Welcome to the “Show Me The Way” podcast with David Seitter
Ep. 11 — How a Business Evaluator Values Businesses with Stephen York
In this episode of “Show Me The Way,” Dave sits down with Stephen York, Exec VP of Stern Brothers Valuation Advisors, to discuss how businesses are valued, advice for people looking to buy or sell a business, and pontifications for the 2023 financial year.
Introducing Stephen York, Exec. VP at Stern Brothers Valuation Advisors
Dave asks Stephen to introduce himself and give a bit of the background, all the way back to the UK.
- Stephen begins by noting that while he was born in Britain, he was raised in Kansas City.
- He discusses his career starting at PWC, to being Controller for a publicly traded company, and then after the acquisition of that company began working for Sears in Chicago.
- He talks about his time as Chief Accounting Officer of Sears, and what that job entailed.
- From those experiences, he said he looks for jobs with companies that were looking to be acquired or acquiring other companies.
- After deciding he could do more good assisting clients in the area of company valuation, Stephen says he joined Stern Brothers.
How a Business is Valued
Dave talks about his interactions asking clients what they think their business is worth, and then asks Stephen when people selling a business should contact a valuation advisor.
- Stephen says business owners should become familiar with the standards and procedures evaluating their company, but often are caught up in the day-to-day of running their business.
- This, he continues, leads to inconsistent accounting, which may lead to issues when due diligence teams give the company a valuation.
- He notes that their job is to clean up financial statements so that any potential buyer will respect the financial statements, and have a good idea of what to expect if they were to buy the company.
Dave flips the question around and asks Stephen how he handles valuation when working with someone wanting to purchase a business.
- He says their number one charge is to determine how long it will take for an investor to get their money back.
- Stephen says they look at quality of earnings, sometimes alongside an outside CPA, examining tax exposure, weigh potential risks, discounted cash flows, etc.
- He says lastly his team will examine different deal structures, and then discusses old deal structures that are coming back into favor again.
Buyer vs. Seller Business Valuations
Dave then asks what the work looks like when doing valuations for a lender.
- Stephen says this typically involves three types of reports: valuation of stock or debt being sold, financial fairness opinion, or a solvency opinion.
- He also discusses what each one of these reports look like, going into depth on the solvency opinion.
- He adds that a lenders love tangible assets, but intangible assets such as IP also need to be valued and taken into consideration.
Dave questions what the client engagement timeframe looks like from a seller side versus buyer side.
- Stephen says the seller side is usually about six months.
- From the buyer side, he talks about how the due diligence process has changed, as it is mostly online now, which speeds the process up to 90-120 days.
Dave then asks Stephen about any interesting stories from business valuations that he has experienced over the years.
- Stephen recalls a story from 2005 about raising funds from multiple investor rounds, noting how the company increased in value and cash flow over the following years.
- The same company, he says, years later went through another investor fundraising round, ultimately increasing cashflow after again.
- He says the owner lost control of the company over the course of those fundraises, but became incredibly wealthy even though he was no longer owner of the company.
- He leads this conversation into how the best thing sellers can sell is future growth of a company, and why this is.
Advice and Projections for 2023 Financial Year
Dave asks Stephen about what attorneys do right or wrong when working with a business evaluator.
- Stephen says the best thing to do is listen more to a business evaluator, rather than asking for what price they want the business to be valued at.
- He adds that there is no email or note he can hide from a subpoena, unless invoking his own attorney, which results in skyrocketing costs.
- He discusses how the economy also affects the perceived value of a business.
Dave pontificates about 2023 and asks Stephen what he predicts this new year will hold for mergers and acquisitions.
- Stephen clues in on a few things such as the tax cuts and jobs act of 2017 will expire at the end of 2025, and discusses the ramifications of this.
- He continues, noting that the baby boomer generation is dying off, and along with that comes very large transfers of wealth in the form of privately held investments.
- He concludes that valuation multiples are down, and explains using some quick math to explain what this looks like today.
Dave follows this line of thinking by asking how inflation has changed valuations over the last year and a half.
- Stephen says that inflation isn’t the primary driver, but rather the struggling supply chain.
- He also describes the importance of environmental, social, and governance controls (ESG) in the purchasing decisions of buyers.
- He continues by drawing conclusions of the swinging pendulum of the American economy, and how expectations of volatility play into valuations of businesses.
To conclude, Dave asks Stephen to give a few pieces of advice for someone interested in transitioning their business.
- He begins by saying to hire an outside expert to review your financial statements and administration policies, and clean them up before going to sell.
- He also says to consider how you title assets of the company, especially if you are leasing equipment.
- He concludes by saying to not wait until you’re forced to sell, as that will drive down the price.
This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship. The recommendations contained in this podcast are not necessarily appropriate for every individual or business. In determining the best course of action, business owners should consult with an attorney on their distinct circumstances.