Terminal Value

Selling your Business to Yourself with Richard Claywell

Janine Bacani

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We have Richard Claywell with us today, and we are going to be talking about selling your business to yourself, which is a little bit of a play on words, but so Richard specializes in in business valuation. But one of the things you really have to ask as you’re building your business is, is this something that I would want to buy if I didn’t already own it and it was available for sale? Because that line of thinking is what will take you toward the types of things that will actually make it more valuable when it comes time to sell it. Richard, please introduce yourself and don’t let me talk too much. 

My name is Richard Claywell. I’m a CPA, and I’ve got multiple designations related to business evaluations, and one of those is a certified business appraiser, which is one of the most difficult ones to get. I’m also the chairman of an international business valuation group, and we teach people all over the world how to value companies.

Outstanding. Outstanding. Well, what would you say? Because I think there’s some of the obvious things right, which is going to be stable cash flows, EBITDA your earnings before interest, depreciation, taxes, and amortization. I think I got all those right. Those are your typical things that you use for evaluation. And then a lot of times what you’ll do is, depending on the model, you’ll put together some kind of future discounted cash flow or multiple based on your industry niche or whatever. But what are some of the other factors or other methods you’ve seen that are less intuitive now? And with that said, I should say that I’m probably giving away my age. I did my undergraduate studies in the late 1990s, and everything was about net present values, discounted cash flows, et cetera. I’m sure there are multiple other methodologies for evaluating businesses or other factors that have come into play. 

There are there are actually three different approaches that, when you value a company, you should consider, and that’s the asset market and income approach. You don’t use the asset approach unless there’s not enough cash flow being generated through this kind of cash flow or discounted earnings methodology in the market approach, what we try to do is go out and find public companies. If we can find any that are comparable to your company, or we’re looking for sales transactions where people have actually sold those. And the theory behind that is, if you look like a duck, you probably are a duck. So you go out and look at these different multiples that are out there, and if certain range, then they typically sell, say, 50% of earnings, and that’s where you fit in. Then you would look at your earnings, multiply by 50%, and you’ve got an answer for what potentially that company can sell for. 

Yeah, well, you said potentially, so I think that’s a box that’s important to unpack here because I would imagine that for a lot of small businesses, especially if it’s something that’s been bootstrapped up from somebody’s bright idea, then you’re probably going to have a lot of systems and processes that are pretty chaotic. And when people are buying businesses, chaotic systems and processes are not usually things they like to see. In your view or in your experience, what kind of impact does that have on the valuation of companies that they can expect if they’re trying to go up for sale?

 It actually has a tremendous impact on companies. And the reason for that is if you want to sell your company somewhere down the road, I’m going to come in as a buales yer, a potential investor in your company, and can I operate it without you? So therein lies part of the problem because you know what you do and how you do it, and you’re probably the only person in the entire company that knows that. So if you die today, you’ve lost a tremendous amount of value and you’ve lost intellectual property that’s in your brain. So that information needs to be documented. What are your processes? What are your procedures, and how you do that? Now, that’s probably extremely sensitive information. You don’t want everybody in the world to know that. So go out there and create a subdirectory on your server. Have your It guy set up a separate directory for that for you, where you have to have passwords and that sort of thing. That way, personally, if I’m an employee, I can’t get in and see what you’re doing to take that information and become a competitor. But all that information should be documented on what you do and how you do that. Part of that process. I believe this gets to be a pain. I know that it’s for the business on, say, a couple of two or three weeks, maybe a month, to jot down everything that they do. Because if you’re an employee and you have a job, you do this, you do this, you do this, you do the same thing day after day. Some minor changes, but with the business owner, virtually never the same thing. What you do and how you do that. So that when I come in as an investor to take a look at this, this is all documented. I know what you’re doing. I know how you do it. That makes it more valuable. 

Yeah. Got it. The thing that I’m thinking when I listen to what you’re saying is that it’s actually remarkable how much of real business success comes down to good operations. But if that doesn’t sell books, that doesn’t sell that doesn’t sell courses, that doesn’t sell consulting gigs, but operations is just really dialed in. Processes, standards, you know, repeatable operations is just so critical to business success. It’s just something I see over and over again. But I find it fascinating how little mine share there is for operations. Just kind of out in the I guess it’s out in the business influencer community. 

Yeah, and I agree. But again, I said a while ago and this is what I believe is the business owner needs to document that someplace, I quote, put somewhere where him and his wife, his best advisor, attorney, financial planner, CPA, somebody that’s not going to be a competitor if I die or I’m disabled. Here’s where you need to go to. I’ve actually got a SubDrive set up where my wife’s got dimension, so I have to contend with that. I’ve got a SubDrive set up where she gets to the point where she just can’t do anything and I need some help doing this or whatever. There are certain people that know to come into the office, this is where they need to go to. Here’s everything they need to know about our personal lives. And then one of them is a CPA, but they know where they go to to find the information. So the business owners got to document that, nothing else. When it comes time to potentially sell the company, you can tell the potential buyer, this is what I’ve got. Here’s what I’ve detailed, all these operating procedures you just mentioned. Here’s how all this stuff works. Here’s managing this. How do we get from point A to point B? I’m not going to give it to you unless they sign a nondisclosure agreement free, because that’s extremely valuable. It’s a trade secret is what it is. Valuable information.

 I think that’s really critical. In a similar way, one of the things that I try to do is either things that I’m doing or things that have virtual assistance doing. I’ll try to either myself or have them basically put together in a pretty simplified standard operating procedure. Basically just document what they’re doing or if there’s something that I’m looking to have somebody else do. What I’ll do is I’ll turn on. Zoom. I’ll screen share. I’ll record myself doing it and talking through what I’m doing and then basically put that up on YouTube as a private link. And then you’re included in a standard operating doc. Because I think and if you could just do say. Three or four of these types of things a week. Eventually you’ll start filling in a lot of the processes for your business and it’ll take a lot of the guesswork out of it because I know you were talking about the trade secrets. Although at least in a lot of small businesses. One of the things that I’ve observed then I’d love to know if you feel differently. But one of the things that I’ve observed is that in a lot of cases. A lot of the value of the business is around the branding and communication. Frequently around the owner. And so even if I took everything you did and tried to do it exactly the same way as you, I would not necessarily be able to get the same results as you if I’m doing things the same way as you just because it’s comparatively few businesses that can basically brand and market themselves completely based on the business without having interaction from the owner. I’d love to know your view there because I am very open to being shown where I’m incorrect. 

Well, I don’t think you’re incorrect. I think I’m going to answer your question for you.

If you and I are going to do the same type of thing because of your experiences, you grew up completely different from the way I grew up, and I’m going to do things differently than you do. It doesn’t mean that you do it right or you do it wrong. Doesn’t mean that I do it right or I do it wrong. It’s just the differences in the way we do that.

But the owner, what I think they need to do is they need to have these procedures and make sure that people are following those procedures. They don’t have to give it to them. So there’s some consistency so you can develop that brand. Now that we’ve got that consistency, three, four, five years from now when I want to sell my company, everything is working the way it’s supposed to work. I’ve got occupation on it. Everything should be pretty much okay, but those employees will train new employees do it the same way. So now you have the consistency

Got it. All right. Well, I think we’ve been exploring some of the real facets of how you really make your business sellable. Let’s unpack the idea of, as I like to say, selling your business to yourself. And the way that I think about it is, say about every year or so, you should really say, okay, if my business was up for sale, would I want to buy it? And I don’t know that you need to actually facilitate a sale to yourself that will involve transaction costs that probably aren’t necessary. But I think what it does is where you say, okay, if I was going to buy this business, what would I be telling my counterparty that I still want them to do or what are the most important things for them to go out and do? Before, I would say I was comfortable buying this at a market multiple or at a market rate. And because I think that’s probably the most effective way to figure out where to start with what you’re talking about is to say, okay, what are those missing pieces of processes, information, documents, whatever, that I would want to see if I was looking to buy this from the buy side as opposed to the seller. Let me know your thoughts on that kind of on that framework. And if there’s any way to augment.

What I would recommend is that it’s kind of expensive at the start, but the costs go away for the biggest part of it. What you need to do is what you should do is get the company value when company we’re looking for the risk from the skeletons, what needs to be improved, that sort of thing. So we can just do without doing the evaluation, which those are some problems. You can’t measure the impact of what you’re changing, but identify all those weak points that your company has that equates to the risk. The higher the risk, the lower the value. So if you get evaluation the first year that you do this, identified all those things. Well, now we know what they are, what is it that we need to work on? And we help clients with what we call profit enhancement. We can go through there, we’ve identified those, we can actually work on those. You don’t necessarily have to have evaluation every year. They’re expensive. Yeah, but maybe every couple of two or three years or so, because now we’ve gone out, we’ve addressed these specific issues. We’ve got a new cash flow methodology or some better improved market multiples, that sort of thing. And now we can apply a discount rate or a market multiple modified for the improvements that you’ve done, so have increased the value of the company. Or not. 

Got it. As I’ve gotten older, I’ve gotten an increased appreciation for simple processes just because complicated things tend to fall apart very easily. But I like that it’s a pretty simple process because, of course, I would assume you want to get to where you’re at least at a break even or have some degree of profitability before you go through the process of getting valued. I think up until that point, you’re really establishing viability or I don’t know, do you think there’s, pardon the pun, value in getting evaluation done before you’ve gotten to where your break even cash flows? 

There are multiple ways to do evaluation and different types of valuations that we do. One of them is called a calculation of value. The other one, from a CPA’s perspective, called a conclusion of value. What you can do is if you and I agree that we’re just going to do one or two parts out of ten, you got to do ten parts to get the valuation. It’s expensive. If you do just one or two, then what you could do is just go out and look at the multiples that are there. And then develop a discount rate or what the risk factor is, and then apply that to the multiples that’s a lot less expensive. It’s not a full blown valuation, so you’re not going to get the benefit of a full blown valuation. But in the early stages, you’ve got something to take a look at. My company is not worth a dime today. Yeah. Three years from now, maybe it’s worth a dime, three, $400. And then that progress process goes on till you get to the point where now you can afford a full valuation. Let’s go and take a look at everything. 

Yeah, it makes sense. That completely makes sense. All right, well, let’s see. So I think we’ve been talking about the talked about some of the factors. Evaluation. Some of the benefits of getting evaluation done. And then also the idea of really thinking the mental construct of selling your business to yourself or really looking at it that way. To be able to figure out what are the areas that you want to approach first in getting your operations dialed in. Because I think that’s the only thing that’s really important to kind of keep in mind is that having your operations really dialed in is probably going to be one of the best things you can do for the value of your company. So kind of bearing all that money. Does it feel like there’s anything we’ve missed or do you think we’ve hit the high notes? 

I think we’ve hit the high notes. Let me just kind of summarize. You’ve got a couple of major things to think about. What is the income stream going to be, which is going to be what’s your profitability and how risky is that profitability? And you really want to work on both of those people. A lot of times I think, look at one of the sales. How do I increase the sales? How do I increase my sales? I understand that, but if you’re continuing to take on additional risk, those sales are less valuable. So you’ve got to work on both ends of the candle on that side. 

Got it. Well, hey, Richard, I really appreciate your time and I think you’re excellent insights and let people know where they can find you online, where are you most active on the socials, and let people know where they can go to find your website.

The website is www.biz-valuation.com. If you want to give me a call, I’m in Houston area. It’s 281-488-7531. And if you want to give me a call and just run something by me, that’s absolutely fine. Or if you want to send me an email, my email is richard@biz-valuation.com. I’d be more than glad to send you a response. Now, something that I do is I not necessarily be in competition with you, but we do some podcasts. And what I will tell attorneys is if you’ve got a question on how you handle whatever, because they’re involved in litigation or involved in the estate planning side of this. If you have a question, let me know what your question is and we will do a podcast to address that question so people better understand it. To me, this is all simple stuff. What you’re doing for you is simple stuff. I wouldn’t touch your job with a ten foot forward. But if we can help each other, here’s your problem. I would rather spend a little bit of time saying, here’s what you need to consider versus down the road six months or a year from now and because you didn’t understand what was going on, now you’re hurting.

Got it. All right. Well, hey, Richard, I really appreciate you you’re your time today, and I hope you have a great rest of your day. 

You too. Thank you for letting me be on your podcast. 

Thank you very much. 

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