In this episode Josh talks with Jason Eary from BizEquity. They discuss business valuation and why it is important to have it.
Jason Early is the Chief Revenue Officer at BizEquity, the global leader in cloud-based business valuation. BizEquity licenses their patented technology to advisors that serve the business owner.
He has spent his entire career in financial services, both in practice and in consulting/technology. He spent seven years as a managing director with Creative Financial Group, and three years as CRO at Hoopis, an innovative training and development consultancy.
In today’s episode you will learn:
- Why do business owners want to value their business?
- What a value really is and what are multiple values?
- Why the value proposition of business valuation today is broken?
- How can advisors provide advice to business owners without knowing the value of their largest asset?
Narrator: Welcome to The Sustainable Business Radio Show podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. In The Sustainable Business, we focus on what it’s going to take for you to take your successful business and make it economically and personally successful. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning and thinking about what it takes to make a successful business sustainable.
Josh: Hey, how are you today? This is Josh Patrick. You’re at the Sustainable Business podcast. Today, my guest is Jason Early. Jason is the CEO of BizEquity.com. That’s an online resource that you can use to get a real value for what your business would be worth if and when you decided to go and sell it. So instead of doing a really long introduction and wasting a whole lot of time, let’s bring Jason on and start the conversation. I’m sure it’s going to be an interesting one.
Hey, Jason, how are you today?
Jason: Hey, I’m doing great, Josh. Thanks for having me.
Josh: My pleasure. So let’s start off with my stupidly obvious question. Why do business owners want to value their business?
Jason: It’s not as stupid as you may think. We get the question an awful lot. It’s always to our surprise, but we set out about eight years ago to as we say, democratize business valuation knowledge for the business owner. But when we think about why businesses need to know their value. Look, we believe that businesses deserve to know their value, but why they need to know I mean when you think about from a financial planning standpoint or a retirement planning standpoint from a capital structure standpoint, or a risk management standpoint, how can you not know the value of your business?
It’s critical for every decision that you make. Be it hiring, firing, invest, and don’t invest growth, all those things. It’s absolutely critical to understand the value of your business whether you plan to exit or not. Now everybody’s going to exit their business one day. The reality is to exit your business properly or on your terms having an understanding of that value is critical.
Josh: So one of the things that I’ve learned over the years is that most business owners I know are not especially interested in selling their business, what they are interested in is increasing the value of their business. The value in most business owners mind is, how much cash can I take care out of the business? What can I sell it for? So with that in mind, are there any good reasons to value your business with that mindset from a business owner?
Jason: Your point is exactly right. But the reality is, how do you know if you’re growing the value of your business if you don’t know what the value is to begin with? So understanding and having that line in the sand, understanding of what the business is worth and then ultimately what levers I can pull or push to increase that value, to increase the cash I can take out of it is absolutely every business owner thinks about that differently, but you have to have an understanding of the value to know whether you’re increasing the value or not.
Josh: That’s absolutely true. So one of the things that you said before we started which was really glad to hear you is that when you guys do value businesses, you come up with multiple values. Can you please explain to us what those multiple values are? And why that might be an important thing?
Jason: Yeah. Our platform generates in real time, the 29 page business valuation report and that’s going to go through things like why valuations are important, a little bit about our methodology, and then four conclusions of value on the business. So an asset value, an equity value–
Josh: As you go through this, can you explain what the different values actually are? And we guarantee though our people in the here asset value, their definition may not be the same as yours.
Jason: Yeah. What I’m happy to do is I’m happy to share definitional and its part of what we do in the report is include the definitions of each the asset enterprise equity and liquidation value of the business. So I’m happy to share a sample report at the conclusion of this and share with those definitions look like for sure.
Josh: Okay, so before values are asset which is I’m assuming if I take assets over liabilities, what’s left over is asset value, am I my correct there?
Jason: Exactly, right.
Josh: Okay. Your next type is what?
Jason: Enterprise value of the business.
Josh: Okay, and what does that mean, actually?
Jason: Forgive me, but I don’t have an offhand definition of it. That’s why again, I’m happy to kind of share those definitions at the conclusion.
Josh: People are kind of going to won’t know what it is. So I’ll take a crack at it. Enterprise value is what the going value of the business is when somebody else takes it over could be known as financial value. Am I correct in that?
Jason: Yeah, fair enough. Yeah.
Josh: So that’s what a financial buyer would pay for somebody who’s just buying your business is not going to meld it into their business, but they’re going to buy your business and run it as a separate entity. A lot of times private equity groups, the people who are the financial buyers of the world. Your third value is—?
Jason: An equity value. And the fourth would be the liquidation value.
Josh: Okay, an equity value in equity is what the equity in the businesses. That’s sort of like assets minus liabilities, too.
Jason: Very similar, yeah.
Josh: Then liquidation value is if I close the doors and walk away, what am I going to have for cash?
Jason: That’s exactly right.
Josh: And by the way, folks, just my observation and being around businesses for 40 years, the vast majority of the businesses in this world liquidate. They are not sold. Although liquidation value is not something you want, it’s something you really need to be aware of. So Jason, what is the percentage of businesses that go to market that are actually sold?
Jason: It’s not a statistic that I necessarily have off the top of my head. What we track and what we believe to be true, or what we understand is that 98% of businesses don’t value themselves and when you think about why that is, it’s because the value proposition for traditional valuation is broken. Now, for us, it doesn’t matter whether you’re going exit your business or sell your business or what percentage of businesses that go to market are sold. What we care about is the business owner and what we believe is that businesses deserve to know their value. Again, that’s why our mission is to democratize that knowledge for them regardless of the plans for the business.
Josh: So when someone you values their business so typical valuation cost somewhere around $10,000.
Josh: What does yours cost?
Jason: If I was a business owner and I went directly to https://www.bizequity.com/, I could go through the seven steps and purchase a report one time for $499. But our go to market strategy is actually a little bit different than that where we license our platform to those that serve the business owner. So financial advisors, bankers, accountants, private equity folks will license the biz equity software and they’ll deliver valuations on their own white label so their business owner clients and prospects complimentary and then provide advice around it. So it’s really a subscription as a service business that those that serve those business owner will license to be able to deliver value to their clients and prospects.
Josh: So one of the things I always like to tell folks is that the business is worth or someone who’s going to pay for it. And the valuation community says, no, no, no, no, you need to value your business. Then you’ll know what someone else is going to pay for it. My experience is every time I get a formal evaluation done and then we actually go to business, it’s sort of like we’re living in two different worlds. So how does your system sort of take into account the wild value fluctuations that actually exists for the value of a private business owner?
Jason: Well, it’s a great question. I don’t necessarily disagree with you. But here’s the reality which is and this is a story that I just heard last week on a call from one of our subscribers who called with a success story and he said to me, “Hey, I want you to hear this story.” A client of his decided it was time for retirement so they were going to exit their business. They’re going to sell the business and he and his wife were going to retire on the sale of that business. So they kind of put the business out there in their community if you will up for sale and there was a competitor, a friendly competitor that was quick to make an offer. The business owner was thrilled with the offer. However, at the advisors direction, they went through the BizEquity platform and came to a value of that business that was $2.2 million higher than the offer. So that caused the business owner to think in fact, they brought the Biz Equity valuation to the buyer. They close the gap. They got a million dollars more for the business than what was originally offered and what they were originally going to take because again, they were flattered with the offer. That’s a little bit about what not knowing or not having an understanding of your value in the marketplace. That’s how it can hurt you.
Now ultimately, the buyer could have said, “No, we’re only interested in this price.” Perhaps if the business owner now understood that perhaps they’re more valuable, perhaps they go and shop at other buyers or what have you. I don’t disagree with you that look at the end of the day the business is worth what somebody’s willing to pay for it, but you are at the sole discretion that the market if you as an owner have no understanding of what the value is based on transaction history and market comps and things like that. So having an accurate understanding of value gives you some control in that process.
Josh: You actually just brought up one of the biggest mistakes I think that business owners make when they market their business. You said they sell themselves and they don’t get somebody who actually knows how to sell a business. They come in help. In my experience, what happens is buyers tend to be more sophisticated sellers. Would you agree with that?
Jason: I’d say it’s fair. And just anecdotally, I would agree, but I would say that is not our expertise, either. I mean we are not very certainly are not business brokers, or we don’t have a marketplace or anything like that.
Josh: I understand that, but you guys are in the world of valuing businesses. So I’m assuming you’re talking to tons and tons of people who are in the world of selling businesses and buying businesses.
Jason: You’d be surprised, not really. I mean, again, our subscribers, our clients, our commercial banker’s financial advisors largely as a large percentage of our client base and accountants. So again, they’re more using our platform to then provide advice to the business owner based on the value. Again, I wouldn’t say that we have any particular expertise very certainly our chief valuation officer does. But I would say as a company, we don’t have any real expertise in business brokerage or anything like that.
Josh: Oh, anecdotally, I am a financial advisor of CFP. I’ve been around the world for more than a couple of years. And every time I see a financial advisor present how to plan for business owners, I generally want to go and throw up. It’s so bad. The reason is so bad is because business advisors or financial advisors, they’ll take with the business owner tells them their business is worth and they use that number in a financial plan. Typically, business owners overvalue their business by at least two times if not five times. One of the things I like about what you’re doing is it will help bring reasonableness to the conversation about what a business is actually worth. Does that make sense to you?
Jason: It does. Again, what we know is equity is that 98% of privately held companies don’t value themselves. And so what kills us is that you have people out there providing advice to business owners and how can you provide sound advice if you don’t have a real understanding of the business? And so to your point, oftentimes, it looks like this where an advisor or walk into a business owner, they’re starting to talk about a retirement plan or an estate plan, or succession plan or even just a personal financial plan. And they say, “Mr. & Mrs. Business owner, what’s the value of your business?” The business owner may say, “Well, my accountant says that in our industry, we trade it three times earnings, and so it’s short. I think it’s worth why.” It’s a back of the napkin type calculation without having a real understanding, but we know that that impacts greatly their financial plan or their retirement plan or what have you. So having that accurate understanding of value for planning purposes is critical.
Josh: So when a financial advisor who probably has eight or nine businesses a deal with out of maybe 100 clients and they sign up to use your service, what kind of training do they get the allows him to talk intelligently about business valuation, if any?
Jason: Everybody that subscribes to our platform gets walk through a robust onboarding and training session. They have full access to our client Success Center which includes things like white papers and blog posts and video content and things like that their own dedicated client success team member as well as access up to our Chief Valuation Officer. Beyond that, we offer the business valuation Institute and so we have a 30 hour all online course that subscribers to our platform can go through to become a certified business valuation specialist.
That just allows them to go a little bit deeper and understanding business valuation. Now, if you do subscribe to the platform, and you don’t go through the BBI, our report, the report that our system generates, those are very nice job of making it very turnkey and very easy for somebody to deliver. As an example, when we go through our KPIs or key performance indicators on that business, if it’s the debt to equity page as an example, we’re going to tell you, what does that mean? Why does it matter? And here’s an example.
Again, back to the four conclusions of value I mentioned earlier, it’s all definitional. In the report, we spell out those definitions and the same when you’re pulling somebody through the seven steps, I don’t need to know what officer compensation is, by definition. You can hover over our tool tips and we’ll tell you exactly what that means by definition and then exactly where you can find it on a tax form. Again, it may sound a little complicated, but in practice it’s very turnkey and easy to pull somebody through.
Josh: Cool. So Jason, here’s another question for you about this. Here’s another mistake I see financial advisors making all the time. If they actually get the business value close to correct with they almost always get incorrect is what the cost is of selling a business. So is your report deal without it all?
Jason: It does. Again, I just want to be clear from an expertise standpoint. I mean, we really focused very little effort on the actual sale of the business because a lot of businesses to your point may have no intention of selling the business. But if I have no intention of selling the business today, but I need to have a proper financial plan or an understanding of what my retirement plan or estate plan looks like, I need to know that value. Again, our mission is simply to democratize valuation knowledge for the business owner because we believe they deserve to know.
We don’t think that they ought to have to pay $10,000 and go through a four to six week process. There’s all sorts of resources out there and companies and consultants and what have you that will help businesses market and exit their business, but that’s not BizEquity’s expertise.
Josh: Just for those folks who happen to be listening because most people listening are owners of blue collar businesses or service businesses. The truth is, the number that you’re going to get from Jason’s company is going to be probably you’re going to have to subtract somewhere between 40 and 50% to find out how much money you’re actually going to end up with at the end of the day. Because when you sell a business, you don’t get to just take all that money and stick in your pocket. You’ve got to pay taxes which at the best cases is 20%, but typically around 35 to 40%.
Then you’ve got cost of selling the business which if your business value is under $5 million, there’s a very good chance the cost of selling that businesses about 10% and then you have all the professional fees that go along with it. So if you sell your business for $2 million, you’re likely to be left with somewhere around a million two to a million three. Although 2 million might be enough, a million two or a million three probably is not enough. It’s important for you as you’re listening to this and say, “Oh, yeah, I want to go out and find somebody who can help me get my business valued and get it from Jason’s company.” Remember that that number you get is not what you get to put in your pocket when it’s time for you to leave. That makes sense.
Josh: That’s something that’s really, really important is kind of one of my pet peeves with going to watch presentations by other advisors on how to do financial planning for a business. They never get the expenses right.
Jason: Here’s what we think is amazing. 70% of business owners say that they plan to fund their retirement somewhere between 80 and 100% through the sale of their business. Yet I said earlier, 98% of businesses don’t value themselves or don’t have an accurate understanding of their value. That’s insane when you stop and think about it. And to your point, even if they do have an understanding of value, they don’t necessarily understand what that sale price means in terms of what they walk away with and what that means in their retirement.
Josh: Yeah, the fact that– this is kind of an interesting thing. Only 2% of businesses get valued and only half of those people will have a will. And only 5% of the people out there will actually talk to other people about what’s in their wills. [Laughs] A million mistakes that happened in the world of planning is unbelievable. I don’t know if you know these factoids, Jason but there’s 28 million businesses United States and only 6 million to have any employees all. So 22 million people think they’re going to sell their business. I don’t know who’s going to buy it, but the business is you. Then there’s only 150,000 businesses that do more than $10 million in sales which are— and that’s the group where you get some real enterprise value in the business that people want to buy it and they’re actually going to pay us some money for it. If your business is less than two or $3 million, you’re likely holding a bunch of paper.
There’s a whole another set of risks. So what Jason is telling you is that you need to know the value of your business so you can do planning that’s actually going to be useful. I 100% in favor. In fact, I’ve coined the term, Jason’s called Perma Five. And what Perma Five means is, is that if I go to you say, “When are you going to leave your business?” You’re going to tell me five years from now, if I go back three years later, you’re still going to say five years and two years after still five years. The reason is, I haven’t valued my business. I don’t know what my business is really worth. I don’t think I can afford to retire. I’m afraid to look because I don’t want to know the answer.
Jason: Yeah. Yeah, that makes an awful lot of sense.
Josh: So folks out there who are listening and are saying, “Well, I don’t know if I want to do this. This seems like a waste of time.” It’s not, at the very least you’re going to get a reality check for what your businesses really worth. And for that, I think it’s really worthwhile thing. So Jason, unfortunately, we are out of time and I’m going to bet that there’s some advisors listening that would be very interested in licensing your product. Because I’m going to tell you $495 for business valuation is a steal? How would they find you? And how would they get in touch with you? And what steps would you like people to take next?
Jason: You can find us right at www.bizequity.com/. You can send me an email direct firstname.lastname@example.org or email@example.com. Those are all great ways to reach out and you can just request a demo because we’re happy to have our team walk you through a demo of the platform so that you can see it in action and make a decision on whether or not you think it’s a real value add for you and your practice depending on what your practice looks like. So if you’re a business owner, again, we encourage you to talk to your advisor about Biz Equity and or go directly to our website. We appreciate the time I would just say at the onset, I think you said that I’m the CEO of BizEquity. I don’t want our CEO to get that message. I’m the Chief Revenue officer, so the CRO.
Josh: Oh, I’m sorry about that. I got that wrong.
Jason: I don’t want my CEO call and saying that you kicked me out of a job.
Josh: I do that on a regular basis. I have to apologize for that. I also have an offer for you, too. We’ve been talking a lot about [inaudible 00:20:09] can you afford to leave my business or not. And I have this little tool we built which is called the Four Boxes of Financial Independence. In about five to 10 minutes, you’re going to find out whether you’re on the road to create financial independence for yourself or not. It’s really easy to take. It’s a free little quiz. You go to https://thecashflowcode.com/.
That’s https://thecashflowcode.com/. You’ll take about five to seven minutes, put some numbers in and it’ll be spit it out and say whether you are on the road to financial freedom from your business or not. The answer is mostly, if not, and you might want to do something about it before you get to be 60 years old. This is Josh Patrick. You’re with Jason Early. We’re at The Sustainable Business. Thanks a lot for stopping by. I hope to see you back here really soon.
Narrator: You’ve been listening to The Sustainable Business podcast where we ask the question, “What would it take for your business to still be around a hundred years from now?” If you like what you’ve heard and want more information, please contact Josh Patrick at 802-846-1264 ext 2, or visit us on our website at www.askjoshpatrick.com, or you can send Josh an email at firstname.lastname@example.org.
Thanks for listening. We hope to see you at The Sustainable Business in the near future.