- March 05, 2020
Barry J. Berkowitz, PhD, CBI, M&AMI
I am pleased and honored to be the 2020 Chair of the IBBA Board of Governors. We have many exciting things planned to begin this new decade! There will be new educational courses for the beginner, intermediate and advanced business brokers. Our online course availability is continually expanding, providing flexibility to learn on your own schedule without travel expenses. We also will continue to have informative webinars, as well as our highly acclaimed podcasts. This is all in addition to the exciting IBBA 2020 Conference and Marketplace to be held in Louisville, KY, April 24-26.
Before discussing our plans for the coming year, I would like to point out that last year was an exceptional year for the IBBA. I want to personally thank Jeff Snell, our 2019 Chair, and Kylene Golubski, our Executive Director, and her team for their tremendous efforts to continue to make the IBBA the premier business broker association. We now have more than 1,400 members of which more than 500 hold the designation of Certified Business Intermediary®. I would also like to thank our many members that selflessly volunteer their time on our various committees.
Our 2020 IBBA Conference is only about two months away. The largest assembly of business brokers in the world will converge in Louisville, “Racing toward Success” (the home of the Kentucky Derby). In addition to new course offerings, the Conference will feature more than 30 new workshops and the ever-popular Mastermind Sessions, where members share their knowledge, experience and war stories. There will be great opportunities for networking with your colleagues as well as the many new members that you will meet. The Marketplace is expected to feature more than 50 Companies that can help you become better business brokers with the use of their tools and services. And, watch out for the special events and surprises! This Conference is expected to be one of the best in recent years and it is one you do not want to miss! Don’t forget to register and book your Omni Louisville Hotel room right away. I’ve attended many IBBA Conferences over the years, and I still walk away from every one with new ideas, focus and energy.
In addition to our expansive educational opportunities and conferences, business brokers get great value with IBBA membership. This year we will continue to provide free access to the Business Reference Guide online, BizMiner reports and ValuSource Market Comps database. You will also receive the recently added V-Rooms virtual data rooms. The savings from these benefits alone are much more than the cost of your IBBA membership. In addition, there are significant discounts and other benefits available to IBBA members that you will want to read about in the members area of the IBBA website. Every member should take advantage of these wonderful opportunities to enhance your tool set as well as your skill set.
As this year begins, we should give thanks to the Board members that will be retiring after their years of service. Warren Burkholder has served as 2018 Chair of the Board taking the IBBA in an upward and fantastic direction. Denise Yardy served with great skill and honor as a Director and most recently as Chair of Conference Planning. Steve Wain, a past Chair and the representative of the Past President’s Council to the Board for the last two years, has been a big part of helping develop IBBA’s growth strategy. Laura Ward, the retiring Chair of the M&A Source has provided exceptional leadership for both the IBBA and M&A Source.
We would also like to welcome our new Board members: Mike Adhikari, Michael Marks and Louis Pereira. In addition, we welcome Bob McCormick, the current Chair of the M&A Source. And we welcome a repeat performance by Lou Vecchio, a former IBBA Chair, who will serve as the Chair of the Past Presidents Council.
Lou Vescio, CBI, M&AMI
In my 17 years working as a Business Broker, I have found that many individuals that enter this profession have a misunderstanding of what we really do!
A broker is a person or firm who arranges a sales transaction between a buyer and a seller for a commission when the deal is executed. The most important word in the definition above is “sales.”
We are salesmen and saleswomen, and the great brokers are great salespersons. Brokers that don’t like selling should probably find a new profession!
Additionally, we have one of the hardest sales jobs as we must make two sales in order to get paid. First, we have to sell the business owner on the fact that we can successfully sell his or her business, then we have to sell the buyer on why it should be purchased. Our job is even more complicated because we have to be knowledgeable in so many areas, such as understanding business valuations, market demand, buyer and seller psychology, how business loans work, purchase agreements, state and federal laws that apply to our profession, business benchmarking, marketing, and a myriad of other topics that may apply to a specific business we are trying to sell. But in the end, we are mainly salespeople!
So, what make a great salesperson? It is a person that likes to win! To quote a person we all know, a good salesperson can’t get “too much winning!” Salespeople love competition, which may be why so many professional athletes go into sales. A great example is Roger Staubach, a Naval Academy Graduate, Heisman Trophy recipient, NFL Hall of Famer and Superbowl winning Dallas Cowboy Quarterback. He liked winning so much that after football he built The Staubach Company, one of the largest and most successful commercial real estate firms in the country. Roger was all about winning all of the time!
An article in the December 12, 2017, issue of Forbes Magazine entitled “Why Athletes Win in Sales,” highlighted the similarities between great athletes and great salespeople. The article emphasized these traits:
Hard Work, Dedication, Focus and Flexibility – According to Frank Zaccanelli, former president of the Dallas Mavericks, “Athletes work exceptionally hard at their craft to get to the professional level — they have been focusing on one task since they were very young, and they had to have the self-discipline to put in the hard work, it makes perfect sense these skills would transition … outside of their sport.”
Love of Competition – Theo Ratliff, a longtime NBA player known for his aggressive style and shot-blocking skills, observed that “athletes are great in sales because we have been competing [for] the majority of our lives,” adding that athletes and salespeople alike love the thrill of the chase.
Self-Motivation and Goal-Orientation – Ryan Murphy, a three-time Olympic gold medalist and world-record holder in the men’s 100-meter backstroke, stated, “Athletes thrive when they have goals. Short-term or long-term, athletes are motivated by the next standard. And once we achieve that standard, we look for ways to reach the next one.”
Ability to Overcome Failure – Giorgio Tavecchio, the starting kicker for the Oakland Raiders, knows the crushing disappointment that comes with missing a field goal with the game on the line. He explained that he is able to keep things in perspective and bounce back to fight another day, adding, “By facing constant competition and occasional setbacks, athletes tend to be very resilient and determined, which allows them to not take failure as permanent or personal, but rather continuously strive for success.”
Strong Interpersonal Skills – Tavecchio also cited the strong interpersonal skills that are honed by working in a team-oriented setting as a reason why athletes win in sales. “Athletes involved in team sports develop people-oriented approaches and communication skills that translate into the ability to work as part of a team and the ability to create positive relationships.”
Great salespeople often possess supreme people skills and can adeptly apply their relationship-building and communication prowess toward successfully converting prospects into clients. Professional athletes perform at a high level while working with diverse and oftentimes divergent personalities, much in the way that top salespeople excel at selling to decision-makers with vastly differing personas.
You don’t have to be an NFL Quarterback or NBA Center or even an Olympic gold medalist swimmer to be a great business broker, but it helps to develop the same drive, competitive nature and love of winning that makes professional athletes and salespeople superstars.
While great salespeople tend to make a lot of money, money is not their motivator. As we have seen above, their motivation is competing and winning. If you are a business broker just to make money, you probably will not make much and will have a difficult time. If you are a business broker because you want to learn as much as possible about the profession, want to hone your sales skills, love the competition, and enjoy getting each win, you will love the profession and the money will follow!
I should also add that it starts with professional education. The best way to start winning is to take the IBBA professional education courses and earn the CBI designation. The CBI is the first step on the road to success, and when you reach the point where you are winning, winning and winning, and you are getting tired of too much winning, you will be very wealthy and can retire or become President!
Lou Vescio, CBI, M&AMI | Coastal Business Intermediaries & Agency Brokerage Consultants
John E. Collins Jr. | VP NRIA Exchange
We all know that unless we’re different from our competitor, we can never expect the fee we get to be more than what they get. We also know unless we show our potential clientele what makes us different, there is little reason for them to use us for their transaction.
Your challenge is to differentiate yourself to ensure you stand apart from your competitor and, therefore, can command the fees that you charge for your services that you provide.
Below are 7 ways you can differentiate yourself. Best of all, you can start doing every one of them right now:
In the end I have a surprise 8th way to differentiate yourself from the pack and add real value to your clients.
Know more about them.
Learn more about their business, organization, and issues than anyone else. Also learn more about their personal aspirations and challenges than anyone else. When you do, you will no longer be a commodity you will be a trusted advisor.
Be fresh. Be original. Be provocative. Don’t just repeat what everyone else is saying. You don’t have to be an Elon Musk or a Bill Gates: Take your experiences, pick a topic of interest to your clients, and boil your ideas down to four or five incisive points to share with them. Go against the grain: Is there a so called “best practice” or technology platform that’s all the rage? Tell your clients why it may not last or be right for them, if you believe that’s true. Sound fresh, not bland and boring.
Have a Unique Relationship Process.
One way of differentiating yourself is through the actual process you use to interact with your clients and manage your relationship with them. This contributes to a sense on the client’s part that “working with them is different.” This can start with the courting process, and how you handle it, the client doesn’t have to wait until they’ve contracted you to experience the difference. You can carefully manage many different aspects of your client interactions for example: Telling versus asking: The way you balance advocacy and inquiry in your conversations, and the kinds of careful, thought-provoking questions you ask.
Speed of response:
How quickly to you get back to your client with things you’ve promised? How quickly do you answer your emails and phone calls (even if to say you’re tied up with a client but will thoughtfully respond the next morning)?
How you involve them in the upfront problem solving and solution development around your services and make them a part of the marketing process, in other words don’t shut them out. Education: Explain to them the various marketing techniques and industry trends that are prevalent in this fast-paced technological marketing environment that we are in now.
Develop a Personal Style.
Adopt a few, small habits and ways of communicating, and they will become a kind of signature for you. Maybe your personal style is always dressing well, no matter how casual the occasion or, always dressing casually (which happens to be my personal style these days…) Set yourself apart from the herd.
Bring Their Ideas to Life.
Innovation is a big topic, and much has been written about how to stir more innovation in large organizations. You will stand out from the crowd if you can be seen as someone who has the patience, discipline, and practical know-how to show a client how to take a concept they have but which hasn’t gotten off the ground–and make it a reality.
Show You Really Care.
Your clients are living their businesses and their organization 24/7. This is their professional lifeblood. They know you care about YOUR business–of course you do. But do you really value and care about THEIRS? Or, is it just another job for you– another day, another dollar–as the expression goes? Clients want to work with advisors and service providers who are interested in and care about what they do and about their people. How do you show you care? Take an actual interest in their business–its history, how it works, the customers they serve, the products they sell, the people they hire, and so on. Be curious. Spend time to understand their organization. Remember the business that they are entrusting to you to transfer to another individual was their creation, part of them, it most likely was not just a passive investment.
Build a Better Relationship.
This had to be on my list, right? This isn’t about just being “liked” better than the next person. A strong relationship provides many powerful benefits–here are just two: First, it enables you to accomplish point 1 on my list–to know more about your client than your competitors. Second, it creates a personal connection that strengthens a client’s loyalty to you. Remember, we don’t really root for someone until we feel some kind of personal relationship with them.
Add the secret sauce.
Finally, the eighth way to separate yourself and add real value to your clients as well as additional liquidity today. Become a referral partner with NRIA Exchange and add our exclusive Capital Gains Tax Deferral Strategy the “Deferred Liquid Sale” to your suite of client offerings today. A happy client leads to more referrals, which leads to a happier life. For more information on how to become a referral partner please contact the author above at 1-201-210-2727 ext. 120 or Email at firstname.lastname@example.org
John E. Collins Jr. | VP NRIA Exchange | email@example.com
Jeff Elder, MBA and Eric C. Boyce, CFA
As a professional business appraiser, we are called to provide our best estimate of fair value. On its face, it would seem relatively straightforward to assume that most of it has to do with the financial well-being of the company, which it does. However, it is also very easy to overlook some of the more salient issues in the ongoing operations of a business which subtract meaningful dollars from its value. In our experience, the issues most prevalent impacting potential valuations can be found in the following areas: financial operations, sales function, operations, leadership and culture, as well as owner psychology. This article will outline a few of the key issues within these areas.
First and foremost, however, is the quality of the financials. It is critical for a business to have strong financial and internal controls. I have seen too many businesses fall flat on their face because they were still being operated much like they were when they first started out.
Operational infrastructure must evolve with the growth of the business, and the evolution of the financial function is one of, if not the most, critical components of a successful business. Not having a strong bookkeeping or accounting function is perhaps the most important reason why valuations fall short of expectations, and why sellers often feel unsatisfied after the transition or sale. In addition, poor financial management will often show itself in the financial statements and footnotes, which can reflect improper capitalization and/or cash flow management. Each of these on their face would receive due scrutiny from a qualified appraiser in their analysis.
A good bookkeeper or CPA can help you set up a clear, concise chart of accounts and establish strong internal controls for the handling, measurement and access to funds. Easy to follow, consistently applied procedures following generally accepted accounting principles is essential for an appraiser to gain an accurate assessment of the financial well-being of a business. A business lacking in this critical area could face meaningful haircuts to value in an appraisal.
Budgeting and financial forecasting are two other key pieces of the financial function which are commonly overlooked by business owners. Surprising to some, but most small business owners do not establish thoughtful and useful budgets. These are the roadmaps used by effective managers in carrying out the annual action plan which typically forms the basis of a strategic plan, which most business owners generally do not take the time to do.
Multi-year forecasts are indeed useful for qualified appraisers who can incorporate these forecasts into their assessment, even if the weights assigned to these projections are less than the ones assigned to the historical data they can see. Suffice it to say, a business appraiser will be able to paint a much more complete and holistic picture with this depth of information, which can also add meaningful value to a company. In other words, the more complete and insightful information available to an appraiser, the more value can likely be recognized.
Sales is the lifeblood of a business – the mother’s milk so to speak. It is certainly obvious, but you can’t have profits and value if you don’t have the throughput at the top of the financial statement. Of course, a business owner is focused on generating sales, but a good appraiser will want to more deeply understand the source and consistency of that revenue. An appraiser will also be concerned with whether the business has established leadership for the sales function, and whether that leadership has created and articulated a strategy surrounding revenue. Far too often, we see businesses that start as order takers from a few key clients, but never evolve their marketing, advertising and client relationship management functions in tandem with overall growth.
Many businesses are adversely impacted by high customer or client concentration. It is easy to assume these great relationships will persist into the future, but I’ve seen far too often where the law of the unknown takes over and the environment changes overnight. Often, the landscape can change due to the shift in the business or ownership of the client, a falling out over service or capabilities, or even as simple as a dispute over price. Large clients usually know when they have some leverage over the seller, and will try to use that to their advantage, especially when substitutes are available. It is admittedly hard to know when and if a substantial change in customer mix may occur, but it is a meaningful risk that any good appraiser will take into account when applying the approaches to value.
The income approach to value depends in substantial measure on the ability of a business to generate consistent profitability, especially for its industry group. Profitability comes from operating leverage; in other words, the ability to grow expenses at a rate less than sales. Underperforming businesses relative to their industry code cohort will usually get valuation markdowns from qualified appraisers doing their homework.
An appraiser will also look at the management of the operation itself. This includes not only the efficiency of the operations, but also the management of human capital. Often, we see business lacking in some of the most basic human resources functions, including compliance and required training. Sometimes, it is as simple as not even having a formal HR function at al. Businesses really are as strong as their weakest link when it comes to human resources, meaning that a shortfall in this area could lead to considerable financial impact and embarrassment for the business, as well as a potential valuation discount.
From an operational perspective, an appraiser will be interested in both the data and so-called soft items. These include an analysis of financial ratios, operating margins, as well as trends in in the data. In addition, an appraisal should consider whether a company maintains proper oversight and management over facilities and equipment, purchasing, vendor management, suppliers, and even such things as intellectual property. We are surprised by the number of small businesses which fail to effectively plan for such things as equipment utilization, repair and replacement, not to mention effectively negotiate and maintain contracts with business partners and vendors.
Leadership & Culture
The culture of an enterprise may be hard to measure, but it nevertheless very important to the worth and value of a business. Employee retention and turnover is one important variable that appraisers will want to understand, as well as some of the underlying drivers. Companies with weaker benefits and compensation programs will likely face more competitive employment pressures and increased turnover, which in turn creates increased discounts to value when analyzed by a qualified appraiser.
Another issue many businesses face is key person risk. We have enjoyed a strong economy over the last decade, which has led to strong new business formation and also to labor shortages in many markets. With tight labor comes increased competition for talent, especially experienced talent in key areas such as sales, operations or finance.
The risk of losing a key employee is certainly real, and can with some effort, be quantified by a business appraiser in terms of its impact on a business value. There are several good rhetorical questions which stem from this, not the least of which is the cost to hire and train replacements. Also, what is the revenue and operational disruption should they lose one or more of these so-called “key” employees…?
For example, a business may have an employee who represents a key sales relationship, sales channel or has skill in developing strategy. Some businesses have people who possess critical knowledge of the products or services or a proprietary process. The adverse financial impact to the business of the loss of this type of person can be significant, and a good appraiser will certainly take that into account during their assessment. The ability for a company to find ways to retain that key talent, through advanced compensation and retention programs, retirement plans and the like, can add meaningful value to a business in an appraisal.
Another aspect of key person risk is the exposure that a key person loss will have on the efficiency and productivity of the staff or leadership. As difficult as it is to assess culture, an experienced appraiser will be able to discern whether the loss of key employees will disrupt the team esprit de corps, or perhaps remove a key personality or psychological attribute from a high performing team.
Sometimes, the loss of a key employee might be good thing, if that person was deemed influential but toxic to team balance or efficiency. A comprehensive appraisal should be able to look past the adjustment or transition period to account for the long-term gain in this case.
Owner Psychology and Readiness
Going beyond the application of control premiums and minority discounts, another important yet difficult to measure component of a qualified appraisal is the mindset of the ownership team. What are their goals, aspirations and motivations? If there is a single owner, how long have they been in the business? Are they happy, motivated, and satisfied? What would make them stay in the business longer (or leave earlier), and what does the future look like for them? If there are multiple owners, what is the relationship between the owners? Does the distribution of ownership adversely impact operations, satisfaction levels, or efficiency in any way? Also, what is the view of the ownership team of how they define “exit”, and what does that future look like for each of them?
A valuation performed as part of an effective exit planning process will certainly consider the existence and vitality of a succession plan. Most owners do not go through the exit planning process, however, and fail to create either a plan of succession or fail to cultivate and train the future leadership identified in the plan if it exists. Each of these issues on their own would lead to a discounted valuation by a qualified appraiser. In the case of family-owned businesses, oftentimes so-called “anointed” family members actually do not wish to carry on the legacy, leaving a void in succession which usually does not bear itself out until the eve of the transition or shortly thereafter.
A valuation performed as part of a transaction will want to assess why the owner(s) seeks to exit the business, sell or transition the business, as well as assess their view of the business legacy they are leaving behind. Sometimes, owners become frustrated by the tedious nature of running a growing business, especially if they were not effective in delegating or advancing the operating infrastructure noted above. Sometimes, it is due to business or personal divorce, where sale is the only possible solution to a difficult problem. Seller motivations are far and wide, but it is important for an appraiser to incorporate anything which might lie below the surface, as seen through the eyes of the owner.
In conclusion, an appraiser’s job in valuing a business, on its face, can be fairly straightforward. The conventional wisdom suggests that a simple review of the published financial data, coupled with an assessment of industry multiples, should suffice in determining value. However, business appraisal is as much an art as it is a science, and it is important to note just how important and influential the “soft” data and details can be in arriving at the final calculated value.
A skilled appraiser will want to understand the various components described in this article, because it helps to paint a more relevant picture and a deeper profile of the company being valued. The output from this important exercise can lead to adjustments in the risk and attribute weightings that are applied within the valuation approaches, which in turn can have a meaningful impact on the valuation. The end result should be a better, more complete valuation encompassing both available information and accessible feedback.
Jeffrey Elder, MBA is a Merger and Acquisition Advisor, IBBA Certified Business Intermediary, and Texas Certified Business Broker for Austin, Texas based International Business Exchange (IBEX).
Eric Boyce, CFA is CEO and co-founder of BKA Wealth Consulting, Inc. and BKA Business Consulting, LLC. He is a Chartered Financial Analyst (CFA) and he is a member of the National Association of Certified Valuators and Analysts (NACVA).
Join us in Louisville, KY on April 24 & 25 for the 2020 IBBA Annual Conference! Registration is open, so be sure to register for the Conference Pass and Courses by April 10th for a great rate! You don’t want to miss these great opportunities for networkinh and learning at The Marketplace, Workshops, Masterminds, Awards Ceremony, and more!
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