This is create the next from Pro CFO partners, where every week we explore strategies and ideas for financial management and growth to help today's businesses but their financial picture in context, Chris

Bintliff back with you today from create the next pro CFO partners. I'm with Carlos Saba and Carlos, today we were talking about valuation. And let's start with just some essentials. How do you define valuation? Or how do you coach our listeners or your clients to think about valuation of the company? What is their business worth? What are some essentials that you're thinking about when we're trying to figure that out?

Let's maybe break that question up into a couple smaller, more more digestible pieces. So what what valuation is, is think of the word worth what is something worth, and we all know what the stock price the stock market does, and that gives a price. But a price is not necessarily a value. A value is what it what it's worth, as opposed to just a price, which can sometimes move and oscillate for too many reasons. So when I think about valuation, and what does what is a business worth, I think about in a particular situation, usually, if you were to sell all of this business, how much would an educated willing party pay for it? Now, we then are bringing in a couple of new words that are going to send this conversation into could send this conversation to a variety of directions. And that's who the party, right, yeah. And who is going to be involved in the other side of a transaction is going to matter a lot for an ultimate transaction. But when you think about and want to understand, what's your business worth, I think about it in in three parts. I think about your financials, I think about your infrastructure, and I think about your strategic value, financial

infrastructure and strategic value. All right.

And sort of going up the three financials is the easiest to understand. Do you make money? Do you have profits? Do you have profits that may be defined as EBIT da, which is often a financial metric, which is your earnings before interest, taxes, depreciation, and amortization. And some people will use that as a proxy for cash flow. It's not the best, but it's also how the industry industries are often going to be devalued. So you have to work with and understand that that construct. So what what are my profits be at a net income, or a pre tax profit or something even higher in the income statement, like an EBIT da? What are my revenues? Are they growing? That's a big thing. Size is also very, very important. So when we were talking about EBIT, da, we'd often be talking about multiples, and somebody is going to get paid for a multiple of their their EBIT, da, that's what the price of the business is worth. So let's say your business generates 2 million and even well, then you get a four times multiple on your business, two times four is eight, okay, your business is worth eight times $8 million. Pretty simple arithmetic there. But we find that in many industries, size matters. So if you were to have a business that generated 20 million in EBIT, da, not only would you be getting the four times that a smaller business might get you might actually get seven times EBIT da, because size is going to be at a premium. When your business is only generating a million or so in profits, it might not be as sustainable as a business that's able to generate 8 million in profits. Sure. So that longevity and that sustainability is going to play a big part in what the what the value and the multiple assigned to it will be. So we've got your your profits, your size, based on on revenue, and your growth as the three biggest financial factors. The buyer is going to look at or that I would look at when when valuing a company.

So imagine fine reporting is important in this area, because you've got to know as specifically as you can, what those things are. And a lot of organizations struggle with having really accurate reporting. So before I need to figure out my valuation, as I'm trying to think about it, I kind of need to make sure that my recording is on point.

Is that true? Yes and no. Okay. So Dan, did a previous Dan Bartlett did a previous podcast on this, and he is absolutely correct. However, private businesses do not always operate with the intention and expectation of selling. So it's, I would be more concerned with are the processes there, rather than are the numbers, right? Because at first, the numbers won't be right. You will have business owners that are going to be expensing things that may or may not really be 100% business expenses. It's just what business hackers minimize their taxes interesting. So I would I care more about the in when working with a company I care more about the infrastructure is there and we can move things around for future years to build to build value and ensure that it's it's captured correctly in the future.

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Okay, walk me through your other two criteria for valuation.

Yeah, so the next part of the hierarchy is the the infrastructure which I also include your your resources and processes and processes is something that I just I just touched on for an accounting department. And that is how well they operate, how organized they are, how quickly they can close the periods, etc. But your your resources are going to include your your team, all of the knowledge that you've built up and industry expertise, your culture, being able to retain, retain that team. So that's really a layer that that can do both help and hurt you. If the resources, the processes, and the infrastructure is there. And that would go to Dan Bartlett's point about your financial reporting being important once you're getting to the point of actually doing a transaction? Yes. Because the only real lever or mechanism that a buyer is going to have is to discount to pay less. Oh, if they don't run the numbers, they're gonna say, well, maybe the numbers are off by 25%. So my price should be off by 25%. That's really the only mechanism that that they have. However, if you've got good resources, good processes, good infrastructure. Teams there I've seen businesses bought, or the people. Yeah, interesting.

Well, I mean, we see that a lot in technology, for instance, where the IP and the the talent, the Aqua hire, you know, comes into play, where it's really the minds of the people involved in the culture, even the drives the business that is most interesting to the buyer.

And that's a great segue into what the third area of where you can find value and where you can sometimes get valuations that make no sense to an outside party. And that's the strategic value, strategic value. The strategic value is what is this business? What is this asset going to be worth in the hands of somebody that can do more with it? Yeah. So you mentioned a technology company. Well imagine if I've got a an app, that I'm struggling to build up. Imagine if I had the the brand and the user base of Apple suddenly behind it? Well, it's going to be worth a whole lot more to Apple. And they can turn it in can turn it into an overnight success. So now what's the what's the value of such a such an asset, it could be significantly more if the business acquiring it has a strategic advantage of what they can do with this with this asset. The other example that that comes to mind was when Walmart bought jet, which was a online market marketplace that was reaching a younger demographic, Walmart was struggling with online shopping and moving to to e commerce, this was a few years ago, but they faded an insane multiple for for that company. And it's because that company had something that Walmart wanted, it wanted those customers and that knowledge of how to market

online. Okay, so now my financials are in order, what is my business worth?

Yeah, great. Great question, Chris. So it's going to depend on the factors we mentioned before of your profitability, the revenue and the size, and how you're growing. But other things that are going to factor in are the environment or the market, if you will, for your industry. trends that are happening in your your industry, capital that's allocated to to your industry, and whether or not there's investor appetite. for it, we obviously know things get hot and cold, based on various parts of the globe, global economy and, and what's getting me even media attention as to what what sectors are going to be attracting, attracting buyers.

So we've got financials, infrastructure, and kind of strategic vision, how, what couple interesting things to me in that is, if all three of those things are on point for me as a business, even if I have no intention of selling, I'm going to run a better business. If I have those things on lock, I'm going to be doing just a better job. But it's also a lot of work to do those things. And and sometimes we get one pretty good, or maybe two and a half pretty good. So if how, how useful is it for me to think of my valuation, even if I have no plans to sell or no suitors out there who are wondering about it, they should I always be thinking about this

in my business. This is all I think about really for the companies that I work with, is how to make them worth more. That's it. That's why the companies I work with hire me is because of my expertise and understanding what they're worth. And one of the things that can be done to them to make them worth more. So you know, split, let's stick with this hierarchy, because I think you You almost glossed over something that was important without realizing it. These three things you'll often address separately, but they are totally tied together. And inextricably woven, if you will. So your resources and infrastructure are going to absolutely drive your your profits. And I can come up with all the great strategies in the world for a company. But if I don't have a great team to execute it, it's it's not worth anything. So often you end up, I end up tackling these with really simple questions. And it might be for a business owner. If God forbid, something happened to you, and you were unable to come to work for two months, or you were fortuitous and got to take a two month vacation. Do you have people in place that could run this business without you? optimistic if the answer's no, yeah. So that's, you know, a very simple example how that the these can be tied together and how you can then want to focus the business so that I've now taken a really basic question, what happens if I want to go on vacation as a CEO and now I'm focused Done, I need to find a good number two, I need to train somebody to make crucial decisions when I'm not available to the company,

Carlos setup from Pro CFO partners, I feel like we've only scratched the surface. I feel like the things you introduced us to we could dive in to each of those areas for five more episodes each. And I hope that we get a chance to I hope you'll come back again, thanks so much for introducing us to this idea of valuation, and making it so easy to understand. I love your three sort of principles or ways to think about things. And I also love that, as usual, if we can focus on those things, just independently, we're going to run a better business. And if we can understand the relationships, the context that this one has to this one has to this one, we're going to build a stronger business and that will inevitably make the conversation about valuation easier and help our companies be worth more but it just helps us build better companies. Thanks so much for being with us today. Thank you, Chris.

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