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Value Acceleration & Exit Planning, Webinars

Business Succession Planning and the Current State of Business Valuation | Webinar Recording


This informative webinar discusses Value Acceleration and business exit planning. You will learn how the Value Acceleration model focuses on value growth to align business, personal, and financial goals and how a quality exit plan asks and answers questions about these goals, including the legal and tax questions involved in transitioning a privately owned business. Also discussed is the current state of business valuation and the factors that impact how your business is valued.

The following is a text version of the recorded webinar presented by Windes in September 2020.

Host & Moderator

Craig Ima, MBA is the Chief Marketing Officer at Windes. He has more than 30 years of marketing, business management, product, strategy, database, business development, and sales experience.


Robert Henderson, CPA, MST, CEPA is a Partner in the firm’s Tax department. He specializes in providing tax advisory, accounting, and compliance services to middle market businesses, and their owners with emphasis on assisting clients to plan for and manage their income tax liabilities. Rob works with closely held and startup business owners to maximize their companies’ value, advising and assisting business owners on how to ensure that their companies are transition-ready, and prepared for exit.

Todd Hollingshead, ASA is a Managing Member of Hollingshead Dearden & Associates, a leading business valuation firm in the region. He has 22 years of experience within the business valuation profession, working for both the taxpayer and government agencies.  Todd conducts valuations for various assets, interests, purposes and industries.

DISCLAIMER: The information presented in this webinar is intended as general information and does not constitute tax or legal advice. You should always consult your tax, legal, or financial advisor for direction regarding your specific situation.

Please contact Windes for more information or questions regarding your particular situation at 844.4WINDES (844.494.6337) or via email at

Craig Ima, Windes Chief Marketing Officer:

Welcome to our presentation of Business Succession Planning and the Current State of Business Valuation. I am Craig Ima, the Chief Marketing Officer at Windes, and I will be moderating today’s presentation.

Today, you will hear from Rob Henderson, a partner at Windes, and Todd Hollingshead, a managing member of Hollingshead, Dearden & Associates, a leading business valuation firm in the region.

In the first part of today’s presentation, we will cover a brief overview of the firm, discuss exit planning, explain value acceleration, and how it ties into exit planning. The second part of the presentation will cover the current state of business valuation and a look into the future.

Learn more about Windes

Our first presenter is Rob Henderson. Rob is a partner at Windes and heads our Value Acceleration & Exit Planning Practice. Rob is a 20-year veteran in the tax and accounting sector and services middle- market businesses and their owners along with startups in various industries. In addition to having a CPA and master’s in taxation, Rob has his designation as a certified exit planning advisor.

And with that, I will turn it over to Rob.

Rob Henderson, Windes Tax Partner:

Thank you for the introduction, Craig. I am excited to present on the topic of exit planning, value acceleration, and exit planning as a business strategy. This is an area that continues to receive a lot of attention, but still remains a problem for business owners.

While studying to become a certified exit planning advisor, I was introduced to the Value Acceleration Model, which provides a conceptual framework for business owners and value advisors. By subscribing to the Value Acceleration Model, I am now helping business owners successfully create transferable value and exit their businesses.

I am also excited to co-present with Todd because business valuation is an important tool that is used at the beginning of a solid exit plan. His presentation on the current state of business valuation will provide useful information to business owners looking at exit during COVID-19 and beyond. Thank you, Todd, for agreeing to do this presentation with Windes.

Before I jump into the presentation that I prepared for today’s discussion, I think it is critical to share with the audience one of the reasons why value advisors, business coaches, CPAs, wealth managers, attorneys, and business valuation experts are spending a large amount of time with business owners to discuss exit planning and value acceleration as a business strategy.

The answer is Baby Boomers. Baby Boomers are one of the primary causes of this shift to provide advisory services, exit planning, and value acceleration. Baby Boomers are the generation of business owners that were born between 1945 and 1965.

In 2012, the first Baby Boomers reached retirement, and in 2031, all Baby Boomers will be over the age of 65. Why is this relevant? Baby Boomers account for six million closely held businesses and $10 trillion in wealth. That is about 63% of the private businesses in the United States.

Furthermore, a recent study done by the Exit Planning Institute, confirms that 76% of Baby Boomer businesses plan to transition over the next 10 years, and 48% plan to transition in the next five years.

A common characteristic of Baby Boomer business owners is that 80% to 90% of their total wealth is tied up in the business. This presents a problem because business owners looking to retire need to cash-in on their lifetime of work to harvest and manage their wealth.

Now that we understand why Baby Boomer business owners are relevant, what are some of the challenges preventing Baby Boomers from creating a plan to exit or transfer their businesses, or complete successful exits from their business?

Challenge number one is that Baby Boomers do not want to exit their business. The business is their baby, and there is a personal attachment preventing the owner to build a fulfilling life outside of the business. Additionally, owners often lack the time to plan for the future, post exit.

Challenge number two is that 50% of exits are not voluntary. We call these the “Five D’s.” Death, disability, divorce, distress, and disagreement. Now, you can argue there is a 6th for disease related to the COVID-19 pandemic.

Business owners are bogged down by the day-to-day tasks to run a successful business. Oftentimes, exit planning is not top of mind because it is an event that will occur in the distant future. However, if half of the exits are not voluntary because of unforeseen circumstances like the five Ds, why do business owners not allocate more time to exit planning strategies?

My goal as a value advisor is to shift the paradigm and sell business owners on the importance of being prepared. A business that is prepared to exit can exit at any time, regardless of the cause.

Challenge number three is that owners are leaving money on the table because they are focused on income generation and not on enterprise value, which I will explain in more detail on the next slide.

There are two types of business owner styles. There are lifestyle business owners, and there are value-creation business owners. Lifestyle business owners are set up and run by its founders with the primary goal of sustaining income and nothing more. They want to maintain a particular lifestyle.

Whereas, value-creator businesses are on a mission to create value for customers, employees, and their owners and investors. All of them are linked together to maximize value and focus on using capital and talent on the most profitable opportunities.

I have shared three challenges preventing Baby Boomers from exiting their businesses. I think it is important to share a few more statistics, which tie back to my initial call to action and purpose for today’s discussion.

Surveys and research tell us that 12 months after selling a business, three out of four business owners regret the decision. Many business owners fail to have a life-after-business plan goal, or they feel they left money on the table because they were not prepared to exit, or they had to abruptly exit for less value than they thought the business was worth.

Nearly 80% of businesses put on the market do not sell. Again, many businesses are not prepared to sell, or the owner tries to market the business for more than it is worth because they have unreasonable expectations of business value.

Only 30% of family owned businesses survive into the second generation. Maybe the kids have different interests or the family did not prepare them to take over. Remember the statistic I shared earlier, Baby Boomers account for six million businesses and $10 trillion in wealth that needs to transition in the next 10 years.

If 80% to 90% of the total wealth is tied up in the business, Baby Boomer business owners should be alarmed by the low succession rate of selling their businesses or transitioning it to the next generation. Well, we address this with exit planning.

According to the Exit Planning Institute, two-thirds of business owners do not know all their exit options. 78% of business owners have no transition team. 83% of business owners have no written transition plan, and 49% have no plan at all.

These are a lot of statistics to absorb, but I want to drive home the point that exit planning that is implemented three, to five, to seven years in advance, will help increase the chances of successful exits and maximize value.

The remainder of today’s discussion is going to focus on exit planning, value acceleration, how to prepare your business to exit, and then I will wrap up my portion of the discussion with some questions from Craig.

A solid exit planning strategy is going to focuses on four core concepts. Later in the presentation, I am going to take a deeper dive into the Value Acceleration Model, but for now, the following four concepts lay the groundwork for a master plan.

Those four concepts are the fictional three legs of a stool, five stages of value maturity, the four Cs, and relentless execution. I am going to explain each concept and provide some color on how they come together to form a master plan.

The imaginary stool has three legs, and each one has a specific role in the master plan. The first leg focuses on maximizing transferrable business value. Stated differently, a business owner works with a value advisor to implement a plan that focuses directly on the business.

Over a period of time, optimally three, to five, to seven years prior to an exit or transfer, the business owner and the value advisor works with the board of advisors to create an exit plan to prepare for exit.

The next leg focuses on personal financial wealth to ensure the owner is financially prepared to exit. Typically, with the assistance of a certified financial planner, the owner prepares a personal financial statement and completes a series of retirement planning models to determine the net of tax proceeds needed to exit and accomplish the owner’s goals.

Here, the owner could also determine if there is a value gap. If a value gap exists, the business owner may need to reassess their strategy because the net of tax proceeds are not enough to accomplish their personal financial goals.

The final leg of the stool focuses on the owner’s personal readiness to exit the business. As I mentioned earlier, three out of four business owners regret the decision to sell their businesses only one year after they exit.

By focusing on the third leg of the stool, owners can work with business coaches, family counselors, and therapists to consider the practical and emotional factors that can lead to disappointment after an exit.

Also, as I previously mentioned, only 30% of family-owned businesses survive into the second generation. The third leg will focus on family disputes and preparing children to take over the business.

The next concept is the Value Maturity Index. The Value Maturity Index focuses on five stages to identify, protect, build, harvest, and manage business and personal wealth. Stage one is identify.

Here, we discover through a series of attractiveness and readiness assessments, and financial planning with the business owners, the business owner’s current wealth. As I mentioned in the introduction, this is where business valuation comes into play because oftentimes we need to adjust the business owner’s expectations.

Stages two and three, are protect and build. In these stages, we de-risk the business and the owner to protect the value and wealth that we discovered in stage one. A couple of examples of de-risking would be buy-seller agreements and estate planning. After we de-risk, we build additional enterprise value by focusing on the deficiencies we identified in the assessments.

Stage four is where we gather the business and personal wealth that we have accumulated, so that it can be managed in stage five to ensure economic continuity.

The next concept is the four Cs, which focuses on building value through human, structural, customer, and social capital. To be more specific, human capital is your employees. Structural capital is your infrastructure, IP, and intangible assets. Customer capital is your customers and ability to generate revenue through strong reoccurring relationships. The last one is social capital, or the network of relationships that you have built over time.

The final concept is relentless execution. Here is where the value advisor is critical. Oftentimes, we are called the Chief Accountability Officer. The value advisor is going to follow up, hold the board of advisors accountable, and promote collaboration by creating a vision, aligning the three legs of the stool, holding all stakeholders involved accountable, and having rhythm.

With relentless execution, the value advisor can make sure that owner stays on track to implement the master plan.

I have mentioned the terms three legs of the stool and master plan. At the beginning of the presentation, I introduced the term Value Acceleration Model.

I am going to discuss how the value acceleration model provides a conceptual framework that integrates the three legs of the stool into one master plan.

Value acceleration is a proven process that focuses on value, growth, and aligning business, personal, and financial goals. It is grounded in action, promotes the use of teams in an engaging process, creates a roadmap to success, and a leap in value.

Exit planning is the key concept and value acceleration is the process. Value acceleration measures the value of your intangible assets, which are direct drivers of business attractiveness. Value acceleration also focuses on the multiple piece of a business valuation.

I am not saying the income or what is called recasted EBITDA or seller’s discretionary earnings is not important, but significant increases in value are going to come from increases in multiple, which have a direct effect on EBITDA. Combined are exponential increases in value because improvements to the business that focus on intangibles will naturally increase the bottom line EBITDA.

Here is the Exit Planning Institute’s Value Acceleration Model. Now, I could spend eight hours discussing the model, but today I am going to keep it limited to the three gates. The three gates are discover, prepare, and decide.

During the discovery gate or what we call the triggering event, business owners are asked to complete a business valuation, personal financial plan, and a series of readiness and attractiveness assessments.

The results are compiled and the value advisor helps the owner prepare a prioritized action plan. This is also the first stage of the Value Maturity Index, which we call discover.

During the prepare gate, through relentless execution, or core concept number four, we de-risk and improve the business by focusing on the four Cs, which was core concept number three.

The business owner works with their wealth managers, an estate planning attorney, and other advisors to make sure the personal financial and personal legs of the stool are covered, core concept number one.

Again, collaboration with a value advisor is key because many parts of that exit plan overlap and it is important to have the same message. This is also the second and third stages of the Value Maturity Index, which we call protect and build.

Finally, during the last gate, it is time to decide what to do. At this point, the business owner is much more educated and prepared to exit. If they decide to keep the business, then the value creation process starts over.

If they decide to sell the business, then the selected transition process begins. This is also the fourth and fifth stages of the Value Maturity Index, which we call harvest and manage.

Before I move onto how Windes can help you prepare your business for exit, there are not enough words to describe how important it is to have a conceptual framework to follow. The Value Acceleration Model is my chosen model to help business owners successfully exit their business for max value.

Prepare your business for exit. Back on the challenge number two slide that discusses the five Ds, I mentioned that my goal as the value advisor is to shift the paradigm and sell business owners on the importance of being prepared.

A business that is prepared to exit can exit at any time and has a contingency plan against unforeseen circumstances. What I am saying is exit planning is business strategy and business owners should not be reactive or wait until the last minute.

Business value is all about transferability. Can a business exist without the owner? Post exit, what would happen once the business owner moves on? Could a buyer offer less because they understand key revenue streams or contracts would not exist without the current owner?

These are just a few examples that illustrate how value and owner dependency are connected and forces the business owner to think about, how would the business perform if the business owner was unexpectedly unable to work for a period of time?

Windes has the capabilities to assist business owners looking to implement procedures and controls that help businesses become less dependent on the business owner. Todd is going to speak on business valuation shortly. Windes has the internal expertise to assist business owners with the following tasks: attractiveness and readiness assessments, value enhancement, strategic planning, audit, exit options and analysis, contingency planning, charitable gift planning, tax planning, estate planning, preliminary due diligence, and net proceeds analysis.

Windes is a full-service public accounting firm that is traditionally focused on tax and audit services. However, we are evolving with the times and developing advisory practices that offer business owners a wide range of services. For purposes of this presentation, many of the services I just mentioned on this slide are examples.

I mentioned that three out of four business owners do not know their exit options. I have provided a few internal and external options on this slide, however, my job as a value advisor is to make sure business owners know all their options and are well equipped to make the right decision.

Referring back to the Value Acceleration Model, during the prepare stage, the business owner’s board of advisors will provide the options that fit the circumstances.

Finally, to close my piece of the presentation, I want to reiterate one more time that the value acceleration process works best when there is a group of collaborative, like-minded professional advisors with a common goal to grow, preserve, and transition the business owner. Whether it is business valuation, estate planning, tax planning, wealth management, family conflict, or accounting, there needs to be one consistent message.

With that, I am going to ask Craig, to spend a few minutes on questions.

Craig Ima, Windes Chief Marketing Officer:

Question: What if you already have business and financial advisors that you view as your board of advisors, how would you fit into the mix and help with the owner’s exit plan?

Rob Henderson, Windes Tax Partner:

Answer: That is a good question. I would be the value advisor, or the person responsible for making sure the board of advisors is completing their milestones and the process is moving along timely, as I called it earlier, the Chief Accountability Officer. Additionally, Windes, and myself could complete various tax and assurance projects, if the business owner needed a CPA.

Craig Ima, Windes Chief Marketing Officer:

Question: What if you do not plan to sell or exit your business for many years – you plan to work until your final days have come? Why should a business owner be concerned with an exit plan when they are already too busy running the business?

Rob Henderson, Windes Tax Partner:

Answer: I mentioned in the presentation that most business exits are involuntary or unforeseen. A great example right now is the pandemic. A business that is always prepared to exit can de-risk itself against the five Ds.

Furthermore, exit planning or value acceleration is a business strategy. Business owners should be focusing on enterprise value or value creation, regardless of their timeframe to exit.

Craig Ima, Windes Chief Marketing Officer:

Question: What if a business owner has no idea how much their business is worth? What role does the business need to play in order to achieve financial freedom?

Rob Henderson, Windes Tax Partner:

Answer: We recommend that business owners complete a business valuation or a less formal option, a broker estimate of value. Oftentimes, business owner wealth is concentrated in the business. Without knowing how much the business is worth or how much it can sell for, net of tax, CFPs and wealth managers do not have the tools to advise their clients on the personal financial leg of a successful exit plan.

Additionally, business owner’s expectations of value are often overstated. Without a starting point, a value advisor, like myself, cannot estimate the increase in value attributable to a value acceleration project.

Craig Ima, Windes Chief Marketing Officer:

Question: Who will take over the business and how can a business owner make sure it will survive once they are gone?

Rob Henderson, Windes Tax Partner:

Answer: The key is making sure that the business is transferable. Whether it is a third-party buyer, management, or a family member that takes over the business, a well-executed exit plan is going to make sure that the business continues into the future.

Craig Ima, Windes Chief Marketing Officer:

Question: If the pandemic has hurt a business, and while the business owner thought an exit was in the near future, things have changed because the value of the company has decreased and the business owner cannot net enough money to maintain that nice lifestyle. How can you help the business owner reassess this situation?

Rob Henderson, Windes Tax Partner:

Answer: That is a really good question and very relevant right now. We can help business owners by completing value acceleration projects. We would determine where the business is deficient, or has been most impacted by the pandemic, and determine if it makes sense to rebuild, or to pivot into more profitable areas.

The pandemic has given business owners an opportunity to rebrand or think about what the future looks like. There may be opportunities to cut expenses like rent or payroll costs, and perhaps refocus on intangible property and building value. The economic outlook will likely turn around, so business owners should look at this as an opportunity to come out of a downward cycle and be prepared to grow and get back on track with their successful exit plan.

Craig Ima, Windes Chief Marketing Officer:

Thank you very much, Rob.

Now, you will hear from Todd Hollingshead. Todd, will cover the current state of business valuations and discuss opportunities when transferring wealth and value creation.

Hollingshead Dearden & Associates was formed in 2013. It has more than 43 years of combined expertise. Their services include valuations with the state through buy/sell agreement services, and everything in between.

Todd is a 22-year veteran in the business valuation profession. His firm is relied upon by esteemed businesses and professionals throughout the region. He is an accredited senior appraiser with his designation from the American Society of Appraisers.

With that, I will turn it over to Todd.

Todd Hollingshead, Hollingshead, Dearden & Associate, LLC, Managing Member:

Thank you, Craig, and thank you, Rob, for including me in this presentation. During my presentation, I will cover the impact of COVID-19 on mergers and acquisitions, what are company executives’ outlook of the market, challenges facing the business valuation profession, and we will discuss the opportunities to increase value and transfer wealth.

As most everything came to a crashing halt at the beginning of the COVID-19 pandemic, so did merger and acquisition (M&A) activity, which decreased by an estimated 80% to 85% in April and May of 2020.

Deals were placed on hold, restructured, or pulled, as more confidence, clarity, and visibility was sought. Markets have turned from a seller’s market, to now a buyer’s/investor’s market.

M&A activity in certain industries may have slowed considerably, or halted, while others have flourished. There are now limited credit markers for acquisition, private equity firms, utilized banks, and other sources to finance deals. However, credit markets are more cautious now about their lending policies. And finally, we might see more M&A activity or opportunity with distressed companies.

What are the changes to M&A deal structures? We are seeing purchase price reductions, and/or earn-outs added to purchase or sale agreements. And if there were existing earn-outs, they are now delaying or extending the time that those earn-outs are in place, covering the risk to potential buyers.

We are seeing an increase in the length of time it takes to close a transaction. There is expanded due diligence, so buyers are digging deeper into their due diligence review and analysis. They are focusing on the impact or potential impact of the COVID-19 pandemic.

They are executing transaction documents and closing the transaction at different times versus simultaneously, as was done in the past. Buyers are taking a wait-and-see approach before actually closing a transaction.

Additional closing conditions are being added to the purchase sale agreement, and may be including default notices. Regarding certain material contracts with both customers and suppliers, there might be default notices regarding potential government orders that could have a material impact on businesses. In addition, there might be default notices regarding the availability of key employees and a sufficient workforce to maintain operations.

Within purchase or sale agreements, we may see language change to certain definitions such as material adverse change, or material adverse effect, and might include something that has to do with COVID-19. We may also see changes to representation and warranty insurance, which protects against breaches of warranty or inaccurate representation.

The National Center for Middle Market is a collaboration of Fisher College of Business at Ohio State University and Chubb Insurance. Every quarter, they survey executives about their outlook on the market.

You can see here on the left column, the fourth quarter 2019 survey, everybody was pretty much optimistic back then. The executives said that 4.9% revenue growth should be expected over the next 12 months. Three and a half projected employment growth over the next 12 months. 50% were extremely, or very, likely to enter markets in the next 12 months, and 24% expected to build a new facility in the next 12 months.

In the center column, when COVID struck, we are seeing a lot more pessimism. You can see that 78% say that revenue growth would now decline. 64% stated that employment would decrease. 70% said that they would hold back on their growth initiatives, and 66% said that they would delay capital spending in the next 12 months.

Moving over to the right column, three months later, in June of 2020, there is a little more optimism. You are seeing 2% projected revenue growth estimated by these executives. Employment is relatively flat, maybe a little decline. 37% plan to enter new markets in the next month, and 13% plan to build a new facility in the next 12 months.

Here is more information from the surveys. These executives were asked, what is the most difficult aspect of running a business in the current environment? You can see the biggest concern was ongoing uncertainty, at 76%. Second was maintaining continuity of operations at 62%. Maintaining employee communication engagement and productivity at 49%, followed by maintaining customer relationships and agreements at 48%, and last, working capital management at 43%.

Moving out three more months, two of the five categories increased, which were maintaining employee communication, engagement, and productivity, which increased at 59%, and maintaining customer relationships and engagement, which increased at 57%.

I want to point out that ongoing uncertainty still represented two-thirds of the executives’ outlook on the market. So there is still a lot of concern and uncertainty about what the future holds.

This next slide is also from that survey. Executives had been asked, what is the average time they expect to be back at full capacity? In March, when COVID hit, only 19% thought it would take more than six months. Two to six months was about 46% of the response, and less than one month was 38%.

However, three months later, initially, those numbers are flipping and you are seeing increased length of time before full capacity. Now, you see more than 6% at 40%. So it has doubled for most of the executives.

I want to talk about the challenges that we face as business valuation experts. Everyone knows these are unprecedented times with lack of clarity and visibility. There are limited industry sources, and if there are certain industry sources, we may have low confidence in these sources.

We are relying more on clients for input. What are they hearing from the industry, their suppliers, their customers, and even their competitors? For example, Value Line, which distributes a publication on Economic Outlook every quarter, and in their May 29, 2020 publication, they forecasted unemployment for 2020 at 15.2%. However, three months later, in the August 28, 2020 publication, they downgraded that to 9%, which is a 6.2% decrease. I also want to point out that in the May edition, they had unemployment for 2021 at 13.8%, which they downgrade to 7.6%, three months later. In 2022, they had unemployment at 10%, and three months later, they had it at 6%.

The reason why this is important to us is because we just appraised a staffing company and their business obviously is tied to employment or unemployment. So, we really have to, again, rely on the clients and what they are hearing, and be cautious about some of these industries sources.

Next bullet point is uncertain supply chains. Will those supply chains be intact to support the businesses? Wall Street appears disconnected with mainstream markets. Pre-COVID, the Dow was 29,568. Two weeks later, it decreased significantly to 18,213. I believe that was on March 23, 2020. It then started to creep up and closed at about 29,100 on September 2, 2020. I think, as of yesterday, it has been fluctuating over the last two weeks and it is at 27,300.

I want to point out that the S&P and NASDAQ reached all-time highs during this pandemic. What I am pointing out is that, when we are appraising large companies, we will sometimes compare those to publicly traded companies. If these publicly traded companies are trading at significant multiples and our subject privately held companies are struggling, how do we decide which multiple to use when these are extremely inflated and do not really represent what our subject company is doing?

In addition, for smaller companies, we look at a private transaction database. The problem there is, again, are these multiples really applicable to what the company has done, when now their sales and earnings have fallen off quite a bit?

I would like to point out also that within our private transaction database, we still have not seen many transactions that have occurred during the pandemic. So, we have to be very cautious when looking at both the public and the private transaction data.

Uncertainty of future government support. Several months ago, families were receiving checks, unemployment benefits were being extended, and companies were receiving Paycheck Protection Program loans.

With the loans, there are a couple appraisals that we have done. One was a company that had a PPP loan of nearly $6 million. The other one was close to $3 million, and those are significant numbers, which can affect value.

We need to discuss with the client whether, or not, the entire loans can be forgiven, or if part of it is going to be forgiven. We may have to talk to the accountants, like Windes, who may be assisting the clients on the application and the paperwork that needs to be done to get the loans forgiven.

Going back to government support. We still have not seen a second round of funds being provided to families or to extend unemployment benefits. That really affects consumer spending and may affect the value of our company.

What is the long-term impact of COVID-19? Will certain industries completely change? Will they recreate themselves or will they just disappear? When will businesses return to normal, if at all?

The last bullet point is a big one for us. Projecting out future net cash flows during this pandemic has been a challenge. What is the appropriate discount rate that we would apply to those net cash flows?

Here on the next slide, you can see this is what we call the buildup method in selecting our discount rate that we applied to these cash flows. The components here are the 20-year treasury, the equity-risk premium, which is essentially the large company return above long-term government bonds.

Then you have the size-risk premium, which is the large cap return, or the decile one above the smallest company return, which is decile 10. In most cases, we are dealing with companies in the decile 10 category.

And then you have the company-specific risk, which can include, what industry that company operates in, is there customer supplier concentration issues? Are there any key person issues? Things like that. So that is more subjective to the appraiser.

Here, at the end of 2019, you can see the components. The 20-year treasury was 2.25 and the equity risk premium was five. The size-risk premium was nine. And for this example, we have 2% for the company-risk premium for an overall discount rate of 18%.

Then moving out three months, to shortly after the pandemic struck, the treasury decreased. However, we are seeing the equity-risk premium and the size-risk premium increasing quite a bit. As a matter of fact, there were some papers published stating that they bumped-up a hundred basis points right away.

Then company-specific risks, maybe that is now in the 5% to 8% range. So our overall discount rate might be 22 to 25. Moving out another four months, again, the 20-year treasury has decreased. Both risk premiums have decreased somewhat because there is a little more clarity. The same thing happened with our company-risk premium, we are probably in the three to seven. So now, the discount rate may be has decreased at 19 to 23%.

However, we do want to take into consideration, with our projections, sometimes we receive projections from our clients. We may go back and look at what their historical budgets have been and compare them to the actuals of that same year to see how close they are hitting those budgets. If we are not comfortable with the projections, we may increase the discount rate a little bit to account for that.

This might be a good time to assess and take a hard look at your business during the COVID-19 pandemic. There are many things that you can look at, but here are some of the bullet points that we think are very important.

You should take care of your liquidity issues, improve your working capital and cash balances. Clean up your financial statements, whether that is removing non-operating assets, you may have some accounts receivables that are a hundred days, 180 days old, or longer. It may be time to write those off.

A big one is to invest in a functional management. Assess the breadth of management, assess the next level of management, and maybe it is a good time to track new talent or recognize existing talent.

We run into some companies where the owner may have a lot of control, where decisions are made with this person, or maybe it is a couple of people. However, when a buyer is coming in to assess a business, or is interested in buying the business, and they see that most of the control is with one person, essentially, they do not want to buy a job, they want to buy a business. It is very important to have a good breadth of management. So keep that in mind.

You should better understand your competition in industry, how are they reacting during this COVID-19 pandemic? Diversify your customer client base. We are dealing with a company that had 30% of its business with Boeing. As most of you know, with the halting in production of the 737 Max, this company’s revenue went from actual $36.5 million in revenue and $9 million in net income, to now an estimated revenue for 2020 at $20.5 million and breaking even slightly, maybe about $250,000. So, diversification is very important because something could happen, as we can see with this Boeing situation.

Another client, who we finished an appraisal within the last month, 82% of their business is with a particular client. Their comment was, “Well, we have a 35- to 40-year relationship with them, so we’re not too worried about it.” However, I do not think any of us thought that we would be in the situation we are in right now with COVID-19. Make sure that you diversify your client base, or if you do have a big client, work towards growing the others as much as possible.

Improve your supply chain, condense, or expand it. Basically, just improve the overall quality. Maybe it is time to add more automation, which may reduce labor costs. Have systems in place to provide timely data, assess your current marketing/sales program. What can be done to attract more business or to retain current business?

If possible, invest back into your business. That might include new manufacturing equipment, new inventory control systems, new computers, or software. Plan for the future; create a strategic long-term plan for your company. Most companies that we deal with are looking at a week or a month. We would planning further out, have a long-term plan.

I do not have a bullet point here, but I do want to point out that you should really seek professional help. Whether it is services that Windes provides, it might be a estate attorney, corporate attorney, or a financial advisor, those are all very important and you should surround yourself with these people. We find it very important when we go into a project that we have a sophisticated client who has sophisticated advisors around them. It really makes our process much easier.

Overall, your company may be struggling during these times, but by reassessing your business and implementing systems may result in your company emerging from this pandemic stronger, with greater market-share, as competitors may have ceased operations.

We ran into this case back in the 2008-2009 recession. We found that companies that had solid working capital and cash balances, essentially solid liquidity, they had minimal to no interest bearing debt, and in some cases, they owned the building that they operated in, struggled, but they were able to survive while their competitors did not. So they gained market-share coming out of the other side of the recession.

By focusing on these points from the previous two slides, you should be able to increase the value of your company three ways. Focus on improving your bottom line by cutting costs, removing non-operating expenses, reduce or eliminate non-profitable products, or lines, to improve productivity and efficiencies.

Focus on top line revenue growth. If you improve your revenue growth, most likely, your bottom line will also improve. More importantly, as your revenue improves from the $5 to $10 million category, to say the $10 to $50 million category, the market for potential buyers increases. And again, if you move to the next category, the amount of buyers increases, as well. So it is a good thing for two reasons for revenue growth.

In addition, the price multiple or multiples your company may command, should increase, as well, as the company is more attractive to potential buyers. For this example, I selected perishable prepared food manufacturing. You can see there are two lines here of multiples. There is the market value of invested capital to net sales, and market value to EBITDA or earnings before interest, taxes, depreciation, and amortization.

I want you to focus on the median multiples of 0.57, and EBITDA multiple of 4.4, but also be aware of the 75th percentile of 0.69 and 5.9. Let us just say here that your existing performance is $10 million in net sales, and you have EBITDA at $1 million. So if you apply those multiples, the media multiple shown on the previous slide of 0.57 and 4.4, you have these two indications of value, and we gave equal weight to them concluding a value of little over $5 million.

You go down to the next area, where your performance is improved, to say, $11 million in net sales, and 1.1 in EBITDA. You play the same multiples, and now your overall value increased by half a million.

However, if you work on the business to make it more attractive, by again, improving the breadth of management, diversifying, working on your concentration of customers and suppliers, working on other things like that, maybe now you are going to command a multiple in the 75th percentile at 0.69 and 5.9.

As you can see, the value of the company is slightly over $7 million. By working on those three areas that we talked about, you have just increased the value of the company by $2 million.

To wrap up here, in the near future, it might be a great opportunity to transfer wealth, as markets, and possibly, your businesses, are struggling, which means probably less valuable. It may be a good time, now, because the estate and gift tax exemptions are extremely high at $11.58 million per spouse.

If your company can withhold or withstand the COVID-19 pandemic, it may come out stronger, with greater market share gain from competitors that did not fare as well.

If solid focus is placed on the current condition of your company with a strong assessment of the future, not only will your financial condition and operating performance improve, your company will also be more attractive and command better price multiples, and thus a greater value, once the markets and buyers return.

Therefore, current transfer of wealth should increase in the near future, should measures be taken to survive these unprecedented times with improved systems in place to attract buyers.

I would like to end with this quote from Warren Buffet. He is quoted, “If you don’t know the value of your company, I’ll steal it from you, and it will be ethical, legal, and moral. If you know the value of your company, and can justify it, I’ll perfectly be happy to pay every nickel of it.”

Here is our contact information. If you have any valuation matters that you want to talk about, or you simply have a question, please give us a call, or email us, and we will be glad to assist you.

I will now hand it back over to Craig, for any questions.

Craig Ima, Windes Chief Marketing Officer:

Question: What are some additional types of engagements that you have been working on since the COVID-19 outbreak?

Todd Hollingshead, Hollingshead, Dearden & Associate, LLC, Managing Member:

Answer: April and May was very quiet. We had existing projects in draft, but some of these clients also had real estate as another asset or investment, so they really had to deal with those issues – with rent abatement, and things like that.

We did have a couple limited partnerships that held securities. We appraised a minority interest in that, because as I stated previously, the markets had declined drastically. So it was a great time to transfer wealth because the portfolio had shrunk quite a bit.

There were some LLCs that we had been working on and they were put on hold because again, I think one of the LLCs had apartments and those were hit very hard. Also, retail and office real estate was hit very hard. So those were put on hold, waiting to see if the values would decline. As a matter of fact, we have picked those back up and started appraising them as of a later date because again, the value should be lower and they should be able to transfer more.

We have been dealing with a lot of mediation, whether that is involving families or business partner disputes. I do not know if that is just because of COVID-19, I am not sure, but we have had three or four of those.

Now we are starting to see a little more of the estate planning surfacing again, because it is an election year and it is such a high estate and tax gift exemption amount.

Craig Ima, Windes Chief Marketing Officer:

Question: Discuss how you now view and utilize valuation methodologies with the presence of COVID-19.

Todd Hollingshead, Hollingshead, Dearden & Associate, LLC, Managing Member:

Answer: We are a little more cautious about the market approach. Maybe there is less focus on that approach because again, if you’re applying to multiple, to let’s say last 12 months, or let’s say last fiscal year, and the company was doing $20 million and $2 million in EBITDA, and now they’re doing $10 million in sales and $1 million in EBITDA, applying multiple to historical figures may not be really representative of the actual value of the company.

So more of our focus now is on the income approach, or the discounted cash flow, where we may be looking at more scenarios. Here is one scenario of when things do not look like they are going to go right, this is probably more realistic, and this is more of an optimistic approach. And then we may apply probabilities to those three scenarios.

Again, we are really relying on the client for a lot more of their input, again, because these industry sources are somewhat questionable sometimes, and clients are talking to their customers and their suppliers, so they are hearing a lot more about what is actually going on.

Craig Ima, Windes Chief Marketing Officer:

Question: What are the opportunities to take advantage of at this point?

Todd Hollingshead, Hollingshead, Dearden & Associate, LLC, Managing Member:

Answer: I will just reiterate. I think if you can, it is a great time to improve your business, make it more attractive with many of those bullet points that we talked about. I think it is a great time to do some estate planning and possibly transfer some assets to children or grandchildren with values low, and the exemption so high.

Going back to that story, the company that had 30% of the business with Boeing, we were appraising them in the fall of last year for estate planning. Thank God, they did not finish the estate planning because we are now doing it again. And again, I point out that the revenue for 2019 was $36.5 million and $9 million in net income. And now they are projecting revenue at $20.5 million and breaking even essentially for net income.

We have now finished that appraisal and the value between last fall and now is considerably less. So the owner now is able to transfer a larger percentage of the company that eventually will rebound in the next coming years.

Craig Ima, Windes Chief Marketing Officer:

Thank you very much, Todd, and thank you, Rob for insightful presentations regarding what businesses should be doing in order to increase value and maximize the use of resources that can help them to successful transitions.

This concludes our presentation. Thank you.

Please contact Windes for more information or questions regarding your particular situation at 844.4WINDES (844.494.6337) or via email at


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