A Lifetime of Value The Role of Valuation Throughout the Business Life Cycle

hi everyone thanks for joining us today my name is Sammy Rose marketing manager here at Biz Equity we're going to give everyone another minute or two to join before we start [Music] all right we'll go ahead and get started again my name is Sammy Rose marketing manager here at buzzequity I'll be your host today and our presenters are Scott gaypart valuation officer and Ryan Thompson valuation analyst Scott I'll pass it to you all right well thank you Sammy and welcome everybody to today's webinar it will be a a whirlwind tour of about business valuation and how it changes over the life cycle of a of the business and uh uh don't want to belabor our backgrounds but I've basically been a business appraiser or a middle Market specialist for close to 30 years uh and uh Ryan Thompson uh like myself is a certified valuation analyst and he's also a CPA and uh we'll be splitting the presentation today uh uh as we see in the uh outline slides uh part one is my domain and we'll be uh introducing the uh perspectives related to being an advisor with business evaluation capabilities before starting in on a discussion of evaluation methods for uh startup types of scenarios and then part two uh will be uh Ryan's presentation uh looking into uh the more traditional uh valuation methods as applicable to uh established businesses so uh kind of a big picture start although we're we're uh we'll be addressing business valuation use cases over uh the life cycle of business uh we're doing so from the perspective of advisors and uh in particular financial advisors Wealth Advisors uh CPAs insurance agents Etc and uh the uh the essence of our presentation uh is will revolve around the notion that having knowledge about business evaluation will Elevate uh any advisor standing among all advisors and uh it offers the uh opportunity to to literally become the quarterback among advisors uh uh which of course allows uh you to improve your relationship with uh your clients uh gain their respect and loyalty and um so I'd like to look at business valuation from the perspective of advisors as an investment it's an investment of your your time to to learn the basics of business evaluation and and utilize that leverage it in in building your client relationships and next slide please so the the very concept of a life cycle for a business is is quite uh varied and if you were to do a Google search for business life cycle you would see uh almost an endless array of uh breakdowns into different phases uh some simple some more complex uh today we're we're breaking it down really into two main uh categories the the launch startup and growth phase which is what I'll address and then the maturity decline exit phase uh which uh Ryan will will be addressing and of course uh as with most things in life uh you you can you can make any given concept as complex and complicated as you want and there are there are many uh life cycle presentations that that are more amenable to uh breaking out the uh startup stages of the company see first stage or series A B C uh Etc but we're going to keep it simple as per this uh particular uh simple life cycle um so in introducing and uh discussing the this uh the concept of using business evaluation as an advisor uh it's obviously a valuable and helpful way for any advisor to to specialize these are the other advisors and of course that's that's the Wheelhouse of Biz Equity uh we're uh we're we're geared primarily towards supporting advisors and as I mentioned earlier um I think if you look at your uh involvement in learning about business evaluation as a long-term investment uh there's no doubt that it will provide uh ample long-run returns in in many different ways uh and in so doing it will uh compel you to think and act uh more like a business owner focusing on growth and profitability issues with your clients and uh I think many people believe that business owning clients are are the best clients they're the most profitable uh in the sense that they tend to have greater wealth currently and uh in the future uh and uh there's uh uh a mechanism for driving retention by being actively engaged with business evaluation as a service uh uh next slide please uh now in a in a perfect world this relationship would begin at the beginning of a company's lives uh and of course that that doesn't always happen and in fact it it probably rarely happens but uh the best place to begin planning uh with a business owner vis-a-vis business valuation is always right at the beginning because even these uh documents the Articles of Incorporation operating agreements they they will contain uh important elements of uh shareholder rights uh restrictions uh and uh the number of fares types of fares uh all of which ultimately will have some impact on a per share values or minority interest values as you later developed by celebrities or get involved in gift and estate tax planning um next slide and interestingly um covid has had many many uh uh effects on everybody's lives around the world and one of the more interesting outcomes I think has been uh what you might call a serbs in the number of new business formations uh so as this slide suggests one surprising phenomenon that came out of covid was was a rise in business applications as trapped by the Census Bureau and it wasn't just a little uh a little increase it it went from 300 000 a month up to close to 600 000 a month and stayed well above the earlier level uh in in to into into and throughout 22. uh so that that tends to both well for uh future business clients uh for advisors of all types next slide um now getting more into the uh details of uh such a relationship uh focusing on small business owners it you it can be used to uh assist with procuring insurance of different types uh you you will become more engaged in understanding the performance of the business and actually uh potentially uh becoming us an advisor uh in terms of optimizing business value uh over time um it will facilitate uh and uh any type of transition event uh maybe uh one key shareholder retires or uh uh or even businesses sold um it uh business evaluation will be in the met and uh therefore uh we have this Equity can can help you uh cement that role now uh let me just quickly say that the biz Equity tool as it exists today is generating what we call a 100 controlling interest value uh which means we're valuing the entire company uh all the shares all the partnership interests all the LLC units whatever they are and as as you know when it gets uh down to uh individual shareholder transactions uh whether it's gift and estate tax planning or stock option grants for employees it's my uh the minority interest values that matter and long story short a 10 interest in a business worth a million dollars will not be worth ten percent of a million dollars it'll be worth something less than that due to discounts for a lack of control lack of marketability and uh possibly lack of voting rights uh and I'm happy to announce that uh we are getting very close to uh introducing a new module in the business Equity system that that is specifically geared towards providing value estimates for minority interest so if if you're in any of those situations you'll be able to uh apply discounts for lack of control discounts for lack of marketability and hone in on those minority per share values so we're very excited about the about that and uh that should help out many of our advisors next slide and obviously as I've been saying business valuation can and and should be a central role in your uh relationship with business owning clients um you're you're not only providing a scorecard so to speak to evaluate uh your uh clients companies financial progress um you're you're doing so at a much lower threshold of cost and time for the client and uh even for the advisor by using the biz Equity tool um and uh effective business planning value optimization requires uh some business evaluation knowledge and that goes back to that uh investment of time in energy into business evaluation uh to enhance your capabilities and along those lines let me let me uh make one other kind of announcement um the biz Equity moniker has has uh always been discover monitor optimize it's on it's on our web page uh at the bottom uh and we we've we've obviously addressed the Discover meaning discover a business's value we've addressed the monitor the businesses value by repetitive valuations over time but today we haven't uh taken on the optimize component um that is what one of our top priorities for the next year uh to build into our model and system a an optimization component which would include some things like scenario planning and and even perhaps more important with respect to some of the discussions that we'll have shortly about startup valuation methods we're going to incorporate a discounted cash flow module uh to again uh just further round out the the depth and quality of the disequity offer um okay next slide uh and uh if you if you don't want to take it from me uh Warren Buffett has uh often spoken about the the uh importance of understanding business valuation and uh he he has said if Business Schools could offer just one course it wouldn't be any of the classes that are routinely taught now uh modern Financial Theory uh but it would be business evaluation the heart of investing and risk management and without it you are buying so uh that's a that's a pretty good uh uh uh advertisement for the importance of understanding valuation and um uh we we feel that uh it's a a good good way to go for our advisors uh now getting into the evaluation uh discussion over the life cycle of the business it's it's helpful to consider business valuation as a collection of valuation or evaluation rounds and and they're all a little bit different but then they also all have some tremendous similarities uh but but there's a significant difference between doing a startup valuation for a pre-revenue company versus doing a business evaluation for a business purchase using an SBA uh guaranteed student loan um so there there are uh uh similarities and and differences throughout these value worlds but that's part of getting in and and educating yourselves on uh business valuation and learning to walk the walk and talk the top uh next slide so Ryan is going to address this in more detail but just for uh perspective if you are of value a growing concern you're you're basically using valuation methods from one of the three primary approaches and these approaches are the same as what are used for Real Estate income approach Market approach and the asset approach um but I'll I'll leave uh that discussion for Ryan and we can go to the next slide uh big picture comments about business evaluation which are I think always a a a nice refresher for anybody who's dealing in the in the in the world of business evaluation and and that is uh for example the fact that every business evaluation is an opinion it's it's not a hard and true fact a uh provable uh quantity it's an opinion but it's an opinion based on Noble and agreed upon facts and General accepted business operation principles and procedures which the business Equity algorithm is reflective of um but uh in in a related vein there there is no such thing as devalue of a company and the reason is that there are many different types of value and values change over time um uh some of the uh major or important differences are for example the difference between an asset sale value and an equity loss the asset sale value is very definitional and reflects the value of the inventory fixed assets and all the intangible assets Goodwill uh covenant not to compete trade name Etc but the asset sale value does not account for cash receivables or liabilities that's where the equity value comes into play and uh so there'll be different values depending on what's being valued there'll be different values depending on the standard of value fair market value is the value to a hypothetical buyer investment value is the value to a specific and known buyer and then to top it all off every valuation method from every evaluation approach will be based on Myriad assumptions layered throughout the analysis such that If you hired five appraisers gave them the same fat pattern the end result would be a mean value around which the variance would be plus or minus 10 or even more uh and that's just the nature of the Beast so it's it's in in this world as an advisor it becomes important to to recognize all of these uh uh imperfections or distinctions uh but at the same time in a uh transaction setting for example uh the more you know the more you can make your case to support your your uh uh proposed value what whatever it might be um next slide so startup or new Ventures require unique perspectives and methodologies uh it will often depend on understanding promoters or stock promoters people who are involved and actually pushing the stock and promoting its growth but uh almost always it comes down to evaluating the the management teams their Vision the market potential uh technology competitive forces Etc so there's there's a much greater subjecting uh element in value uh startups and they'll be used to typically raise Capital via debt or Equity uh and they tend to be the domain of Angel Investors Venture capitalists and private Equity firms uh and uh even uh key employees uh to the extent that uh they'll be they'll be offered stock options at the very beginning of the company's existence uh so some of the uh potentially unique factors as compared to established firms would be of course minimal history perhaps no revenues or even negative profits um it may be a very unique company so it's such that there aren't any good quote-unquote comps um and uh the amount of information available may not be as thorough as you would like which uh could could include some speculative or aggressives of projections next slide uh Above All Else these startup companies are operating within a high risk environment and high risk environment means a higher discount rate when you're valuing those future cash flows a higher higher risk means a lower multiple would be applied or a lower capitalization rate um and uh as I mentioned there's a great amount of subjectivity in uh uh evaluating these startup companies because there's nothing not as much to sink your teeth into it requires diligence situation specific considerations many many methods have evolved uh to address startup valuation and we don't have time of course to go into all of them but I I picked a couple to just give you a a feel for what what they're involved what they involve but um uh if we go to the next slide um the first Chicago method is is one that you'll see uh bandied about and ultimately the first Chicago method uh it is is it a DCF method discount or cash flow method in most in most applications which means you project the future cash flows uh accruing to the owners the equity interests and then you discount those back in the present value and then at the same time you're assuming an exit after five years and you apply a multiple at that exit year and then discount that value present value uh with this the distinction being that the first Chicago method is based on modeling three different scenarios uh so the next slide uh well this slide illustrates that the first Chicago method is actually a combination of an income approach method and a market approach method the income approach component is the discounted cash flow production future cash flows available to the shareholders uh and the market based approach is applying an uh an exit multiple to calculate What's called the terminal value and then discount discounting that back into present value but the next slide illustrates kind of the Hallmark of the first Chicago method and that is that you you don't develop just one forecast you develop free forecasts one base case or maybe most likely case and then one on the upside one on the downside and then based on whatever analysis you can do you assign weights and then you end up with a weighted evaluation uh that reflects those sometimes but it's basically a DCF model uh using three uh different case scenarios next slide the scorecard method is uh uh what you would refer to as a market approach method basically and it's based on comparing the company that you're valuing to other similar Angel funded startup Ventures so so basically uh you want to somehow go out and find a similar stage investments in similar companies and uh list those values and then go in and compare your subjects uh to the group of comparables uh based on various factors which we'll see on the next slide uh so at the top here we see the comparables that were located and there there are various places that you can find those comps for similar stage uh uh valuations um but in this case the average of all those comparables was 2 million 725 000. so from there you evaluate the subject investment look at the management team size of the opportunity product technology uh etc etc and then you weight those factors based on assumed importance and you end up adjusting that average comparable value up or down depending on the the relative strengths and weaknesses of the target uh so that's an just another example of a startup evaluation method that obviously is fairly subjective but somewhat grounded in Market uh transactions uh involving similar stage funding uh events um okay thanks a lot uh there's there's a very uh interesting report that I would encourage uh uh all of you to consider buying uh it's it's not not expensive I think it's like 125 but it's published annually from uh Pepperdine uh University and it's called the capital markets report and it's uh it's based on importantly survey data so they go out and Survey hundreds and ultimately thousands of Angel Investors Venture Capital firms private Equity firms investment bankers business brokers business appraisers and they come up with all kinds of really interesting intriguing and insightful data and the next slide uh gives us some of the uh results when it came to Angel Investors and of course Angel Investments are are typically small at the very beginning at the seed stage anywhere from 25 000 to a million uh and I have some statistics that I'll show you momentarily to give you precisely insights but note that about a third of the respondents are basing their valuations on that field and and that again that's just the the subjective nature of startup valuation uh when they when multiples were used uh you you can see that Revenue multiples were the most prevalent and and that would be largely because there may not be any earnings or ebitda but there could be some Revenue um and uh uh I think that's good uh for now you of course you can come back and and review these uh additional details or actually go uh look at the report online I think you can actually download the historical reports free online um let's go to the next slide uh so here here is one of the many tables that they created for uh angel investor uh Animas so you can see that as you go from seed to Startup to early stage to expansion to later stage the size of the investment Rises the average revenue multiple Rises uh but the percent of equity being purchased Falls which is more or less what you would expect um but you can see that uh you know at the median the uh the investment amounts are pretty small and the revenue multiples are between two and three times um next slide uh so these Angel Investors again uh were surveyed and here we see again that roughly a third you base their valuation on that field beyond that they used to use discounted future earnings or discounted cash flow uh capitalization of earnings guideline transaction method uh kind of a typical uh array but gut feel of course is the most uh interesting outcome uh next slide so moving up the uh scale so to speak from Angel Investors to venture capital investors the valuation methods that they're using are first and foremost last round of financing which means they base their valuation today on what an actual investment uh what that was made within the previous six months uh and obviously if there have been major events that unfold in those six months that may not be a viable way to go but there are many times when uh a different valuation is needed for a different reason three months later and they'll just look to see well what did somebody pick you know and was it an arm's life transaction and if it was well that's a good estimate of value next in line is the VC method or discounted expected exit Value method and the Venture Capital method is basically uh a uh quasi discounted cash flow model where you're projecting the terminal value at the time of exit and discounting that back in the present value and there's there's obviously a much more to it than that but it's uh it's it's essentially what I just described and even Venture capitalists are using gut feel 14 of the time uh next slide please um and here and and when Venture capitalists are using multiples 63 of the time they're using a revenue multiple uh so again same notion even Venture Capital firms when they get involved there may not be substantial earnings or even Donald and as a result they are almost forced to rely on using uh Revenue multiples uh and then various uh cash flow earnings multiples uh are used as well but to a far lesser extent uh and then the next slide takes us into the realm of more established businesses and investment banker uh uh survey data and you can see the valuation methods uh change uh completely whereby uh the the big uh the main method is the guideline company transactions method which is to say they're looking at what did other similar companies sell for uh Accenture and then also uh capitalization of earnings uh I'm pretty sure that second one would be uh discounted cash flow I don't see that they put a title there but I'm pretty sure that's what that would be so a multiple period discounting method or DCF discounted cash flow is a common method and then a capitalization of earnings method is actually just a subset of a discounted cash flow model where you're you're only uh uh projecting one year of data and then capitalizing uh that estimated value um and in terms of multiples when they do Use multiples uh of course we we switch completely from revenue to recast adjusted ebitdown multiples and adjust it even though is essentially similar to what we call discretionary earnings in In The Biz Equity uh module but clearly the earnings take take over the cash flows take over once companies are established next slide and I include this just to give you a rough feel for some of the average multiples that are that are out there and and this was a survey uh at the end of uh 22. um and of course what you see in every single one of these uh columns or Industries or types of businesses is what we call the size effect the size of that is one of the most important components of business valuation and it is simply the case that as a company's earnings rise the multiples rise so Main Street companies like downtown uh downtown's small town downtown restaurant uh maybe two two times three times discretionary earnings but to get into a middle Market manufacturing company uh then you're talking more like four three four to six times uh discretionary arms and even higher and then of course the largest companies of all are the publicly traded companies and they're selling now for something around 23 24 times after tax profits so it's basically higher greater earnings higher multiples um and that is seen uh pretty much across the board and all these different types of uh businesses uh okay uh next slide uh and I'm going to close with a discussion of of what what they refer to as the valuation Gap and basically the investment bankers were surveyed as to why why did their businesses not sell uh so so over the course of a year they get you know uh 20 businesses to sell they may sell eight eight of them uh or six of them and they're the and when you ask why did they not sell what happened what was the problem the number one issue was evaluation Gap in pricing which means that either the buyer thought the asking price was too high or the seller thought that the offer value was too low and this is where the the where negotiations obviously become important and uh you you can't effectively negotiate a a optimal deal price if you don't understand the basics of business valuation and are are capable of making your case and obviously investment bankers are uh in in most cases capable of doing that but it's uh it's just intriguing to see that the valuation Gap was the the main reason why the deals didn't didn't sell and in terms of the size of that valuation Gap um you can see that uh uh eight percent were between one and ten percent a small Gap and and and and and so on uh you can interpret the the chart but uh it's not a small Gap and um the the main point here is that the more you understand about business evaluation can talk the language uh walk the walk talk we talk uh the more you can help whatever side of the transaction you might be on um all right and now uh I'll turn turn it over to uh Ryan Thompson all right and thanks God you know really good information there around you know evaluation in in the startup phase um you know but you know kind of building off that naturally you know a business that survives the initial startup and growth stages you know it's going to move into a more mature or established realm and you know there's no obvious or definitive line that you're going to cross you know between a start of a maturity phase however you know we can look to certain characteristics of the business to determine you know if it's in this stage so one sign of mature company is that the patterns are going to begin to emerge and be stronger and the company's metrics are going to be more predictable the company's growth patterns are going to be more consistent over the long run and revenues and expenses are more stable and the profit margins are going to be a lot more static yeah you know and additionally um these companies tend to have you know a strong and recognizable brand customers are going to be placing you know more trust and uh into the brand and they're willing to pay a premium for you know the businesses products and services and then depending on the nature of the business they're also likely you know to be a higher percentage of repeat customers who continually come back and purchase the goods or services and potentially even recommend you know the company to their friends another feature is an experience management team that has been with the the company for a long time at this level you know the leaders have a deep understanding of the business and the customer base and they're going to be able to make those strategic decisions for the company and then a final indicator here is strong financials for the company so obviously you know like we said a mature business is going to have steady growth they're also going to have consistent profitability and a healthy balance sheet um you know they might have multiple different Revenue sources that are well established and they're able to generate cash flow that can be returned to shareholders and reinvested in the company so um you know a little bit different than some of the approaches that Scott just went through you know once companies Reach This maturity stage the methods tend to get you know a bit more um conventional than the early stage companies and you know Scott touched on these briefly as well but you know I understand he's as an advisor and a business owner can be you know pretty helpful um you know with clients that have mature businesses so as the company progresses out of these stages we're going to fall back more onto these traditional approaches the asset approach the income approach and the market approach however for the majority of mature operating companies they're most likely going to have steady cash flow and be operating as a going concern so that's going to make you know for for a majority of cases the asset approach a little less relevant so the asset approach in those cases is generally considered the floor value because it doesn't really take in the future earning potentials of the company which is a pretty key factor in determining value you know as we move into established companies that focus is going to shift more toward the income and Market approaches under the income approach the two primary methods are capitalization of earnings and discounted cash flow and just you know just like Scott said a DCF method essentially keeps cash flow into the future and then discounts it back to today in this method even with mature businesses can still be used but it's more common when management expects fluctuations in the business you know or when valuing that those startups are high growth companies under the capitalization of earnings method you know the business is essentially um the value of the business essentially estimated by dividing its earnings by a cap rate and that cap rate reflects a rate of return required by investors to invest in the business and this method it um is used when the company's earnings are expected to be more consistent and for most mature companies this is going to be one of the preferred methods and finally we have the market approach which tends to be a more user-friendly approach with the idea here being that um you know you could take a business and look to you know in reference reasonably comparable guideline companies or comparables that for which the actual transaction values are already known and this content is very similar to real estate where you know you might price uh your house based on what your neighbor's house sell for so with a company you know there might be a similar company to yours that sold for one times revenue and you see a sale of that so you know it could follow that your company to potentially sell for that as well and then another good thing about them Market approaches as these companies reach maturity phase the number of number of comparable companies starts to expand right when you're when you're in that startup phase you're a little bit more differentiated uh and then as you grow you know there's there tends to be more companies that at least could have some similar characteristics to you so you know with a better understanding of these methods you know we can take a look at you know how valuation can be leveraged over the business life cycle to meet you know the goals and needs of the business owner so you know as the business becomes more established it's reasons for requiring evaluation become more Dynamic um it could be that the owner wants to review their insurance coverage maybe they're planning to you know gift the piece of the business or just spot check where the business currently stands uh regardless of the issue you know understanding of business evaluation can you know Assist in numerous um events over the life cycle you know another important thing is over the next two decades you know it's expect that trillions of dollars are going to change hands as Baby Boomers exit their business and advisors who understands the needs um the business owning of their business and our clients rather and understand the aspects of business value uh are going to be able to better position themselves you know to assist those clients who are exiting as well as those who are going to be inheriting those businesses so you know over the next couple slides here we're going to provide a high level review of um you know some events that might necessitate uh evaluation of the business so uh first being you know um some Buy sell insurance so you know once owners reach a certain level of maturity once the business does rather you know they're going to switch you know the tone a bit from when they were a startup and you know things are going to slow down and they're probably going to make sure they have the proper risk mitigation um efforts in place so you know part of that might be you know reviewing the buy sell agreement typically these are set you know early on in the company but a lot of times they fall to the Wayside and you know owners don't revisit them however you know as the company grows um the value is also going to grow so whatever value was you know originally set to fund this Buy sell agreement might want to get visited you know periodically especially when there's material changes to the business a few other here that can be tied to the value of the business again uh disability buyout insurance so um you know the business owner may already have a business or excuse me buy sell agreement that's set up and clearly indicates you know how the shares are going to be repurchased when the you know the owner passes um but what happens if an owner becomes incapacitated from a long-term illness or injury before that well the disability buyed Insurance funds the buy sell agreement to buy out a totally disabled owner um and again it can help with less disruptions to the operations of the company and it's important to periodically review that buy sell agreement and the funding vehicles to ensure they're keeping Pace with the current value of the business and again overhead expense Insurance you know that can pay a benefit to help you know cover operating expenses such as payroll in the event that the owner can't work and while this isn't directly tied to the value of the business uh periodic business valuations you know as part of that you're reviewing the expense levels of the company so it can help ensure that you know you're choosing the appropriate coverage amount so possessing an up-to-date evaluation helps owners purchase the protection they need without overspending or underspending and advisors have a clear opportunity there to provide some valuable guidance to their business owning clients about the importance of uh insurance and those coverages foreign clients you know your client might be looking to expand the business and once a business reaches a mature level you know some can fall prey to complaints excuse me complacency and take for granted that the business will continue to have consistent results in the future one way to keep ahead of that stagnation is you know a continued focus on evolving and growing the business over time and mature businesses will generally need to look as to whether they're doing internal growth or external growth to expand the business with internal sources the business might seek to offer new products or services or focusing on capturing a greater market share established companies might find it easier to grow externally through mergers and Acquisitions M A Acquisitions allow the company to purchase another business that is sometimes complementary to their own and access a new market or acquire new customers mergers are another common way to grow a company and they can allow for increased sale or increase scale and resources either way valuation is a key component in the process when you know considering the expansion of a business through external sources so while might seem obvious the valuation can provide you know Insight determining the appropriate price paid for the Target company and it generally involves analyzing the target company's financials Trends and other factors that provide insight into profitability liquidity and debt levels all of which are helpful in evaluating the financial health of the company so you know with a clear understanding of the company's value and financial help the acquiring company you know can negotiate a fair deal that's beneficial to all parties uh one thing that's almost certain to come up is uh gift and estate purposes so a business is something that an owner might choose to pass down to their spouse children or another party and one study found that as many as 37 percent of business owners want to transfer the business to a family member as part of their exit so uh when an owner wants to gift all or a portion of the business you know a formal appraisal you know might be required um so that they know how much they're gifting and the recipient knows how much they're receiving uh one thing to be mindful of is the federal exclusion threshold so if a business owner gives more or gets more than the annual gift limit amount they're going to need to file a gift return with the IRS I believe currently in 2023 those limits are 17 000 per individual uh and 34 000 per married couple on an annual basis and those change each year and then once the owner has given more than those annual amounts they begin to eat into their lifetime gift and estate tax exemption the current lifetime exemption is about 13 million per individual however uh the current policy is in place uh that's expected to Sunset by the end of 2025 and the lifetime limit could drop nearly in half to about 7 million per individual so that's definitely one policy to be mindful of uh for many small businesses that's not going to be an issue however for large businesses you know if they're going to want to make sure they're they're ahead of that and taking that you know into account uh for proper planning and mitigating any future tax ramifications and then another important aspect of this in estate purposes uh Are the discounts that Scott uh mentioned earlier those being primarily discount for lack of control and discount for lack of marketability which really allows a business owner to transform more of the business at a lower price and these can be a very effective tool and planning for gift and estate purposes so understand the value you know the advisors and owners can work in Harmony and plan the right strategy for the client as well as the timing of any gift another thing here so uh when even when there's no immediate need for a transaction and you know there's nothing on the horizon uh business valuation is still helpful in the client and you know growing the business and acting as a report card so performing business valuations can identify strengths and red flags and opportunities for growth and you know they can be useful in preparing an effective growth strategy and setting goals for the company additionally valuations typically include some sort of ratio or Trend analysis analysis and certain ratios are calculated such as debt to equity or fixed asset turnover which can be utilized to identify the company's internal Trends over a period of time Additionally the company can use these results of these ratios to Benchmark their performance against industry peers which provides very valuable feedback for how the company is performing and then having periodic business valuations really acts as a report card for the business so it's it's a great opportunity in that it gives owners a fair sense of what their business is worth um which could be different than their expectations owners you know might overvalue or undervalue their business so periodic evaluations can really give them a frame of reference and with this you know with this business value information um owners can take actionable steps to increase the value of their business whether it's you know increasing profitability or lowering risk and then they can compare these results you know to their previous results so it really acts like almost like a quarterly report card and have self evaluations and ensure that they're on the right path thank you so it's as far as planning goes that's made of that you know on average 75 or more business owner's wealth is tied to their business however most business owners don't know what their business is actually worth so this creates an obvious concern you know when you're trying to plan for any future needs uh planning and business valuation really go hand in hand um it'd be very hard for an advisor or an owner to have an effective planning process in place without at least a feel for what the business is worth the exit planning Institute estimated that 83 percent of owners are privately held businesses had no written transition plan um you know by including valuation the planning process an advisor is in a better position to assist their business owning clients and they can really help increase the long-term value of the company um so evaluation also provides more clarity into the total planning process in regards to timing of an exit or retirement goals so you know it's often the case that the owner has an unrealistic view of what their business is actually worth if the business owner undervalues the business you know they might remain working in the business longer than they should have uh when they other otherwise could have exited meeting their actual retirement goals and then you know on the other hand an owner might naively believe their business is much more valuable than it is leading to distorted retirement goals so really just to recap there advisor who can understand or at least gain an understanding of evaluation is better to serve you know their their clients planning needs for the future and then finally here we have uh exiting the business so at some point a business owner is going to exit the business whether it's gifting uh through the state closing the doors or selling a business and you know it seems obvious but reviewing the business value when the selling the business is Paramount some owners will simply just list their business for sale with the preconceived price uh without actually giving you know additional insight and valuations are helpful because they can you know reveal areas where the business may be able to approve its financial performance and by analyzing the business financial data the valuation process can highlight areas where the business really is underperforming which can be addressed before you put it up to the market on that same note knowledge of the business value also helps determine the best time to sell a business the seller might realize you know by getting evaluation the value is lower than expected and they can wait uh to list the business until a more opportune time understanding worth is really key obviously to negotiating the sale of a business and getting a good deal without a reasonable expectation of the value an owner might have an inflated view of the business and inadvertently turn away a qualified buyer or you know the seller could not understand you know a reasonable price that was offered um and accept a low ball offer effectively leaving money on the table so you know when contemplating an exit it's useful to consider you know a preliminary evaluation which can allow you to get a feel for what the business is worth uh and give them insights you know for the owner to act upon and really it gives the advisor and the owner a long enough Runway to effectively plan for an exit so uh just a couple uh cleanup items here so in support of today's webinar you know we'll be providing this presentation uh for you to take a look at which provides some additional bonus slides around business valuation that we couldn't get to today and uh there's also going to be several white papers that can be made available that cover a wide array of topics including you know commentary around the 2023 economic Outlook and business valuation related material and with that I'll pass it back to Sammy for any additional comments or questions thanks Ryan move on to questions now feel free to drop them in the chat we currently have one question for Ryan and Scott what approach does bazequity use I'll take that one Brian um well we we are you could say It's a combination approach but it is primarily a market approach driven uh methodology whereby the uh industry is selected by by the user so the multiples that we're using come from a variety of the uh the best transaction databases in existence and uh so in a in a big picture the multiples are industry specific their size adjusted as I discussed earlier multiples rise as the earnings rise and their company specific risks reflective which is to say that as the user goes through the seven step tool the actual final multiple will will be raised or lower depending on uh the results so for example there are a number of slider questions importance of the owner the amount of recurring Revenue customer concentration uh all of those things will push the multiples up or down depending on the uh the situation that's at hand in addition uh some of the balance sheet entries will impact that actual final multiple uh for example if the inventory and and or fixed assets are uh greater than the uh industry Norm uh that would have a a positive effect on the uh multiple but in in essence we're using a multiple of discretionary earnings to to Value uh most companies and discretionary earnings is the broadest most complete measure of cash flow available to a single owner working on a full-time basis so discretionary earnings are basically equal to ebitda earnings before interest passes depreciation and amortization plus the actual compensation paid to a single full-time owner operator and then adjustments are made in the tool based on uh uh analysis to ensure that that owner compensation entry is correct in those cases where for example there are multiple owners or a passive owner um so all of that is uh is addressed and that multiple discretionary earnings leads to uh what what I referred to earlier uh called the asset sales value and this multiple and measure of value Asset sale value is is a uh generally accepted value um quantity that Bankers use appraisers business appraisers use and it's specifically it reflects the value of the inventory the fixed assets and all the intangible assets uh as I mentioned before Goodwill trade name customer base uh covenant not to compete Etc but then we use that asset sale value as a foundation for determining the equity value and depending on why you're doing the valuation either the asset sale value or the equity value will be uh more important and the equity value is broader in that it reflects the value of all the assets all the liabilities known and unknown uh and specifically it incorporates the cash receivables other liquid Financial assets but then also backs out the liabilities but so we're primarily a market approach driven engine but we also have a kind of a quasi discounted cash flow uh component for high growth High profit companies uh which uh is uh incorporated into our growth sliders and then as I mentioned earlier uh we're uh as part of our work on the uh the optimization component of our system we will be developing and incorporating a discounted cash flow model which will be available as well uh I I'm not sure exactly sure when that will be but uh it's on our roadmap so primarily Market approach method based on five digit Nicos code and transaction data from the the leading uh transaction reporting service in in the world uh but also an income approach uh component great thanks Scott one more question here before we wrap up why would a business owner use Biz Equity instead of their accountant uh yeah I think um you know they could it's not to say one or the other it's you know you could use your account in some ways obviously some people are going to be comfortable with that but I think the tool also provides a different perspective right it's more of a software you know driven capability and it can get to you know a couple different estimates of value so you can see a few different things now typically you know accounting might um you know they might be able to come up with one value they could calculate them all but their resources you know unless they're business appraisers are likely more limited they might not have access to the same uh you know ratio databases or industry multiple databases um so the result could be a bit different and then it also depends if the CPA you know is a you know uh ABV with um with the aicpa or some other sort of credentialed valuation analysts that you know could really get the job done and I think the you know it's important to to state that this Equity is is not a tool that you can use to uh support and estate and gift tax return it's not a full and formal appraisal as uh required by the IRS but it's incredibly accurate uh and I say that based on the fact that you know we we now have thousands of users and hundreds of financial services companies that have all vetted tested uh poked and squeezed and uh you know looked at endlessly and uh they they came to the conclusion that it that it is accurate within the sense of what I described earlier uh you know evaluation is an opinion it's an art and a science and there is no such thing as devalue but uh it's uh incredibly uh surprisingly accurate for a software tool but not so surprisingly to me because it is essentially mimicking what what I would do in most cases and performing a real world evaluation of a an operating company great thanks Ryan thanks Scott so to wrap it up here today we will follow up with the questions we didn't get to live there will be a follow-up email with the presentation and content after the webinar concludes any questions feel free to reach out and thank you for joining us today okay thanks Tammy thanks Ryan and uh thanks to everybody for joining