sure we’re staying aligned with the team, and that on a quarterly basis that plan is getting integrated and we’re driving value.

Kelly Borth: Can you define for our listeners what the top market and operational drivers are that either add to or subtract from business values? These are the intangibles, right?

Michael Ella: Absolutely. I think owners’ unrealistic expectation of value is one of the most key things that we deal with, and usually they’ve heard of a multiple that you can supply to an ESOP, but that may not be appropriate for them. Educating them around how that value is determined and how you calculate it is one of the first things that we do. The first question a business owner asks is, “What’s the value in my business?” From our perspective, it’s tough to give a short or small range because we don’t have enough information. We’d be using averages the owners have already heard about. Then, the intangible assets, getting to what’s driving those big business values factors and owner dependency. Are there other people within the company that can be relied upon, or is the business really relying upon the business owner? If it’s really relying on the business owner, then there is not going to be a lot of value when that owner exits or transitions the business. So that could drive down the value quite significantly. The strength of the management team is huge. If you want to sell to a third party, you might be interested in a financial buyer or private equity. They’re going to want to make sure that their management team is strong because they want the business to continue once the owners exit. ESOPs, Employee Stock Ownership Plans, are the hottest thing now on the market. Every business owner is either considering it or wants more education on what they are. ESOPs work really well in situations where the management team is strong, because once the owner exits, that management team is sticking around to make sure the business runs. You’re not having any flux of new talent from an outside buyer. I guess the third one would be customer concentration. We see a lot of value given to diversity of customer. Look at Apple. Apple’s a great company; they’ve got the four intangible assets. They’ve got a really diversified customer base. If you or I leave Apple, it doesn’t really matter to them cause we’re just such a small component of that. How do owners look at ways to diversify their customer base if they have a customer concentration? It’s a lot easier to do that three or four years away from transitioning, versus your last year of transitioning. That could be done but it’s going to be challenging.

Kelly Borth:: There’s a lot of interconnection when we talk about Apple and we talk about one person not mattering. On the other hand, if Apple does not stay true to their brand, if they don’t have good consumer experience, eventually it will impact them. It’s interesting how they all interconnect.

Michael Ella: The more the owner can make the company about the brand and not themselves, the better off they are. We tell owners the more you can take a step away from the business and let the management team run the company the stronger the brand. Because once you exit and transition, value’s not going with you.

Kelly Borth: How can business owners asses their current value and identify the important value drivers that need their attention?

Michael Ella: Look at the business from an outsider’s perspective. Being in the business for as long as they are, it’s hard to be objective. Someone coming in and giving an objective analysis of the value drivers, benchmarking it, is a triggering event. Doing an assessment and correlating that to a range of value is the best step in going forward. Because now we know today what the business is worth, and we can start driving value into it on an annual, quarterly basis. So that’s number one.  Number two is making sure that the process is not built around just one component and taking a holistic view of everything. If they’re looking to do something internally, I would make sure you’re integrating your personal aspects of your planning, integrating the business planning, and integrating the financial planning. It can’t be done individually, and they’ve got to be moving on congruent paths throughout the process. That’s how they’re going to drive value.

Interested in an analysis of your business’s value drivers?  Contact GREENCREST to inquire about an assessment.

To listen to the whole conversation on value drivers, tune in to GREENCREST’s conversation with Mike Ella at the Ignite Your Business^® Podcast.