Business Valuation Process with Terry Lammers - a podcast by Michael Veazey

We talk about the business valuation process with Terry Lammers. Who helps people buy and sell the business; values businesses and coaches in the programme.


Terry Lammers of Innovative Business Advisors https://innovativeba.com/

Terry helps people buy and sell the business; values businesses and coaches in the programme CEO to CEO “Chief Everything Officer to Chief Operating Officer”Terry’s book:
“You don’t know what you don’t know”Everything you need to know to buy or sell your business
Getting an accurate valuation of your companyWhat are the classic errors that people make?

People overvalue their business!Terry has trademarked the “bankability method” - they usually value the business in the way a bank would:

Can you make a reasonable downpayment at the bank and buy the company within 3-5 years?That’s the main deal for buyers.
What do we need to think about when selling?The main part of the value comes from accurate financial statements.

This is something many business owners or managers struggle with, even those who run quite large businesses.Normalising the statements
Terry has owners go through “Normalising” financial statements.Which includes:

Depreciation and AmortisationSeller discretionary earnings
EBITDAEBITDA is NOT pre-tax profit!
Your company is not about sales and net income, it’s about Gross margin and cashflow.Depreciation

Depreciation is a non-cash expense you use to write down.You can take a large chunk in one year “USA” eg buying a truck
Normalising owner’s salary Sometimes the owner doesn’t pay themselves anything. If so, they need to add in money to account for this.

If there is an overpayment of salary eg $300K pa for a $1M a year revenue business, you add back in the difference. In this instance, you might add back $200,0000 to the net profit and take just ascribe $100,000 to the director’s salary.When you have expenses like cellphone bills, you need to be able to invoice the company specifically for bills.

Saying that of $10K for phone expenses “about 3K is personal” is not going to be popular with any buyer of the business.Determining fair Director’s salary
In the USA, the Bureau of Labor Statistics can give you a fair number.If a company cashflows $100K a year, if a fair salary is $50K, it only gives the company a profit of $50K for example.
What do you do about any equipment?Say a computer or a machine - you buy this to create cashflow.

If the value of the cash flow exceeds the value of the equipment, you have goodwill in the company.Book value vs market value
Excavating companies have a lot of equipment.The “Book value” of the computer does not represent the “market value” of the computer.

If you have a computer worth $1000 new, and after 4 years, the book value of it is $200, you can sell it at “book value” of $200. But that doesn’t tell you about the cash flows which that asset enables the company to generate.Owner involvement in the valuation 
Owner excessive involvement doesn’t do much affect the financial valuation of the company. But it may often push a company from sellable to unsellable.Financial vs Strategic Valuation 
Financial valuation If $50K is the profit (Cashflow), $50K manager’s salary.

Start with $50K as the cashflow.Then usually multiply 3-4X to get the business valuation.

Strategic ValuationTerry sold his business for a large multiple because it was a valuable strategic purchase for the buyer to eliminate a strong competitor to the market and had a lot of assets.
MultipleCompany value is usually a multiple of EBITDA.

But the multiple is not set - within the “bankable deal” theory it’s based on cashflow. (Debt service coverage ratio)Bankability
The bases of any loan are collateral and cash flow.Collateral
What can the bank put a lien on that they could sell if they don’t get paid?Most of the time,

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