This week on the podcast we’re sharing an expert live from the Guild membership. Ashley Micciche shared How to Value Your Business in Less Than 30 Minutes. Valuing your business is the 1st step in your exit plan, but only 2% of business owners know their business value.
5:40 priorities change
7:58 valuing your business is the first step
19:30 bare minimum to get a good estimate
23:27 the next steps
25:09 4 key areas to grow your value and close the gap
27:37 actions you can take
Watch the recording to catch some helpful visuals here.
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Transcript: How to Value Your Business in Less Than 30 Minutes w/ Ashley Micciche
Becca: All right, everybody. So, today, we have Ashley with True North Retirement Advisors. And she’s going to do a presentation on valuing your business in 30 minutes.
So, Ashley, I’m going to let you introduce yourself. And then, we can dive into that presentation.
Ashley: Great. Thank you so much, Becca. Thank you for having me. I was on the Maximum Lawyer podcast not that long ago. So, it’s great to be back and talking with all of you about exit planning and valuing your business.
So, just a little bit about me, before we get started, I am a business owner myself. And I’m a certified exit planner. So, my background is in finance. I went to college, got a finance degree. And then, right after I graduated college, I joined my father in his financial advisory practice.
And very early on, in my career, he kind of threw me to the wolves and told me I had to go out and find my own clients. And the easiest way that I found to do that actually was by going door to door to businesses and just kind of knocking on their door walking in and saying, “Hey, do you have a 401k plan? Do you know what the fees are on your 401k plan?” And so, I got a foot in the door with small business owners through the 401k plan.
And what I noticed, after I had kind of gained some momentum and started to build up this clientele of small business owners managing their 401k is that a lot of them are very close to retirement. Most of them were in their 50’s, 60’s. And almost none of them were planning or doing any sort of concrete actions towards their exit which I thought was really interesting because most of them, their business had value, they’re all very close to retirement, you know, within five years or so. And for most business owners, and for these clients included, a lot of their net worth was tied up in the business. So, it’s not something to just kind of kick the can down the road and figure it out later. But that seems to be what I was seeing with my clients.
And then, about eight years ago, I had a client who was in his late 50’s, business owner, and he unexpectedly died of a heart attack very suddenly. And I watched, from the sidelines, as his business was just plunged into chaos over the next couple of years. So, his wife came in. She had no involvement in the business prior to his death. If you can imagine that situation – very chaotic for her.
They ended up selling, about two years after that, to a company on the east coast – we’re on the west coast, this company was on the east coast, for pennies on the dollar for what the business was actually worth. And then, a lot of these long-term employees who had worked for this business for 15 to 20 years were pretty much all laid off right after that acquisition. So, it was devastating to have this big ripple effect across everyone in that business.
And so, you know, that was sort of the catalyst to focus more on talking about exit planning, being intentional about that. Like, Hey, you’re getting close to retirement, how does your business fit into your overall plan for retirement? And how can we take steps to make sure that you could transfer your business, you know, on your terms?
And so, a good exit strategy really addresses a few key elements. It’s about transferring your business, on your terms, on your timeline, to the person you choose, for the money that you need. And so, that’s what I’m going to be talking about today.
And the very first thing that you’ll want to do, as you think about and start planning for your exit, is valuing your business. And I’ll talk a little bit more about– concretely, I’m going to show you. I’ll do a demo. And we’ll go over that.
What’s interesting about the path that I took, you can see the last bullet point there, I married my high school sweetheart. We have three kids. The youngest is six months old. So, it is crazy around here.
But what’s interesting about how I came to where I am today is I almost did not have kids. In my early 20’s, I was very career focused. I was very, you know, tunnel vision with my career. And I knew, if I had kids, that it was going to be a stumbling block to where I wanted to go with my career.
But then, right after I got married, in my mid-20ss, I had lunch with a mentor of mine. And she’s about 30 years older than me. And she said she had never had kids. And I said, “You know, I’m not sure I want to have kids. I don’t know. I’m not very maternal by instinct.” And so, I was just bringing this up with her and saying honestly where I was at. And she got very serious. And she said, “Ashley, I’m telling you. Have kids.”
And so, you know, if I look back on my life, 10 years ago, when I was thinking about not having kids, to my life today, where I have three, my priorities have shifted dramatically. You know, I’m not so tunnel vision with my career. And I have a very full, joyful, busy life.
The point of this and why I’m sharing this with you is because our priorities change, right. So, like, if you’re in your 40’s, 50’s, 60s even right now, you know this. You know that your priorities change dramatically from decade to decade, even from year to year.
And what I find with my business owner clients, who are getting close to retirement, is their priorities are shifting too – not the same way that my priorities were shifting in my 20’s to my 30’s. But a lot of people, who are business owners, they’ve been working head down in their business, especially lawyers. You know, law firms, lawyers are notorious for working long, long hours, just head down, working 50, 60, 70-plus hours a week. And, you know, if you do that for 20 to 30 years, a lot of times, especially if you are at a point where you’re getting really solid financial footing and you are in a financial position where you can begin to kind of think about moving into the next phase of life, these things start to become top of mind.
So, if the fire in your belly isn’t quite what it used to be, it’s not burning as bright, I would really encourage you to pay attention to that because it’s probably saying that your priorities are changing. Maybe you want to spend more time with your family. I know a lot of clients who just want to reduce the stress and reduce the time that they’re spending on working and on travel, more things like that.
So, that’s why, you know, exit planning – we’ve got to start thinking about this, making plans for as these priorities begin to shift. And this isn’t just my own anecdotal experience with my own clients. There was a survey done in 2019 by the Business Enterprise Institute and what they found was that 81% of business owners today, they want to stop working in the next 10 years. The overwhelming majority of business owners want to stop working in those next 10 years. It’s just staggering.
And so, my goal today, with what I’m going to share with you, is that I’ll give you some clarity about the first and next step that you’ll want to take, if exit is top of mind, or at least getting there for you, and then some direction about where we go. More specifically, I’m going to talk about a few things. Number one, why valuing your business is really the first step to a successful exit. You could start different places, but I would not recommend that and I’ll explain why. And then, I’m going to bust some business valuation myths that are out there. And then, we’re going to do something really cool. I’m going to do a live demo with you and I’m going to value a law practice. And I’m going to show you how you can value your business in 30 minutes, no joke, start to finish. It’s not even going to take 30 minutes. I’m building in some extra time for you to gather the necessary data but like keying in the data and actually get an evaluation only takes a few minutes. So, it’s really cool. I’m really excited to share that with you.
And then, lastly, if you run evaluation for yourself and you find that it’s not where it needs to be, maybe you need your law practice to be worth $2 million and it’s worth $500,000. Okay, we have a gap. So, what are some strategies that we can use to close that gap? So, depending on how much time we have at the end, I’ll go over some of those.
So that same study that I just mentioned, a couple of slides ago, also looked at the number of business owners who actually knew the value of their business. And very, very few people know the value of their business. So, if 100 people are watching this, only two of you know that. And you’re you probably know the value of your business because you’re very close to exit. But it is foundational. We need to know what the value is today because that informs the things that we do next.
With the example that I just gave, if the value isn’t yet where it needs to be or it’s not on the trajectory yet where it needs to be, where it’ll just naturally get there over the next maybe 2, 3, or 5 years, then we need to take some different actions than we would normally take if the valuation was where it needed to be. So, it’s very important to arm yourself with the necessary information about where you’re at today, where you’re starting from. It’s exactly like putting in your current location on a GPS. If I want to travel, you know, to Mount Rushmore, from my house, I don’t know how to get there. In order to get those directions, turn by turn, I need to tell it where I’m starting from. And the same thing is true with navigating your exit.
And there are a couple of reasons, at least in my own experience, why I think a lot of business owners don’t actually know the value of their business. First of all, there’s some myths around that. Number one is that the myth is it’s very expensive. And that’s true. If you need a certified valuation, which you would in certain cases, that can be expensive many thousands of dollars, sometimes tens of thousands of dollars, depending on how large and how complex your business is.
The second thing is that it’s time consuming. I had a client recently who had to get a valuation – a certified evaluation done for her business. And it took about two months. And it was a very slow process. And it’s also disruptive, because that person who comes in and does a certified valuation, they’re going to want to talk with you, they’re going to look through your books and records. Then, they’re going to scold you because your books and records aren’t very clean. And so, it can just be this disruptive experience.
And so, for that reason, a lot of owners say, “Well, I’m just going to rely on a rule of thumb. In my industry, businesses typically sell for this many times revenue, or EBITDA, or earnings.” And so, a lot of business owners will just rely on rules of thumb. And that can be really, really inaccurate, and lead you down some paths that you don’t want to go down.
Again, if we’re starting with bad information, we’re going to have a bad result. And we don’t want that. And so, technology, right now, allows for you, as a business owner, with very few key data points to value your business.
Let me explain what I mean by that. These are the data points that you would need today in order to value your business. You can see it’s all very high-level information and mostly financial data. You can get this from your balance sheet, your income statement, your tax return, very accessible to you. I’ll show you the only one that trips people up usually is EBITDA margin but it’s pretty straightforward and I’ll explain that.
And then, the last two, you can see, “Do you rent or own?” Easy. You know that. What industry you’re in – offices of lawyers, in this case. So, it’s very, very easy to collect this data. And then, once you have that data, you’re going to take that to the valuation tool.
So, this is a free software tool that we make available to our clients and anybody else who wants to use it. I actually pay a monthly fee to have access to this software tool. It’s not free to me, but I turn around and make it free to anybody who wants to use it because I don’t have any skin in the game in this regard because I’m not in valuation. People do not pay me to do valuations for their business. But, as an exit planner, I know that this is the very first step. So, I can’t make a lot of progress with clients until they know what the business is worth and then what are we going to do with that.
So just using this as an example. I use a dental practice all the time as my example because most people, we all go to the dentist, hopefully. And most people kind of understand how the business model works. But we’re going to run through a scenario using all of this financial data, but we’re just going to change it from a dental practice to a law practice to make it more applicable so you can see how it works for your industry.
Before I do that, though, I just want to show you where you can get this information for yourself. So, if you go to truenorthra.com/valuemybusiness, there’s a checklist there that will explain all those data points to help you gather the data. And then, once you gather the data, I’ll provide you with the free access to the valuation tool. So, all that is available at that “value my business” link. Get the checklist and the unlimited access to the software tool that I’m going to show you right now.
All right. So, I’m excited because we’re going to value a business and we’re going to value a law practice. So, this link, you can see it’s truenorthra.bizequity.com. This is the link that you go to to run your valuation. Again, if you get that checklist, I’ll email you that link automatically so you’ll have it. You don’t need to worry about writing this down.
So, you enter the business name. So, we’re going to do Jude Law Firm. And the zip code, I’m just going to enter my zip code. And then, the industry, you’re just going to start typing in. So, if I start typing in law, you can see offices of lawyers. Okay.
Now, we have the right industry. This is very important. We have to get the industry right because valuations are completely different for technology companies, manufacturing, offices of lawyers. And so, we need to know what industry it is. That’s very important. And that’s why it’s one of those data points.
Okay. So then, you’re going to enter some basic information here. And you can see, there’s other data points. You do not have to enter all of this. You just have to enter enough that it will let you advance to the next screen here.
So, it’s just basically name, email. Your business structure. I’m going to do PC. I know a lot of law firms are PC, so we’ll use that. And then, it defaults to what tax form you use. This will be important. You’ll see when we get to the next screens because some of that data you’re going to pull that from your tax return, especially if you’re using prior year’s data.
And then, the inception year of the business. Let’s just say 2012. And I have five employees. And I just want to do a valuation.
Before I move to the next step here, I want to show you a couple of important things, if you’re doing this. You can save this for later. This is important so that you can save your work and you can go pick up where you left off. That way, if you get stuck, you can just save it and come back to it. You can do that any screen, anytime. Also, if you don’t want to mess with this but you have maybe a bookkeeper or an accountant, you can delegate this and email this link to somebody else, and then have them fill all the data in for you which is pretty nice.
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Ashley: All right. So, moving on to the next screen. I’m going to enter that same data I showed you for all of those data points from that Keegan’s Family Dental. But instead of a dental practice– it’s all the same data, but it’s just for a law firm now.
Okay. So, the revenue was $1.1 million. All right. Well, while waiting for it to catch up here– so, do you see how it pops up over here? If you just hover your mouse over this, it explains to you what it means by revenue. So, most people know, Okay, revenue’s just top line money coming in the door. But then some of these other ones like officer compensation, you want to get that right. So, it provides an explanation for you about how that’s defined which is important because you want to be entering the right data. And then, it also tells you– if you hover over that little form icon there, it tells you where, on your tax return, you could find that information because, again, you told it what kind of business structure you had. And so, it says, “Oh, well, that’s lines 12, 23, 24, and 26 on your form 1120.
All right. So, the revenue was $1.1 million. Pre-tax income was $250,000. And watch what happens in the upper corner. All I need is those two data points to generate a preliminary valuation because the number one important driver is the valuation are your industry, your revenue, and your pre-tax income.
But I’m going to show you, this number’s going to change dramatically as I refine the results here. Officer compensation, that’s another requirement. Again, not a requirement to get a baseline valuation but it is a requirement if you want an accurate valuation. So, take the time to look up that and enter it in. In this case, it’s $190,000.
And you can continue and fill in all the line items. And you can see there are three years of data you could fill in here, but you don’t actually have to do that. I’m showing you the bare minimum that you would need to enter to get a pretty good strong estimate of value. So, I’m actually not going to complete anything else on this page. And you can see that the valuation, because I entered the officer compensation, it dramatically changed the valuation by over $200,000 because I entered that additional data point.
I’m going to move on now to the next step and filling in 2020 data here. So, the only one I’m going to fill out on this page is accounts receivable. In this case, it was $90,000.
Keegan’s Family Dental has people who people who are not paying their bills on time. See, so that increased it by a little bit. Moving on to liabilities I’m going to enter two data points on this page. One is accounts payable, $25,000– again, if you’re not sure how that’s defined, you can go over here. It says, “This balance should reflect amounts currently owed to suppliers of all types. Amounts owed on credit cards should also be included here.” So, if you have credit card debt, you would put that there as well.
And then, bank loans, this is really important. If you have an outstanding bank loan, that’s going to impact the valuation. In this case, it’s zero, so you could just leave this blank, if that’s the case for you as well. But I’m going to put a zero there just for the sake of showing you that that is one of the data points you want to fill in.
All right. So next, you can see we’re getting closer now. You can fill out these slide bars here. Projected revenue growth. If you’ve been if you’ve been growing revenue, maybe 10% a year, somewhere in there, whatever it is. You could put that in there. If you’re a brand new law firm and you’re in high growth stage, you know, we’re going to want to, you know, put that wherever it is accurate to put that.
This one is important though. This one’s on that checklist. It’s the long-term EBITDA margin. And you can see it’s– “EBITDA stands for earnings before interest, taxes, depreciation and amortization.”
And then, again, right here, it’s just a figure. So, it’s revenue divided by your EBITDA. And so, in this case, it was 20%. So, I’m going to put 20% there and look how that changed the valuation again. It jumped up another $100,000.
Percent of your business that’s recurring. You know, maybe you have clients that come back to you over and over again. Maybe that’s 25%. If you have any intellectual property, things like that, you’re going to enter it here.
So, we’re going to move on to the next one. What percentage of sales comes from your top three customers? These are optional. If the owner of the business left, how would your profits and revenues be impacted? In a law firm, probably not going to remain the same, if you’re a small law firm. If you’re a large law firm with multiple partners, not as much of a risk, so you’ll want to slide that along to how it impacts you.
And then, the last thing here is, “Do you rent or own?” Well, we rent. We don’t own the space. If you owned the space, where your business operates out of, that’s going to have an impact on the valuation because a lot of times you’ll package up those things.
Okay. So, when we get to this last screen here, rent versus own, I want you to just take a little screenshot of that because, when you go to the next page, it’s going to go away. And then, typically, what I do is I just email you the screenshot of your valuation, once it’s done, because I get notified whenever someone completes a valuation.
So very, very easy. Very straightforward. There’s no excuse why you should not be figuring out what your business is worth. And this is not a one-time thing. And there’s no strings attached, like you can go in today, you can go in a month from now, a year from now. You can put hypothetical numbers in here to see how that works out.
You know, if I’m getting ready to retire, and this is worth $800,000, how does that inform the next steps that I’m going to take? And that’s where the exit planning comes in.
All right. So, while we have a few minutes left, I just want to show you. This is what the screen shot looks like. So, in Keegan’s Family Dental, if I enter some of those same data points, that’s the valuation that I get for the dental practice.
What’s really cool about this is that here in this lower left-hand corner, in that blue box, you can see how the business ranks nationally. So, in offices of dentists, it’s small print but you can see there’s 370,000 offices of dentists. There’s like 55 million businesses in this database, currently, the last time I checked. So, you’re going to get really, really good comparative data versus other businesses in your industry.
This dental practice, around the country, she ranks at almost in the top 10% of valuations for all dental practices. So, the same is true because law firms are such a common business entity and industry, you’re going to have really, really good strong comparative data. Sometimes, I struggle with clients to figure out, “Okay. Well, what industry are you actually in?” because it’s not always clear. But, for law firms, it shouldn’t be too much trouble.
So, again, one more time, if you missed that link, you can go to truenorthra.com/valuemybusiness to get the checklist. And then, we’ll also provide you with that link to access the valuation tool anytime you would like.
So, the next question is, “What if you do the valuation and it is nowhere near where you need your valuation to be?” So, there are four key areas that you could focus on, instead of pursuing an exit strategy/an exit path, if you really needed to focus on growing the value of the business or, you know, closing that gap, there are four key areas to do that.
Increasing business value – easier said than done. But if that’s possible for you, in your practice, and your circumstances, usually that’s going to provide the best bang for your buck and devoting more resources to increase in the business value is likely going to have a better payoff than, say, saving more or reducing your lifestyle in retirement. But sometimes in certain businesses, certain industries, depending on where you are in your career, your energy level, you know, you may not have that ability to increase the business value – much easier said than done. So, there are some other options too. You could save more. You could retire later.
One of my favorite stories is someone who worked way past their prime was actually a lawyer. There’s an attorney in New York in this very well-known New York City law firm. He’s worked there for like 60-plus years. He’s 104 years old. I read this article a few years ago, so maybe he’s passed on now. But his wife made him stop going to work. Every day, he had to dial it back to like two days a week after he got pneumonia at the age of 102.
And I have many other clients who are lawyers. And one in particular, I can think, you know, his dream is to die in his chair. So, all the power to him. That’s great.
Now, some people want to retire a lot sooner – yesterday, but there’s a lot of people out there who are just retiring a little bit later. If you can do that, it will naturally kind of help close the gap.
And then, lastly, reducing your retirement lifestyle. This is probably the least palatable of the options. Not many people, especially if you’ve been working so long, you know, 20- or 30-plus years. Maybe you’re used to a high income in your law practice, and it’s challenging to shift out of that, and you take a big hit to your income. So, a lot of people aren’t really willing to do that.
And in the last couple of minutes we have, I’m not going to go through all of these, but I wanted to put this big list on the screen so that you could see, “Okay. Well, if my valuation is not where it needs to be, what actions can I take?” With my own clients, these are the areas that we look at first. You know, “Have you done this? Have you done this?” Improving your operations. Putting systems in place.
Most businesses, especially law firms, they struggle to exit their business and not just close the door and leave – walk away from their business because they haven’t groomed that next generation and there’s nobody there to kind of take over once they pass on. So, building a next generation management team or a successor for your law practice is key there, especially if you are a small law practice.
Diversifying your customer or your revenue base. Recurring cash flow is a lot more powerful and contributes a lot more to valuation compared to a one-time cash flow. So, even just certain ways of like maybe your revenue’s the same but how you get your revenue changes a little bit, diversifying that as well.
Other areas, too. This is really popular for clients who are later in their career. You make a lot of money. You have a good cash flow – good income, but you’re not saving enough or you’re not maximizing those savings vehicles that are available to you in your business. I’m thinking 401k plan, profit sharing plan. If you adopt a cash balance plan. The combination of those three, if you’re late in your career, you could save well over $200,000 for retirement per year and get a tax deduction for it for your business.
And another option, non-qualified deferred compensation plan. You could just work a little bit longer that sort of naturally closes that gap. It’s less years you’re taking social security. It’s less years you’re relying on your retirement investment portfolio for income. So, it has that positive ripple effect. Even just a year longer or two years longer can have a much greater impact than most people realize.
And then, lowering your retirement expectations but that that tastes like vinegar in most people’s mouth when I say that. So, if we can do other things and pull other levers to close that gap, then then we want to start there first.
All right. Just to recap, I talked about why valuing your business is the very first step. You have to do that first. Don’t get distracted in doing other things. Do that first. I busted some of those business valuation myths. We went through a demo to show you what that looks like. And we talked about some next actions you can take if your valuation isn’t where you need it to be.
I just want to close with this quote by John Maxwell. He’s an author and a leadership consultant. He said, ”A hundred years from now, all that will matter is the people you connected with in such a way that you added value and meaning to their lives.” I hope this was valuable for you. I hope it gave you some clarity and direction. I hope I fulfilled that promise that I had laid out at the beginning of this talk and you know exactly what you need to do from here which is taking that first step in valuing your business.
If you would like to get in touch with me, if you have questions, I’m more than happy to answer any questions. If you would like to talk about your own exit. If you’re getting close to your exit and schedule a free 20-minute phone call and we can talk about whatever is top of mind, and there’s no strings attached to that either. So, if you’re not familiar, I put a QR code – a lot of people don’t know how those work, but you take the camera app on your phone out and you just hover over that QR code on the screen, it’ll take you to a link that provides you access to my calendar and you can schedule a call, any day that’s convenient for you that I’m available. It goes out 60 days. So, I encourage you to take advantage of that if you have burning questions about your own exit.
Thanks for listening to The Maximum Lawyer Podcast.
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Have a great week and catch you next time.