The Science of Certainty: Who Should Actually Value Your Business? - Part One (#273)

Amy Morin and Ralph Gigliotti, manager of R&A CPAs, star in our latest MBV Podcast release, 'The Science of Certainty: Who Should Actually Value Your Business? - Part One (#273).' Their discussion explores the key drivers of enterprise value, such as reducing owner dependency and customer concentration, while explaining why a formal appraisal is necessary at least five to seven years before an exit. Listeners will walk away with a clear roadmap for improving their company's risk profile and team culture to ensure they don't leave value on the table when it’s time to transition. This episode is the first of a two-part release. Don't miss next Friday's release! 

Tune in weekly to hear more from Mastery Partners and to receive relevant key content on your journey to maximizing your business value!

Podcast Chapters:
0:00 – Introduction & Show Mission
1:08 – Guest Welcome: Ralph Gigliotti
1:34 – CPA vs. Business Valuation Expert
5:04 – Opinion of Value vs. Certified Business Valuation
8:48 – Phased Valuations & Reporting Options
11:31 – Emergency Succession & Strategic Exit Planning
12:50 – Shift in Strategy: Running a Business to Build Value
15:26 – Outro

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Learn More about Amy Morin
Amy Morin is an accomplished entrepreneur and Business Growth Coach who brings exceptional value to your network. She has an impressive background as a Certified EOS Implementer®, Outgrow Sales Advisor, and Certified Exit Planning Advisor®. What makes Amy truly remarkable is her real-world success. She co-founded and scaled a company from zero to $40 million in revenue across multiple states before executing a successful exit. Later, she purchased a struggling Montana fly-fishing resort, implemented effective systems and accountability measures, and transformed it into a profitable enterprise that she also successfully exited.

Learn More about Ralph Gigliotti
Ralph Gigliotti is a business valuation expert creating successful results for high-net-worth business owners navigating transitions. He helps his clients maximize enterprise value by focusing on company weaknesses that diminish value to a buyer, mapping out value potential, and directing them in a best practice course of action. He also works with business owners going through transitions, whether an actual merger and acquisition process, estate and gift tax planning, or other related compliance matters. Ralph has more than 25 years of experience performing valuations of businesses, business interests, and intangible assets. He works with closely held businesses generating between $10 million and $300 million in annual revenues in a wide range of industries.

Mastery Partners

Elevating Businesses to Achieve The Business Owner’s Dream Exit 
The unfortunate reality is that for every business that comes on the market (for whatever reason), only 17% of them achieve a successful exit. You read that right. 83% of attempted business transitions never reach the closing table. Mastery Partners is on a mission to change that. We ELEVATE businesses to achieve maximum value and reach that dream exit.

Our objectives are simple - understand where the business is today, identify opportunities for dramatic improvement, and offer solutions to enhance the business, making it more marketable and valuable. And that all starts with understanding the business owner’s definition of his or her dream exit.  
Mastery has developed a 4-Step Process to help business owners achieve their dreams.

STEP 1: Transition Readiness Assessment
STEP 2: Roadmap for Value Acceleration
STEP 3: Relentless Execution
STEP 4: Decision: Now that desired results are achieved, the business is ready for the next step in the journey!

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Transcript

Tom Bronson (0s): Welcome to the Maximize Business Value Podcast, brought to you by Mastery Partners, where our mission is to equip business owners like you, to maximize your business value and achieve the exit of your dreams, whatever that means to you. With insights gained from over a hundred business transactions, we share real world strategies, lessons, and expert advice to help you build long term sustainable value in your business.

Each episode is hosted by one of our Mastery certified partners, their seasoned experts who've helped countless business owners navigate the complexities of growth, scaling, and building value. They bring firsthand experience, actionable insights, and a passion for helping you build a business that thrives. So, let's dive in.

Amy Morin  (1m 8s): Hello, this is Amy Morin, and Welcome to the Maximize Business Value, a podcast for business leaders who are passionate about building long-term sustainable value in their businesses. Today it is my extreme pleasure to introduce you to Ralph gii of R-N-A-C-P-A firm. Ralph, welcome to the podcast.

Ralph Gigliotti (1m 31s): Thank you, Amy. It's very, it's a pleasure to be here.

Amy Morin  (1m 34s): Thank you. So, Ralph, you and I are both in the exit planning space, and so this podcast is dedicated to that. So, we'll, our focus is gonna be around that today. But first of all, before we really dive in, I'd love for you to clear up the misconception of the differences between A CPA, which you are one, right? You are A CPA, and you're also a business valuation expert. So explain those differences and why necessarily somebody's local tax accountant is not gonna give them the same valuation that a business valuation expert would.

Ralph Gigliotti (2m 15s): Sure. Well, I think that's an easy question to clarify, and I think that in today's age, you know, especially, you know, during my lifetime growing up, you know, late eighties into the nineties, into the two thousands, you know, over my career, most professionals have gone from being singular professionals where they carry a designation in a certain field, whether they're a certified financial planner, whether they're a certified public accountant or what have you, to being multi credentialed.

And oftentimes you see business professionals and they have multiple certifications after their name. Well, you know, in my day, you didn't really go to school and get into the appraisal profession or a certain profession because you were encouraged, you wound up there through the course of your career. So for me, you know, I spent the early part of my days as a CPA fresh OUTTA school, getting my certification, and then discovered valuation as a career, and transitioned over and attained two more certifications, my accredited and business valuation certification, and my accredited senior appraiser certification.

So for me, I carry multiple certifications, and I think for the public, over the years, as CPAs largely went into appraisal, the only certification most consumers or business owners recognized was the CPA certification. Yeah, for sure. So over time, attorneys and business owners and bankers became to think that I needed a business valuation, I should call my CPA. Well, reality is CPAs are not trained to do business appraisal.

It's not on the CPA exam. It's not in their coursework. So unless a person carries a certification, specifically identifying them as capable of doing valuation work, really a business owner would wanna seek out someone who is trained and certified in that field. Not that A CPA can't bring a lot of value from deal structuring, tax advice, and answer a lot of financial questions because they have an acute knowledge about the client, his personal situation, as well as business situation.

But again, would you go to your banker to have him draft legal documents? I would say the answer is no. And so it's the same thing here.

Amy Morin  (4m 39s): There's no question that A CPA is definitely part of the exit planning team, but I think really what you and I are trying to get to today is that they shouldn't be the sole person doing the business valuation. We should be getting somebody in there who has a, you know, has a background and is an expert in business valuation to work in conjunction with the CPA as part of the team. For sure.

Ralph Gigliotti (5m 4s): Absolutely.

Amy Morin  (5m 4s): Yeah. Excellent. So we're gonna dive into building value in company, right? This podcast is Maximize Business Value, and so we wanna always love to dive into what are the levers that business owners can pull in order to help them get there. But let's talk first about the differences between an opinion of value versus a full certified business valuation for a company and where you know, where one is okay, or the other one is needed because there's a huge cost difference that's gonna come to a business owner depending on which one of those they choose.

Is that correct?

Ralph Gigliotti (5m 46s): That is correct.

Amy Morin  (5m 47s): All right. So what's the difference in what situation calls for each?

Ralph Gigliotti (5m 52s): Okay, so in the case of a, and I just want to clarify, so, so when we talk about an appraisal or valuation, I'm gonna use those terms interchangeably because essentially they mean the same thing. Now an appraisal is oftentimes the term you hear when you're talking real estate or furniture and fixture appraisals, machinery and equipment appraisals. But valuation has come to be more of the common nomenclature when talking about the appraisal or value of company stock, or a company itself.

Just like you wouldn't say, I need an appraisal of Microsoft, you, you want a valuation of Microsoft on this date. So those two terms I'll use interchangeably. So a full appraisal or comprehensive valuation is where the appraiser would provi perform all of the required steps from gaining an in-depth understanding of the company, its operations, the pain points the business owner has, where risks or strengths lie in the company, both inside and outside.

In the macro environment, economically in the industry, what's happening with ai, what's happening with trends in the industry that the company is not responding to correctly, he'll look at a number of economic and industry sources. He'll go through a comprehensive benchmarking and financial analysis of the company, and then he will apply one of three broader approaches of valuation to render an opinion of value on the company. Now, those are most often needed or acquired in litigation cases for the IRS for banking, if you're gonna be lending money, if the bank's gonna back an SBA loan, it's needed.

Okay? So there's a number of regulatory reasons in the case of ESOPs and the like. But when a business owner might just want to have an understanding of what his company's worth, but the report really isn't going anywhere except in the business owner's file cabinet or on his hard drive. If it's PDF report, you know, there's what's called a limited scope or what's sometimes referred to as a calculation of value. And that's where either because of data limitations, such as in the case of a litigation case, that you can't get all of the documents that are required because of restricted document flow, or the business owner just simply wants to agree with the appraiser to limit the scope and omit certain steps because he just wants to get a rough estimate as to what the company might be worth.

A limited scope appraisal or a limited scope cal or calculation of value would be the way to go. And that's where they can pare down the scope and ultimately reducing the amount of work, reducing the amount of cost. And that would give a business owner a pretty good idea as to where the company might fall without digging into all of the nuts and bolts that we would typically do.

Amy Morin  (8m 48s): Okay. And is it fair to think that an, an owner could start out with an opinion of value and then work on some stuff, and then a year or two years or whatever down the road, go ahead and do a, a larger scope, you know, a to a total certified business valuation? Would that be a decent plan in some cases, do you think?

Ralph Gigliotti (9m 13s): I think in some cases that would be acceptable. I think in cases where the business might be more homogenous, whereas you might be running a business and, and not to say that this is the business line that the person's in, but if you're running a franchise operation, if you're running a homogenous business like a coffee shop or a laundromat, things that, you know, there's not a huge amount of disparity between one company and another.

Alternatively, there is also a situation where you might have a lot of moving parts inside that company. Yeah. And that company business owner might want to have a valuation where he's looking at some of those details. Again, does he need the comprehensive report to substantiate anything at this point? No, but just to convolute the issue a little bit further, yeah.

What a business owner might do if he still wanted a comprehensive valuation and to dig into some of those moving parts that may pose risks and so forth. He might opt to have an actual appraisal done, but yet not draft a hundred page valuation report. And instead have the appraiser orally present his findings in a management meeting with him and perhaps just, you know, provide him a memo or something. But essentially he'll have the same data without the added cost of having a hundred page report in his hand.

So it might leave him a little bit empty handed, but he'll have the analysis completed in that way. Yeah. In the case of a limited scope appraisal, he'll always have a, a report handed to him by standards. It's required. Ultimately, I think that you, again, you can do the limited scope appraisal upfront and on the back end when you might want something to substantiate to a potential buyer, then have the comprehensive report done closer to the time of exit, but ultimately the, at least the piece of the analysis that digs into the value drivers would need to be done on the front end.

Amy Morin  (11m 25s): Yeah, for sure. 'cause otherwise, in that you really have no idea which levers to pull to increase the value, right?

Ralph Gigliotti (11m 31s): Absolutely.

Amy Morin  (11m 31s): Yeah. Yeah. Which takes me to our next question, Ralph. This is just fascinating. So thank you for sharing a lot of that. So you and I work with business owners that are thinking about an exit somewhere on the horizon, right? Sometimes it's three to five years, sometimes it's closer to 10, and sometimes they're not thinking about it at all, even though that they should be. I've got got a construction company right now that unfortunately ha had an issue with the five Ds, as we call them.

The owner, founder of the company, owned the company 41 years, dropped dead of a heart attack in his garden last summer, and, and so now the company is in, in a state, and they haven't done any exit planning at all. So as you and I, you know, I mean, you and I talk about all this and we say, Hey, listen, even if you don't plan and exit, it should be part of your business strategy, exit planning for these kinds of reasons, right? Whoever expected that. But as we drill down to the day-to-day part of this, what's fundamentally different about how an owner should be running their business once exit planning becomes part of their strategic planning or their strategy?

Ralph Gigliotti (12m 50s): Sure. So I think for the most part, a lot of business owners, when they first start their companies and they start working, a lot of it is about developing sales, watching your expenses, generating a net income, and providing a paycheck initially, and then grow the company and grow and take every piece of work and business that comes your way. But ultimately, they sit down with their CPA at the end of the year, they discuss tax planning, they'll turn around and decide to perhaps take some bonuses out of the business, take some depreciation deductions, and do some other things.

And the goal is to help minimize taxes and preserve as much cash flow and keep, keep more money in the business, or perhaps in their pocket personally as they work through a, a growing business and the cash flow pains of a growing business. But ultimately, at some point, there's a break point. And you know, I remember in my first five years in public accounting, we used to sit down and do just that with a lot of our clients in the firm I was at. And then one client, it was my first client where they did not want to come in for tax planning at the end of the year.

It was a much larger business. And I remember saying to my, my boss at the time, well, why aren't they coming in for tax planning? Don't they wanna save money? And his response was a bit unique. He said, you know, Ralph, they're big boys. They know how to write checks to the IRS because ultimately they had bridged this momentum of going from being a small business to a mid-size business, and they were looking to grow their company and run it like a business operation. So the idea of saving taxes was important, but not, it was secondary.

It was secondary to the primary goal of leaving the money in the business, reinvesting it, reinvest in property, plant and equipment, reinvesting in personnel driving sales growth because they wanted to have a company that was worth something in the future.

Amy Morin  (14m 50s): Yeah. Yeah. That's great. Yeah, I, we went through a similar thing when we were growing our construction company, right? And getting it ready for sale. So walk us through what enter enterprise value actually means. So when, you know, business owner hears that their company is worth 5 million, they think it really should be worth 8 million. What are the drivers that create the difference between a $5 million company and an $8 million company?

And, and, you know, as it relates to enterprise value?

Speaker 4 (15m 26s): Thank you for tuning into the Maximize Business Value Podcast. This episode is the first of a two part release. Part two will be posted next week.

Tom Bronson (15m 36s): Thanks for joining us for another episode of the Maximize Business Value Podcast. I hope today's conversation sparked new ideas on how you can continue driving value in your business. But remember, it's not just about listening, it's about taking massive action. Visit our website mastery partners.com for more resources. Grab a copy of any of the books in the Maximize Business Value series on Amazon or via the links below, and don't hesitate to reach out if you want to know how to apply these concepts to your business.

So until next time, I'm Tom Bronson reminding you to relentlessly execute while you Maximize Business Value.