May 24, 2022   //   Business Consulting Podcast   //   By PKF Mueller Solutions

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Join David J. Nissen, CEO at PKF Mueller, for an in-depth overview of Business Valuations. With over 40 years of experience under his belt, Dave explains the importance of business valuations, especially for closely-held businesses, and the standards that make up business valuations today.

“That number (valuation) to me”, said Nissen, “is part of the scorecard that you need to be successful.” So, are you keeping score?

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David J. Nissen, CPA/ABV, CVA
CEO
dnissen@pkfmueller.com
+1 630 524 5274

Episode transcript:

[00:00:00] Emily: Hi, everyone. You’re listening to the PKF Mueller podcast, “Business Owner’s Guide: Tips, Trends, and Talks from a CPA.” I’m Emily, and today I welcome PKF Mueller CEO, David J. Nissen. But before we begin, let’s do a quick introduction of guest.

As the CEO, Dave is responsible for communicating and achieving the Firm’s vision. While Dave’s primary role is in the leadership of PKF Mueller’s operational activities, he also spearheads the international business development activities of the firm.

Dave has extensive practice experience in accounting, tax, business consulting, and attestation services. Dave is also a certified valuation analyst and accredited in business valuation and has testified in numerous business valuation litigation cases.

Dave, thanks for joining the podcast today.

[00:01:02] Dave: Oh, thanks for having me here.

[00:01:03] Emily: Of course. We’re happy to have you. And so I have a couple of questions for you about valuations, and given your many years of experience and accreditations in the field, I thought you were the perfect person to ask these questions to.

[00:01:16] Dave: Oh, thank you.

[00:01:17] Emily: So simply put, why is a business valuation so important or why is it needed?

[00:01:24] Dave: Oh, there’s, that’s a very lengthy– I could I could, answer that for an hour and I don’t think we have that time, but it’s a valuation really important because, you know, when you you hear in the news about the stock market. The market is up and market is down, you know, you have an individual stock and you know, you could go right to the, I guess to the internet now and know what that’s worth, but when you look at a uh a privately held company, like most of the clients that we serve, you don’t have a stock market valuation. So you have to determine what is the valuation regardless of any of that. So I think there’s a lot of reasons.

So when you when you when you look at that, because you have to know kind of, what is it worth, like, what is your company worth? Because Every company wants to be worth more tomorrow than it is today. So, you have to have kind of a starting point of what is the company worth.

[00:02:16] Emily: Sure. So, what are some other examples of when a company might want a valuation?

[00:02:21] Dave: When you really look at a valuation, okay, you, you, might need one just to get the starting point of what is your business worth.

But a lot of times you’re using it for estate planning. Uh you know, as as, you may know, someone can have so much of net worth in their estate when they pass. And if it’s worth more than a certain dollar amount, then there’s an estate tax that has to be paid. So a lot of times you want to know what is. that that business worth?

Now, we’ll remember go back, a closely held business, normally the owner of a closely held business, they say 70 to 80% of their net worth is tied up into that business. So, if that’s the case, it’d be very important to know what is that worth to be able to calculate what the total estate value is.

Other reasons you get a valuation, you might have a uh a, key employee that you’re trying to bring in to help you grow the business. You want to know what is it worth today, because if it’s worth more in the future, maybe there’s a way for getting them compensated for how they increase the value of the business.

On a couple of negative things, a lot of times valuations are done if there’s a divorce because an owner has grown a big net worth, based upon the value of the business. And so, when you’re trying to divide assets, it’s important to know what is the value of that closely held business. So, there’s, there’s a lot of reasons for a valuation.

[00:03:44] Emily: Earlier I mentioned your valuation credentials, but I’m curious to know, can any CPA perform a business valuation?

[00:03:53] Dave: Well, every, anybody could try. Okay. But there are standards that we have to follow. So, like you said, I’m credentialed. I’m a credential, a CVA and an ABV.

And when you follow those with the credentials, there’s certain valuation standards you have to adhere to. And this has become very, very specialized over the years. When I first started doing business valuation, it wasn’t as specialized. We’re talking, you know, 30 plus years ago, and you could, it was, it was very, uh, normal.

If I was a uh an expert witness to value, a business for a divorce case, and I was on one of the spouse’s side and there was another expert on the other side, there could be someone that could be at zero, and somebody else on the other side could say it’s worth $3 million. I mean, it was that big of a swing, but as the standards have been perfected over the years, the range of a value is much less because there’s certain things that we all have to follow.

So, when you say who can conduct them, it typically is somebody that has credentials in doing business valuation.

[00:05:02] Emily: Can you dive a little further into those valuation standards? Explain what’s taken into account when you’re doing a valuation to get that final number.

[00:05:12] Dave: Well, it’s interesting — Again, Uh one of the biggest values I think of a valuation is knowing exactly what is the true earnings of a business.

A lot of times, these closely held businesses are are, being run based upon reducing their taxes and to reduce taxes, Emily, you know what that means? That means that you drive up expenses and you bring profits down. Right? Both of which doesn’t drive business valuation value. So, I think what you first start doing in a business valuation, is you have to determine what is normalized earnings.

Like, what is the business truly making? So, you kind of go through the profit and loss statement, you go through the balance sheet, and you try to pick out things that are maybe one-time expenses or maybe expenses because of trying to be aggressive on the tax write-offs. And maybe someone’s taking out a very large salary?

So, you back the salary down to what is a true normal salary. So, it’s really a lot of, it’s really interesting to me. That’s the first part is to determine what are you making because a value of a business is normally derived by the income that it could generate. And then you take that income and you give it a multiplier.

So, you’re you’re then saying it’s worth five times normal earnings or six times or seven times. And that multiplier I’m telling you about is all based upon the industry and the market that they’re in, which is again, very specialized.

[00:06:44] Emily: Sounds like it. So, what advice would you give to a business owner? Who’s thinking about a business valuation for any of the reasons that you listed earlier, but they haven’t done it yet?

[00:06:56] Dave: I’m a big fan of being proactive. And a lot of times clients may put it off because they don’t want to spend the money. And, and no, there’s no question. It’s expensive to get a business valuation, expensive to get any professional service. But I think when you make a unknown known in any thing in business, it’s good.

So, if you could get to know what your business is really worth, it will make you be able to maybe make better decisions in the future of the business. So, I guess the word I would say is, be proactive, and think about the reasons why you would need a business valuation. And if you need it, pull the trigger and do it.

[00:07:41] Emily: And what about advice to those who have gotten a valuation, but that final number, wasn’t what they expected? They believe their business is worth more

[00:07:52] Dave: Well, that happens a lot, you know, because what I’ve found is, in a closely held business, it’s like their, their child. It’s like their baby, you know, and they, they grew it from nothing or it’s like, they’re a seed, you know, they grew it.

And so, they really probably value it more than what it really is worth. So, what I always think about, and I’m an optimist, as you know, but I like to know, even if it’s lower than I thought it would be, that gives you a good — a benchmark of how you might be able to derive a higher value. Let me explain.

So, if you have a business that’s making, and say you thought it was worth $5 million and the business is making you thought it was making, a million dollars and you say, well, it’s worth at least $5 million. It’s a million times five multiplier is $5 million. Well, let’s just say the valuation comes back that the business is really only making $500,000 and the multiplier is maybe six, more than five.

So, now you’re talking about a $3 million value, which is less than I thought. The way I look at it is, let’s look at what made up that value and we can start working on the profit. So, if it made 500, let’s try to come up with a plan over the next year or two to try to increase profitability that would drive the value because then, you know, every dollar that you can increase profitability adds $6 to the value.

So, if I can get it to a million, now it’s worth $6 million and not five, and I’ve been pro– again, the word proactive comes in and that’s what I would do.

I think anytime you focus on something, I think it always helps you. I think if a business owner is truly serious about making things better, they will focus on it.

I just had a conversation with one of my clients before this podcast. Same thing. He’s got an idea. He’s got a plan of trying to drive sales up and increase sales, and we’re discussing the plan of how to do that.

And there’s more of a chance that’ll happen because we’re going to have a proactive plan to do it. Anytime somebody has a plan, Emily, there’s more of a likelihood that they’ll be more successful.

I love helping our clients. PKF Mueller loves helping clients. We really do. And I think the valuation is just one of those proactive tools that we could use to really help a client move in the right direction. Because again, you have to keep score. You have to know where you’re starting, what is it worth now and what is it worth in the future?

So, it’s very important to have that number. That number to me is part of the scorecard that you need to be successful. So, that’s what I would say.

[00:10:40] Emily: If any of our listeners have any questions or would like to learn more, will you please share how they might be able to reach you?

[00:10:46] Dave: Oh, absolutely. Yeah, if you needed to reach me, anybody out there, you could reach me at my telephone number, which is (630) 524-5274, or you can email me at dnissen@pkfmueller.com

And again, thank you for having me today, Emily.

[00:11:08] Emily: Perfect. Thanks Dave.

And thank you to our listeners. Don’t forget to visit us at pkfmueller.com to learn more about all of our firm’s services. You can also follow us on social media for more updates, insights, and upcoming events.