In this podcast, Michael Carter, CEO and president of BizEquity, talks about:
  • The danger for business owners of not knowing their company's valuation;
  • The art and science of valuations for businesses at different stages;
  • How BizEquity can be helpful to the business owner and their advisors; and
  • Success stories from business owners that have prepared online business valuations.

About the Guest

Michael Carter is the CEO and president of BizEquity, the first patented and leading online business valuation service. BizEquity was created to help democratize financial knowledge to the small and midsize business marketplace.

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Noah Rosenfarb: Hello everyone and welcome! It’s Noah Rosenfarb with another episode of our Divestopedia Exit Strategy podcast. Today’s guest is Michael Carter. He is the CEO of BizEquity which is the first patented and leading online business valuation service. It’s really exciting to have them on the show because not only does Michael has this great technology that he has created but he has got a background that will be interesting to all of our listeners in venture capital, private equity, technology startups, and more. So, Michael, thanks for joining us.

Michael Carter: Noah, thanks for having me.
Noah Rosenfarb: So before we start talking about your latest venture in BizEquity, take me back through your career when you were deploying capital for other people and you were working as an entrepreneur. Share with me some of the stories that you had of building businesses and how business valuation got ingrained in you as a key measure for success for businesses.
Michael Carter: Noah, sure. You know, as Noah mentioned, I started my career actually in business consulting and then had a few software companies from there in marketing, business development officer of US Interactive which was one of the first publicly traded internet companies in the internet services arena. So kind of Web 1.0. We went through that and then after that I founded my second software company and then was lucky enough to work for my mentor, a gentleman by the name of Warren Pete Musser and Pete was the founding investor of Comcast, QVC, Novell, and over five hundred companies and he is a legend in East Coast venture capital and we did a lot of private equity and venture, worked together over the course of the last ten years.
Valuation became first and foremost because at the end of all the sessions with all the entrepreneurs, I noticed that Pete would really ask one question with a silver bullet which is, 'What do you think your business is worth.’ No matter how sophisticated the entrepreneur or market opportunity they were pitching whether it would be information technology, software, stuff in the cloud, all the latest trends and technology or even a retail rollup strategy, every entrepreneur was hesitant about answering the valuation question and really because it was art, art and science and they really just didn’t know and we looked at one company in particular together which was called Power Up Manufacturing. It’s still a business in Elmhurst, New York.
We visited Power Up and I remember asking the two gentlemen that were the founders in their 60’s, 'What do you think your business is worth?’ They are in the lithium ion battery making business, pretty successful, less than $10 million in revenue, let’s say over a million dollars in earnings. They said, 'Oh I don’t know, two times.’ I said, 'Two times revenue?’ They said, 'No, two times earnings.’ I remembered boarding my little US Airways commuter flight thinking what a shame. If they were in Boston and not Buffalo or Austin, let alone San Francisco or New York, they would know that their business is probably worth 2 to 3 times revenue because it’s in a hot, lithium ion battery making space and they have the high gross margins.
You remember thinking it’s an access issue right? It’s an access to knowledge issue and the stuff that you’re doing Noah today and you’ve done with your shows and with the website, you get the whole point that it’s all about how can you help educate instead of democratize knowledge and bring it to the people that really need it and that’s how valuation became so important to me and I wanted to solve this problem.
Noah Rosenfarb: In terms of valuation, when you were working as a venture capitalist, what were the tools you’ve used historically to help you value companies?
Michael Carter: It’s really just comps and feel. So the idea of being you kind of know a pre-revenue company with a decent entrepreneur, maybe not an A+ Silicon Valley entrepreneur but a decent entrepreneur, with you're kind of in that $2 to $4 million pre-money valuation space with an A+ entrepreneur, maybe it’s $4 to $6 million and that’s pre-revenue. Post revenue, there was always a multiple of next year’s revenue numbers if it was a growing technology company. You basically take investment banking reports and bid it off with comparable, but it was more art than science and kind of gut feel.
My mentor, Pete Musser, has a great saying which is 'Always the projections that you’re shown in these venture meetings, divide it in half and see if it works. Divide the half in half and see if it lives.’ Meaning the projections of the company and the capital that they seek and that was more from the capital utilization perspective, but for the value it was really just based on comps and it was more art than science which I think you know in the early stages is more applicable but as the company develops, it has to be a science. What we figured was there wasn’t an easy way to find that data, because you could buy licenses to comparable databases. But they were to $3,000 to $5,000 per seat per user and often it was only just for one industry category.
Noah Rosenfarb: Yeah. So historically, I have testified as an expert witness in court on how much businesses were worth and how much money people made from those companies and my reports, they were probably $25,000 to $50,000 depending on the layers of complexity and sophistication. Occasionally we have the ability to do what we call like a rule of thumb valuation, letter report which was $5,000 or $7,500 but there was a lot of time and effort that we invested in figuring out the art piece. So the science clearly was available through the databases that we had to pay a lot of money to access but the art was really the difference in professionals. And the reason I’d end up testifying is because when I applied my art and an opposing expert applied theirs, we had differing numbers. What did you see in terms of the experience on the sell side when you were looking to exit companies and figure out a valuation? Was the art and the science mixed a little bit different than it was when you were investing in the early stage?
Michael Carter: I think so. As I mentioned, in the early stage venture business, I think it is more art than science. In the later stage, it’s definitely more science because there’s revenue and comps to point to and you know it’s really important as an entrepreneur to focus on not just what the value is today, but what the value would be if put into the particular acquirer’s channel, how it could accelerate your performance or your future revenue or earnings potential, and what that would do. A lot of times as an entrepreneur if you really believe in what you’re doing, the proforma is really you’re buyable from a business basis or from a valuation basis and that’s what you want to sell off of - meaning your long-term in revenue growth or long-term EBITDA margin growth, because that will help trigger and drive a lot of the premium around the valuation of the business as an owner, operator, or entrepreneur.
Noah Rosenfarb: How did you birth this idea? Was this your idea to create BizEquity?
Michael Carter: Yes. My idea in the sense of building what we built with BizEquity and it was really born from that commuter flight to Buffalo, New York to Philadelphia thinking you can find your home price through Zillow. You can find your car price through TrueCar. But for your biggest asset for most small business owners or most estate planners working with small business owners is their business that there was no easy way online to help you ascertain that value and that was how it was born. My original concept was called the business genome project so kind of Pandora but or businesses, the idea of being successful businesses leave clues and patterning that with big data, and then I was lucky enough to be able to acquire assets from Advanta which were called BizEquity and merge it in to what I was doing. So yeah, the initial kernel was certainly kind of my idea born on the flight four and a half years ago from Buffalo to Philly.
Noah Rosenfarb: As at my firm, Freedom Business Advisors, we’re avid users of your software. We refer to it as the Zillow for business. What we tell owners is, 'Have you ever gone on Zillow to see what the value of your house is worth?’ Almost inevitably, all of them say yes. Is it right? They say, 'No. My bathroom was just renovated. They don’t know about the fancy tile I have outside and my backyard and my landscaping.’ But it gives you an idea right. We say, 'Okay, we’ve got the Zillow for business owners if you want to see what your business is worth.’
Michael Carter: That’s awesome.
Noah Rosenfarb: Tell me how it has evolved and maybe tell me who’s using it, how are they using it, and how is it being helpful to business owners and advisor’s owners?
Michael Carter: Sure. We have the privilege of being able to say as you mentioned earlier, we’re only the patented way to do it online and we’re the largest global business valuation company in terms of number of company valued. So we valued to date over 13 million and 100,000 plus businesses and every day, kind of like I'll date myself a bit, but remember the old McDonald sign where you would go past the McDonald’s and say, 'How many millions of burgers or billions of burgers were served' before it was digital? We have the same thing off of our website, off of BizEquity.com where we’ll tell you how many businesses we valued in real time.
How people are using it, it is for business owners, as a gut check, for tax planning at the end of the year. We’ve had even been utilized in divorce cases where somebody just wants to understand the value of the business and ascertain it for a low fee. But really I think where we’re getting a lot of the list and a lot of the usage, Noah, is people like you and your firm that are doing it to help your clients and to help your prospects better understand their value because at the end of the day, to do proper estate planning or to make sure that they are ensured properly or to make sure they have enough capital, this is the trigger question. As you mentioned, before us, there wasn’t an easy and cost effective way and fast way to do it online. We’re real proud of the fact that we’re trying to help educate the market and help people get more value from the business, help advisors be more valuable to their business owning client, help agents become advisors, and that has really been the lift for us and we’re really excited about where we’re going.
Noah Rosenfarb: There’s an easy group of naysayers let’s say, especially people that are in the field that I was in that value business as a profession and charge $25,000 to $50,000 for reports. What do you say to them? When they say, 'There’s so much art involved in what we do that you can’t replicate it through a computer model.’ What are some of the stories you might tell to combat that?
Michael Carter: Yeah, so before I tell the stories which are getting more and more every week, so it’s really exciting. Just to make everybody I think feel more comfortable in the certified business valuation space, I think it’s important what this is and what it’s not. What it is? It’s the only patented way online to get a value of your business in real time. In less than 10 minutes, you can print out a 23-page report on your business in four different valuation figures and so and so forth. That tells you about it all online, so I’m not going to talk about the product today in too much detail.
But what it isn’t is we’re not verifying that the data entered is accurate. Our view is much like Google’s which is if you’re going to spend time in going to our online product where over $7 million dollars has been spent in R&D, you’re not hopefully wasting your time and putting in phony numbers, because at the end of the day, it’s like a Google search. If I was looking for a sushi restaurant in Fort Lauderdale, Florida, I’m not going to say I’m looking for a sushi restaurant in Omaha, Nebraska because it doesn’t make sense, so our view is if somebody is going to spend over 180 seconds on our site, 94% of the time, from our analysis, it’s accurate data.
Much like Intuit it fought early on in the early 90’s when they started it, the accounting channel and accountant saying, 'Wait a minute. Who’s this upstart software company from California? They’re getting into our revenue stream. We’re accountants and people have to come to us and sit with us.’ What Intuit did so eloquently is work with the accounting channel and basically say to the accounting channel, 'No, no, no. We’re democratizing the ability to help people get refunds through turbo tax. And oh by the way, they can still work with you, and over time, we’re going to grow the pie.’ It’s really analogous to what we’re doing in the valuation space. We’ve learned foremost leaders, Scott Gabehart and wrote the book The Business Valuation Book. He’s our head of valuation support and services.
Everything we do is factually accurate from a systems perspective, but we’re not sitting there saying, 'Here’s our letter to verify that the data entered is accurate'. That’s still the generally accepted valuation professionals in the area or the accounting folks in the area and we see them over time Noah as a huge channel for us. So our view is is today valuation market is a $2.8 billion dollar market, 99% done offline. In the future, we think it should be a $50 billion market in 20 years because what’s more important than the valuation of your business when you’re running a business. So what we’re trying to do is expand the pie and still work with the channel in those cases where you need a certified letter for an IRS case, that’s not us. There are cases where you need expert testimonial from people like Noah. That’s not us. So it’s important to know what you are and what you’re not and we are a software system to help people understand their value so they are in a better position going forward.
Noah Rosenfarb: I'd add to that because we’re a great supporter of BizEquity and the work you’re doing and the results that it creates for a client. The people that say yes to us would never spend the money to have a valuation done by a traditional professional services firm. There’s no need for it. But this service provides them a tremendous value and gives them access and it gets them to begin to understand the value of having a valuation done and measuring value. I believe like you do that it will actually lead to more professional service work for the owner in the future because they’ll have a better understanding of the value of the art behind it when they do get into an experts type report versus a computer software solution.
Michael Carter: Great point, great point.
Noah Rosenfarb: But do share with me some of the stories you were telling me before the call in the green room about a company that just closed this past weekend.
Michael Carter: Yeah, this is an amazing story. We’re really excited about it because I think from a number’s perspective, it’s one of the largest we’ve seen on people how to get value from our tool. A local investor in the Philadelphia area that had invested in an SAP consulting company - SAP is a very large German software company for everybody who doesn’t know and one of the biggest in the world. There are a lot of small businesses that have been created over the last 30 years that specialize in putting SAP software into place, in the businesses. This business was in the warehouse and logistics space, and they were consultants to SAP's product for manufacturing businesses. They built a nice business over the course of the last six years. The principal is in Canada and this gentleman had invested in the business and was really the chairman of the company.
They were looking to exit the business because SAP warehousing and logistic space was in their opinion was getting commoditized. They went to a local investment bank, boutique bank that charges $25,000 to $50,000 retainers and one of the things they do in the retainers is they value the business. David paid this retainer. They came back and said, 'Oh, the business is worth $8 to $10 million dollars in an auction process which is a typical process that a lot of investment banks go through with their business.’
He contacted us and said, 'How do I use your product? I’ve heard about your product in the local media.’ So I said, 'Here’s the email and here’s access to the system. Here’s what it costs.’ So on and so forth. He signed up. We came back with a figure of $18 to $21 million dollars in the three different core valuation areas, the asset, the equity, and the enterprise in our report. He then based on that changed the investment bank. We actually referred an investment bank just as a favor for a user. We do that sometimes. We didn’t get any fee. We referred an investment bank by the name of Janney Montgomery Scott. I had a friend that ran their technology practice. Janney took them on board and they sold the business last week. It finally closed on Friday of last week for north of $20 million dollars, so in the range that we provided. I think we’re taping him this week because he’s so excited about it. In his view, we saved him and his shareholders $11 million dollars.
So it’s such an amazing story because we’re used to helping people save or show that their company is worth hundreds or thousands more than they thought, never to this magnitude. So $11 million dollars, he saved on an expenditure of $365 dollars with us. His name is David Gulian. The company was called LogiStar, and we’re really excited about it.
Noah Rosenfarb: Yeah, I had a similar instance with one of our clients, not quite as definitive. But when we asked the owner what he thought his business is worth, he said $20 million. We did the BizEquity report for him and it came back at $40 million and so he says, 'I had no idea. I can’t believe it. This is amazing. But oh by the way, my wife just booked first class tickets instead of coach.’ Again, it’s the power of knowledge and I think a lot of business owners don’t really know what their business is worth and the conversations we have with them especially at the smaller end of kind of the lower middle market. People will say, 'You know, I think the business is worth $2 to $4 million.’ Well the difference between $2 million and $4 million for someone’s retirement is night and day. It’s three vacations a year versus stay-cations. It’s treating your grandchildren to a part of their college education or not. These become substantial lifestyle changes when people look at the range in such a broad distinction and what we’re hoping them do is narrow that range and create better expectations for clients.
Michael Carter: Absolutely. To your point, Noah, when you know your value, you know what you need to protect and there is the industry stats that 50% of businesses are under-insured, 40% of business owners don’t have life insurance even. So I know for myself as a business owner, one of the first things I did knowing the value of BizEquity was purchase a whole life product for my wife and my expanding family, my dogs, my cat, and the new child on the way. It’s critical because business valuation is kind of its on-ramp question to a lot of important financial decisions that I know that you and your firm and others listening on this call help business owners with.
Noah Rosenfarb: We’re a little bit tight on time today so maybe I’m going to just give you an open floor and say what else you would like to share with our listeners and feel free to break it into what business owners should be thinking about and maybe what advisors to owners should be thinking about.
Michael Carter: Some of the case studies that I would like to share, there is an owner of a rug company in New Mexico and this was on Fox. Fox did a piece on us, Fox business online. She didn’t know her business was worth really anything. She would just kind of shut it down. She found us online through Google. Evaluation of her business came back at a good sum, low millions, and we saved her the ability of just shutting down her business versus profiting from it. We have numerous cases around that’s from a small business owner perspective and then also in the advisor side.
Chris Roehm from your firm I believe, Noah, has a great, great case study where there were 14 small business clients that he couldn’t get meetings with that had turned him down. He offered this tool working with your firm, and sitting down with them, and I believe we got 10 meetings from it and even closed one or two opportunities from it. I think it’s really what you said, Noah. I think if you’re coming from a good spot as a business owner with the solution that people actually need and you’re trying to help them solve the problem, and I think valuation is this problem that to your earlier point they haven’t been able to afford before because it costs anywhere from the average price of the valuation at $7,500 dollars and it takes four to six weeks, but really the good ones historically offline have been even north of $20,000.
What we’ve been able to do is make it literally $365 and give them access all year per company the ability to do that, but really to work with their advisor, to walk them through that and the word advisors is such an important and sometimes overplayed term. But more and more advisors with tools like BizEquity and other tools that are out there, not in the valuation space but maybe in the accounting space like Intuit, wealth planning or estate planning tools that are out there, are really helping small businesses better plan for the future. If you think about it, with the baby boomer generation, close to eight million businesses in the next ten years are going to change hands. If three quarters of them don’t know what their value is, which is the industry stats that are out there, that means there is over six million businesses that don’t know what they’re worth and the ramifications of that are horrible for their shareholders, for their families, for not being adequately prepared as you said about the $2 million versus $4 million example.
We’re happy to be able to have this solution that we privately lable to work with advisors like your firm, Noah, to really help the business owner get more prepared and spread this knowledge. I’m very happy to be on your show. I’ve heard multiple things about the show and your firm, so it’s a real pleasure, Noah, and I look forward to hopefully coming on again in the future and any questions that anybody has, I can be reached at mcarter@bizequity.com. I’d love to help anybody that has any questions.
Noah Rosenfarb: Terrific. Well, thanks so much for coming on today for all our listeners. You could always reach me at noah@freedomadv.com or visit us at freedomadv.com. Please feel free to send your comments and questions in to me and obviously if you have some feedback that you could leave on iTunes and rate us on iTunes, that’s always helpful for us as well. Don’t forget to share this with a friend and we look forward to having you back on another episode. Thanks so much and God bless!
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