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Episode Summary
You think you know what your company is worth because your buddy in the industry got 11x and your CPA mentioned a number once at a meeting. That’s not knowing. That’s guessing. Your CPA does taxes. Your banker manages the line. Nobody is sitting at the chart with you asking what a buyer would actually pay and why. I brought Brandon Hall on the show, a certified business valuator who has done over 130 valuations and has a background that’s hard to beat: blue-collar trades, Big 4 auditing across companies from $1M to $1B, M&A at Polaris, corporate finance at Best Buy, and three years now full-time in valuation. We got into the actual mechanics. How you build a normalized EBITDA number that means something. Why owner comp and personal expenses can swing your value by hundreds of thousands. How the buildup method stacks risk-free rate, equity premium, size, industry, and company-specific risk into your cap rate. And the line that should stick with you: transferability of cash flow is the entire game. The easier the cash transfers to a buyer, the more they pay. The harder it transfers, the more they discount. This is part one of a three-part valuation series.
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## Top 10 Takeaways- Your business is worth what someone will pay. That price is cash flow on top, risk on the bottom.
- Normalized EBITDA is the real top of the equation, not the EBITDA on your tax return.
- Personal expenses hide value. Twenty grand a year at a 5x multiple is $100K of valuation forfeited.
- Normalize your owner comp to what a hired operator would cost. The difference is real cash flow.
- The buildup method stacks risk-free rate, equity premium, size, industry, and company-specific risk to reach your cap rate.
- Transferability of cash flow is the whole game. The easier it transfers, the more they pay.
- If the business runs through you, no buyer wants to pay a premium for your stomachache.
- Client concentration at 90% means a 90% revenue risk. Your multiple compresses whether you like it or not.
- Stop trying to save the $125K CFO hire. That investment can return $500K to $1M on your enterprise value.
- Don’t call when you want to sell in three months. By then, every value lever is already locked.
Sound Bites
“When you look at value, the biggest thing is the transferability of your cash flow. You got your business that produces some sort of cash flow. How that transfers to a buyer, to someone else, that’s rule number one.” (@TBD) — Brandon Hall
“Why would someone else want to pay money to be in that situation? The same stomach ache that you go to bed with saying, god, I hope Target doesn’t fire us. Why would someone else want to pay for that stomach ache and pay a premium for it?” (@TBD) — Ryan Tansom
“You’re 90 percent concentrated on this one customer. A relationship gets broken, something happens, that client goes away, goes to someone else. Boom, there goes 90 percent of your revenue.” (@TBD) — Brandon Hall
“I had five people reach out this last week that said, hey, I want to sell my company within the next three to four months. It’s way too late. You can’t do anything. You can’t fix it.” (@TBD) — Ryan Tansom
About This Episode
Brandon Hall is the founder of BGH Valuation Services, a certified business valuator based in Minnesota. His path is unusual and gives him a perspective most appraisers don’t have: blue-collar trades (roofing, painting, finish carpentry) before college, then an accounting degree at St. Cloud State, then auditing companies from $1M to $1B at Baker Tilly, corporate finance at Polaris (heavily active in M&A at the time), and a stint at Best Buy. Three years ago he went headfirst into valuation. This episode is part one of a three-part series Ryan recorded on what your business is actually worth: this conversation on valuation mechanics, then Ryan Turbis (CPA) on net proceeds, then John Warrillow on the value driver system.
Resources Mentioned
- BGH Valuation Services — Brandon’s firm. Contact: 763-777-7140 or brandon.hall@bghvaluation.com
- Value Builder System — Eight key drivers of value report (John Warrillow). Available through GEXP.
- BizEquity — Free baseline valuation software GEXP subscribes to (limited free slots)
- GEXP Collaborative — Ryan’s firm at the time, sponsor of the show
- Capitalism Without Capital — The book Ryan and Brandon discuss on the rise of intangible assets on the balance sheet
- John Warrillow / Built to Sell — Referenced as the next-up guest on the value driver system
- Ken Sangenario / VOP system — Referenced as another value-driver framework
- John Thwing (SBA) — Referenced for digital business deals where the asset is “a domain and a flash drive”
Connections
Phase + Module:
- Module 2 — Expand Knowledge — Owner education on what value actually is and how it’s calculated
- Module 4 — Sustainable Financials — Normalized cash flow as the top of the valuation equation
- Module 5 — Predictable Revenue — Client concentration as a value-killing risk
Milestones:
- Milestone 4 — Owner’s Value (DCF) — The income method Brandon walks through
- Milestone 5 — Market Value — The market comparison method against transaction databases
- Milestone 7 — Value Growth Plan — Reverse engineering from the exit goal back to today
Concepts referenced:
- Normalized EBITDA — Add-backs for owner comp and personal expenses
- Free Cash Flow — The economic benefit a buyer is actually buying
- The Multiple & WACC — Multiple as years of payback, cap rate as required return
- Enterprise Value vs. Equity Value — Hard assets versus goodwill in the purchase price
- The Owner-Operator Trap™ — Why owner-dependent businesses don’t transfer
- Three Lenses of Value — Owner’s value, market value, transaction value as separate questions
- Value Gap — Between what owners think it’s worth and what a buyer will pay