Robbie Clinger is the managing director of Highland Global. He is a Certified Business Appraiser and Accredited Valuation Analyst and has strong experience in the fields of business valuation, financial analysis, and strategic advisory services.
1. When should a small business owner consider getting a valuation for his or her business?
There are a number of situations that may necessitate a business valuation for a small business owner. Most commonly we perform business valuations for small business owners when they are contemplating a sale of the business or seeking bank financing with an SBA guarantee. Banks are looking to ensure that the value of the business will support the loan. In a potential sale of the business, the owner needs to have a set of expectations for the value of the business based on a third party, independent assessment of value. My valuation is a function of expected returns to a buyer when considering a variety of company-specific factors to develop the risk-adjusted rate of return. There are other situations that may require a business valuation for a small business owner such as succession planning, an employee stock option plan, estate tax or gifting purposes, or rollover of funds from an IRA.
2. What are some of the factors that you consider when making a valuation?
In the most basic form, the value of any asset is the sum of the present value of the future cash flows that are expected to be generated by that asset discounted at a risk-adjusted rate of return. This is a basic principle in financial theory. Some finance professionals conduct analyses to determine the value of publicly-traded companies. So, they look at the expected dividends of Exxon, for example, in the future and discount those discounts at a rate of return that considers risk factors to which all businesses are exposed and risk factors specific to Exxon. When I'm valuing a private business, a regional manufacturing firm for example, I take a similar approach. I look at the expected future cash flows from the business after they've reinvested in capital equipment, serviced any debt, etc. Then I consider a variety of factors in developing the discount rate applicable to a company's expected future cash flows. When it comes to risk factors specific to a private business, I consider the company's financial risk, customer concentration, diversification, stability of earnings, supplier risk, distribution risk, and earnings margins, to name a few. Two of the biggest factors, in my mind, are the financial characteristics of the business. That's to say, can the business make money and how much money can it make? If the business doesn't make money or can't generate cash flow to an investor, there may be little value there. Second, is current ownership or management competent and capable of running the business at a profit and to its potential? If the owners or managers aren't experienced or don't have a track record of successfully running a business, there's a good chance the business won't be successful or as successful as it can be. This, of course, negatively impacts the value of the business.
3. Do you find that there are specific concerns or questions that tend to come up with family businesses?
What's my business worth? What do you mean it's only worth that much? How do I increase the value of my business? I think those are the most common valuation questions that I encounter when dealing with a family business.
A lot of family businesses are concerned with how they can successfully transition the business from one generation to the next or from them to a new owner. They want to know what their options are, what the best options are, how they can maximize value in a transaction, and how they can market and sell their business.
There are a lot of family businesses where the owner is getting ready to retire and they're not sure what to do. They've worked all their lives to build the business, and there's a lot of emotion as they consider the future. The business is like one of their kids. They've nurtured it and been there through good and bad times, and they're not sure if they're ready to let it go. By the same token, they often have a much larger expectation about the value of the business. They think it's worth a lot more than what it is. From a valuation perspective, the business has a certain value to a financial buyer and a higher value to a strategic buyer. Ultimately, the business is worth what someone is willing to pay for it. I can't predict what a specific buyer is going to pay for the business. So, I have to explain to the business owner what the range of values are to specific buyers and help them understand the valuation process that produced the valuation. This, of course, requires that I explain to them the methodologies used and factors that influenced the valuation.
4. For someone who is just starting a family-run business, what are some suggestions you might offer, based on your experience working with other family businesses?
Make sure the business is well capitalized when you start it. Most start-up businesses fail because they run out of cash. They don't have enough cash to sustain operations while the business gets established and starts generating cash flow. You need to have a comprehensive business plan before you start the business. That business plan needs to set goals and explain how you're going to achieve those goals. The business plan needs to identify how you’re going to sell the product or service, what resources you're going to need, how much working capital you'll need, what your break-even point is, and what your budget is for the first three years. The budget or forecast is a crucial point to consider. You need to know what your fixed expenses are going to be for the first three years and any variable expenses. You need to know how much cash you're going to need to pay those fixed expenses until the business is generating free cash flow. If you go into business expecting the business to pay for everything right off the bat, you're probably going to fail. I have yet to see a start-up business generate free cash flow from day one. There's always a period at the beginning where the cash outflows for ongoing expenses exceed the cash generated from sales. That's just a business and finance 101 fact.
The business plan needs to be your roadmap. There are going to be deviations and changes along the way. You need to be prepared to adapt to changing circumstances. You need to have contingency plans in case something happens to disrupt business or change the business model. If you were a buggy-whip maker when the automobile came along and you didn't change with the times, you probably went out of business. You've got to be adaptive and resilient. Times change, and your business needs to be prepared to change with them.
And I think most importantly you need to have an end-game strategy in mind from the outset. You're going to invest a lot of money and time in a start-up business, but what's your anticipated return, and how are you going to monetize the investment in the business? How are you going to exit the business? Are you going to just liquidate? Shut down? Give it to your children? Sell it? If so, are you going to be able to sell it? Is someone going to want it? You need to be thinking about this as you build and grow the business. It will pay off for you when the time comes to convert your investment in the business into cash.
5. How did you first become interested in a career in business/finance, and what do you enjoy most about your work?
I've always been intrigued by the financial markets. When I was a kid, and this was long before we had internet, I'd look at the stock prices in the evening paper. I'd follow companies that I knew--you know, Pepsi, Disney, Exxon. They were all companies that we were probably all exposed to at a young age. I didn't understand much about it as a kid other than I was fascinated by it. I remember my interest really took off when I was given shares of stock for my birthday one time. This was back when you actually got a paper certificate of stock with your name on it and the number of shares it represented. It was fascinating to me. Here was this beautiful stock certificate with my name on it, and it meant that I was a shareholder in a company. I guess that was how I got interested in finance, so when I went to college I majored in finance and learned a whole lot more about it. After I graduated from Coastal Carolina University, I got a job at a small investment bank. I was the in-house financial analyst responsible for doing valuations of private companies for mergers and acquisitions. I really took an interest in valuing private companies and all the nuances that go with that. It's a lot more complicated than valuing a public company. When things went bad with the company I was working for, I went out and started my own business focusing on valuing private companies, and I've been doing that ever since.
What I enjoy about my job the most is that I get to use my analytical skills every day when I value another business. Each and every business is different. I get to see all kinds and see what works and what doesn't work at similar businesses. Each project is a new challenge, and I'm fortunate that I'm getting to do what I love and what my education is in. I also get to do a lot of research in my field. I get to write articles from time to time that combine both the business valuation and finance fields with some economics. So it's mentally stimulating as well.