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Valuing Our Business

• American Gutter Monkeys, LLC • Season 1 • Episode 7

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In this episode of Monkey Business Radio, hosts Chris and Dennis dive into the importance of valuing your business. From financial metrics like balance sheets and P&L statements to the intangible value of Intellectual Property and Goodwill, they explore the methods that business owners use to assess their company's worth. Whether you're growing your business, considering investment, or planning an exit strategy, this episode provides practical insights on how to calculate your business's value and make informed decisions. Tune in to understand how valuing your company can shape your future success!

Chris:

Every once in a while someone comes along, shocks the establishment with a new innovation and a tired industry From the movie Moneyball. Here's how Boston Red Sox owner John Henry put it Really what it's threatening is their livelihoods, their jobs.

Dennis:

It's threatening the way they do things and every time that happens whether it's the government, a way of doing business, or whatever the people who are holding the reins they have their hands on the switch. They go batshit crazy. Hello.

Chris:

I'm Chris Collins, your host. In this podcast. We dive into stories of innovation, resilience and what it takes to shake up an industry. Joining me is my co-host and resident small business expert, dennis Siggins, or, as he's known on the Cape and Islands, bobby Downspout. Dennis, along with his college roommate, andy Brennan, founded the Cape Cod Gutter Monkeys and transformed the humble task of gutter cleaning into a thriving, multi-million dollar business that redefined the game. Together, we'll uncover the strategies, lessons and inspirations behind building and growing a successful business. So, whether you're here for business insights, inspiration or just a great story, you're in the right place. Grab a cup of coffee, sit back, relax and welcome to Monkey Business Radio. Hello everyone, welcome to Monkey Business Radio.

Chris:

Episode 7, valuing Our Business. So today we're going to break down how to value our business. Whether you're growing, seeking investment or thinking about the future, we'll talk about the financials, intellectual property, goodwill and how did those factors come together to figure out your company's true worth? Hello Dennis, chris, how you doing? I'm doing great. We got this great quote you've been hanging on to for a while. Why don't you go ahead and hit us with it? Which one is this? The?

Dennis:

hockey analogy the Wayne Gretzky hockey analogy. Yeah, it's one of my favorite mantras these days. Some people go to where the puck is. I want to go to where the puck is going to be when I get there. And then there is a third category and that's the folks that just don't know that there's a puck and they stand around getting hit in the shins.

Chris:

I love that.

Dennis:

Yeah, you don't. You don't want to be in that group and I say it jokingly, but but seriously. You want to be able to see where the puck is going to be when you get there. You want to have a good vision, a broad vision, a deep vision.

Chris:

Yeah, so that's perfect, perfect analogy for business, right, which is what we're talking about. Yeah, yeah, yeah.

Dennis:

To see where you want to be six months, 12 months, 18 months from now.

Chris:

Okay, let's get into it, figure out where the puck is going, all right. So let me ask the first question. You know I'm not a business major or anything like that, so I kind of understand that you know I need to know my business value. I'm eventually going to maybe sell my business, but that's not until 30 years from now or something like that. So why is it important that your average business guy, your guy just starting out or whatever, why is it important to be able to value your business?

Dennis:

Yeah, I do my balance sheets for my three companies annually, my balance sheets for my three companies annually. And so, for internal purposes just me, my staff, my inner circle we want to be able to make comparisons year to year to see where we're growing, how we're growing, where our strengths are, and we want to fortify those strengths and eliminate the weaknesses. Another reason that you want to have a good valuation on your business is if the owner or the manager wants to apply for a loan or a line of credit and your banker is going to do a risk assessment and he or she is only going to loan you as much money as they're comfortable, very likely based upon your assets, and your assets would be your balance sheet. Also, if the owner wants to sell stock in his or her company, you want to know what the value is.

Chris:

Yeah, that's an interesting one because I know I've joined American Gunner Monkey and we kind of went through this when we were actually discussing about joining.

Dennis:

It's actually what's the value of the company, what was the value and even since you've been here, we've been wined and dined two or three times over the last two years by investors, venture capitalists. They're oftentimes interested in a company and we seem to have hit on some of their radars. So I have a process now where I can tell in 15 minutes if we're going to go any further, because I know my valuation. I know it before they call here and I will always have that conversation with a potential investor, even if I'm not interested in selling. It's always interesting. But I have a pretty accurate valuation. So I want to know if this potential investor is coming in low, looking to maybe score something for less than it's worth, or if he's a real player and he really wants to come in and buy the company at market value. So for me it's important.

Dennis:

Another reason too, too, is if you do decide to sell Sure, and everybody's company is worth something, and we're going to talk about that in the next few minutes Everybody's company is worth something and it always helps to know that you and I were talking before we come on the radio here. I have a friend he's a relative of mine, mine and he's buying into a company and he and I recently had a meeting. He's been a manager of that company for seven or eight years and now he's going to very likely purchase 25% of the stock and become an owner and he and I sat down and we did a rough business valuation last weekend. So he has a much better idea as to how he wants to approach his good friend who owns the company. So it's important for those reasons and many others to know the value of your company. Any thoughts, chris, on that?

Chris:

Yeah, it's interesting. Yeah, especially the stock one. Now you mentioned it and we started talking about it. You know it hit me. Oh yeah, this is exactly kind of what we did, you know, two years ago, whatever. Sure, yeah, that's really interesting, very interesting. So, in terms of like figuring out your value, now, what's your? What sort of metrics do you use? I'm not familiar with all the different things you can use to get your value. I know we used a balance sheet for that purpose, but you know what other yardsticks are there that I can?

Dennis:

use. There's a there's a lot of them Depends on what stage of your business you're at. If you are starting a home service landscape company and you buy a truck, a couple of lawnmowers, a string trimmer and a few rakes, you know you probably have 60, $70,000 worth of trucks and tools and equipment, but you don't have any business value because you haven't cut a lawn yet, right? So all you have is your assets, your hard assets. So what you have there is a startup company. So the metrics that you could use, that that owner would use, would just be a basic value of the hard assets the truck, tools and equipment.

Dennis:

But other startups may want you know they've been in business, say, a year or less. They would take a series of monthly profit and loss statements which demonstrates the profitability month by month, demonstrates the profitability month by month. At the end of the year you're going to have gross annual sales and you're going to have your annual profit and loss and your annual P&L will be what you use for your taxes. That's going to give you a value based on the profit and sometimes that value would be a measure of 3x or 5x of pre-tax profit, or EBITDA is what it's called, and that's the next level of yardstick measure for profit-friendly value. Some of the best things are when you have several years of profit and loss statements, three to five-year history of financials, including your balance sheet. Eventually, the business owner, after two, three, four years, is going to want to produce a balance sheet, because that is the Bible. That is what tells you exactly what your company is worth. Now there are some variables in there, but the balance sheet is a great tool for determining value.

Chris:

So in terms of like the profit and loss statement, that's kind of telling you where you're going, you know how you're moving along in terms of profitability, and then the balance sheet is kind of where you are on that day, sort of what your current standing is.

Dennis:

Yeah, actually we'll talk more about balance sheets in just a few minutes on what it is and how it's built. A couple of little points I'd like to make is methods of valuation. There's a cost-based method and that's kind of what we talked about with the startup company who owns a truck and a couple of lawnmowers and some tools and equipment. It's a cost-based method. What would it cost you to replace those items? You don't have any business yet. You don't have any intellectual property. Your trademark name isn't worth anything yet because you haven't really cut a lawn. It's based on cost, Right.

Dennis:

Maybe, a liquor store or something like that. Sure, and you do comps within the industry as well. There's a market-based and that's basically. You look at other businesses that have sold, other businesses that maybe are on the market but haven't sold yet, and what are they valued at? What are other companies in your space selling for the sales-based? You know there's some industries that are basically sales-based companies. If you are a salesman and you sell widgets, then you are a widget salesman. But if you sell software, there's very little cost to the software once it's built, all the cost is upfront. So if you are a sales company selling software, a lot of times it's just based on sales. There's not a whole lot of tools and equipment and infrastructure in the industry. And coming back around to our asset-based valuation, which is the one I like the best, the asset-based valuation really hints at the balance sheet and that's when you take all your assets back out, your liabilities, add any other variables in there and you get a value, a bottom line, that this is what your company's worth.

Chris:

So you previously mentioned that the balance sheet is the Bible of the financial statements, and it sounds like it's a big part of asset-based valuation, so maybe we should dive a little deeper into how to use the balance sheet. What it is. I love the balance sheet I do.

Dennis:

You can always tell your sales at the end of the year by the number and how they grew over previous years. Profitability is a pretty simple concept to understand, but the balance sheet is where it's at. That tells me what my company's worth. It's called a balance sheet for a reason. The balance sheet is balanced. You have your assets, which is a piece of value, and the liabilities, which is a financial obligation that you must pay on either side of the equation, and they have to balance out. The asset-based valuation method of building the balance sheet is very, very objective and for year-to-year comparisons, we always want to use the same method. Very, very objective. And for year-to-year comparisons, we always want to use the same method, so that we're always comparing apples to apples. And this is just going to give you. The balance sheet will give you a different view of your growth for the year and over the years. So what it does is it starts out with all the assets.

Dennis:

Now, an asset is an item of value. It's a piece of value that you own and for our purposes today, there are three types of assets. You got current assets, fixed assets, and then intellectual property A current asset, or, in this case, cash. A current asset is an asset that is easily convertible to cash and for today's purposes, again, cash accounts receivables that's work that you've already completed but you haven't got paid for yet. That's an asset. Prepaid expenses If you prepaid your quarterly taxes, for example, or if you've prepaid for something but you haven't received delivery on that something, that's an asset. And the final one that we'll use for today's purposes is inventory.

Dennis:

Inventory could go either way. It could be a fixed asset, but it really isn't. Inventory is our product and materials. That converts to cash as soon as we put that out into the market and either sell it or use it in our line of service. So the first asset is current assets. You add the cash, the accounts receivables, prepaid expenses and inventory. You add that together and you got a number. And then we go to our fixed assets.

Dennis:

A fixed asset or a long-term asset is things like your building. Do you own the building you live in? Trucks, tools, equipment inventory could be, because some inventory is long-term office fixtures, desks, computers they all fall under the umbrella of fixed assets. So, again, we add them all up. You're going to have this on. You put this on your balance sheet. You add up the value of your building, the value of your trucks, your tools, your equipment, the office fixtures, the furniture, the chairs on the table, everything and you add that together and you have a number and that becomes your number for fixed assets. And then, chris comes to the tricky one the intellectual property. What is the value of the name of your company, the trademark, the patent, the service marks, the goodwill you have in the community?

Chris:

Yeah, that's an interesting one. You know I'm from the high-tech world so you know I can understand the trademarks, patents that's what I'm familiar with. But this idea of your company's standing in the community being part of your valuation is fascinating to me. It is, yeah, especially when you come to things I mean, of course, cape Cod gutter monkeys. You spend a lot of time cultivating this idea of the. Bobby Downspout is your spokesman. You've put hundreds of commercials out there very popular. Today I'm wearing my Cape Cod gutter monkey sweatshirt and you walk into a restaurant. They all know you Walk in the door. Oh, it's the gutter monkeys are here.

Chris:

It happens a lot yeah, you were on the phone the other day. I was here and a woman wanted to know if this was Bobby. She was speaking to Bobby Downspout. She recognized your voice as being Bobby Downspout. Yeah, you talked about the story about the one who called in and said oh, is this Bobby Downspout?

Dennis:

Use your Bobby Downsp financial guy and I was sitting in the back and there's a knock at the door and an older gentleman comes walking in and he asked are you the guy on the radio? Because he saw my truck in the parking lot and the bank apparently wasn't that busy. So the only other person was me and he was funny. He said you guys do my gutters every year. You do a great job and then it's flattering. Yeah, yeah, but, chris, to that point, yeah, we have a good reputation in our region and that's called intellectual property. That's the value of your company name, my company name. We could be cool and we could be hip and people think we're funny. That's all well and good. But if my phone doesn't ring, if I don't get clicks on my website, if people don't come into my restaurant to eat my food, all that popularity isn't worth anything, right?

Chris:

So on its own it's not really worth anything. It's sort of the multiplier of the other things that you're doing the assets, your business, your revenue.

Dennis:

So, yeah, let's take for example, gross sales. You mentioned one of our companies, the Cape Cod God of Monkeys. Okay, we are in the home service industry. That typically is going to value itself somewhere between 1 and 3x. So if you're doing a million in sales, it means your value of your intellectual property is going to be one to three X, one to three million. Now there's other factors that will come into play, but basically, for your own internal balance sheet purposes, choose an accurate method. Talk to a business consultant, talk to your accountant, come up with a formula Is it 1x, is it 2x? I know the one that we use and we're consistent with it year after year, and it's a function of what we do for sales. So I take my annual sales and I multiply by 2.5x, because I believe that's a fair valuation and that's what we use. So what you have is a total value of your assets current assets like cash accounts, receivables, inventory, fixed assets, your buildings, your trucks, tools and equipment and office furniture, fixtures, equipment, that type of thing, and then your intellectual property. Add them all together. That's your whole set of assets. Right there On the other side of the equation, is the balance sheet portion.

Dennis:

The balance of the assets is the liability. Assets is a piece of value, it's something of value that you own. A liability is the opposite. The liability is a financial obligation. So if you have a long-term debt, a mortgage on your building, or you have a truck loan or two on your trucks or fleet of trucks, that's a liability. You have current liabilities and those are financial obligations that are due between 30 days and one year a shorter term. There's others that I don't even want to bring up today shareholder equity, retained earnings and stuff like that. We'll leave them off the table for today's discussion. So your liabilities is going to be a total of any loans, any long-term or medium-range debt that you owe, and you add them together and you have a number for liabilities. You take the total number of dollar value of your three assets, your three categories of assets, and from that you deduct your liabilities and that's what you get. Your bottom line is your net worth. Your company is worth this and is a dollar amount, and that's what it's worth.

Dennis:

When you use this method, two, three, four years in a row, you're going to get a picture as to the value of your company, year after year after year, and you're going to see that value. Most likely you're going to see that value grow. And as you add trucks, you get those trucks paid off. If you're the restaurant owner, you purchase some new restaurant equipment. You pay it off in two years. You now own all that brand new restaurant equipment.

Dennis:

That falls into your asset column. If you add more tables to your restaurant, more chairs, you build out a bigger platform. It's going to show up in your balance sheet. It might not show up in your sales every night. You might just be that restaurant owner that's bolstering for your Thursday, friday, saturday night run. The rest of the week it may remain very similar, but you built out your restaurant a little bit. So those three nights of the week you can capture those extra customers and clients and that shows up in your balance sheet. That's why we want to keep a balance sheet every year. So, chris, in my opinion that's my most important financial document is the balance sheet.

Dennis:

But let's go back and talk about some of those other methods of valuation. So we're going to talk about sales. If you're the restaurant owner and you sell $600,000 worth of food and services, that's your sales for the year. Next year you do 600 more. You do 1.2 million. You just doubled your sales and you want to continue that pattern of growth. Another method of valuation is profitability. As a new restaurant owner, maybe that $600,000 in sales you only broke, even because it's your first year You're a startup company you haven't paid off a lot of the short-term loans that you took out to get the business started. So maybe that first year you were not profitable, but the second year you doubled your sales but your profitability went from zero to 300,000. This is part of that process. So you want to keep monthly and annual records of gross sales, but also pre-tax profit. And then the third item that you want to maintain annual records of is your balance sheet. What is your balance sheet? What is your company worth? And in my opinion, those are the three.

Chris:

Those are the three key pieces, with the balance sheet being the most important of the three, and since there's some variability in determining particularly in the last one there the balance sheet, consistency of doing it the same way year after year, using the same consistent formulas, and things like that are very important to make sure that you're getting an honest picture of your year to year.

Dennis:

Well, and there's a lot of information out there too. Everyone has a computer. There's so much information out there on how to build a balance sheet, and many, many websites are going to give you three, four or five different methods of building a balance sheet. Choose the one that makes the most sense for you and again, talk to your accountant. Yeah, get help. Yeah, get a second or third opinion.

Chris:

Yeah, you guys are all Bentley graduates. Financial.

Dennis:

We're all accountants at heart.

Chris:

So you're all set. But yeah, for the average business guy who's going to need some help.

Dennis:

But honestly, Chris, I still go online, I look stuff up, because this isn't you know. We go into the real world. I've been in the trades my whole life. We get good at what we do. We get really good at one thing, and when I sold my construction company 15 years ago, I really didn't have a job and prior to starting our current businesses, I did a little bit of consulting and a little bit of freelancing. But when we started the Gutter Monkeys, I pulled out some of my old books, I went online and I determined what type of P&L, profit and loss statements we're going to use, what type of balance sheets we're going to go with.

Chris:

Yeah, because it was a little different than your other businesses. You had a construction business which is very different than this gutter business and particularly this gutter business because you do have the aspect of you know the Bobby Downspout aspect of it, the goodwill, the marketing, the amount of marketing you do is huge and you know your standing in the community is amazing. So yeah.

Dennis:

So, chris, let me tell you this is the one thing that I really like about what we're discussing here today the overall US economic inflation in recent years. According to an article that I read in inflationdatacom no-transcript and people are outraged Inflation is soaring at 3.4%. Yet the stock bond and mutual fund market, which historically averages 11%, has been banging away at anywhere from 14% to 18%, other than the one I think it was. 2022 was a rough year, but in general it's been averaging between 14 and 18%, but it's always going to average roughly 11 over any 25-year period, any 25-year slice of that pie.

Dennis:

And I'm looking at a growth chart from one of our companies and I look at the growth patterns and we had growth years, in the beginning, of a hundred percent, when we went from 300 to 600, that's a hundred percent. Then the next year we went to 900, that's a 50% growth. And as you grow, you know you get up to 1.5 million. And let's say you grow 300,000, you're still growing the same 300,000, but it becomes a smaller and a smaller and a smaller percentage until, let's say, you hit 3 million and then the next year you go to 3.3, you only grew 10% and the next year it's like 9%. You're growing the same amount.

Dennis:

It's just a smaller portion, relatively speaking. However, if you look at that same group of sales and alongside of it you take profitability, or, in this case, let's take the value of the business, and I'm looking at the value that we had throughout these years, based upon this company's balance sheet, and it grew 50 percent, then 33 percent, but then we bought a building and that year it grew 144%. Remember, inflation is 3.4% and the stock market will produce somewhere between 11 and 16%. That year, my company value grew 144% because we bought a new building and then it went back to 27%. Then we built this big building that we're in now and boom, it grew 140% and then we just went. We kept doing what we're doing 18%, 16%, 12%, 11%. It's diminishing my company. This particular company, is still growing in value, but now it's becoming a smaller percentage of the whole pie.

Dennis:

But as I look at these two numbers, over the past 10 years this particular company has averaged 34% increase in sales each year and it's averaged 50% growth in balance sheet value. What this tells me is let's say, my company has an extra $200,000 at the end of the year Me and my partner, the other owner. We could split it. We could each take $100,000 bonus and I could put that in my retirement portfolio and earn 11%, or I could turn it back into the company where we're averaging 50% value. Yeah, so you got a clear path. This is a very clear picture as to where I want my money to be invested and this is why I want everybody that's listening to create a balance sheet for his or her own company. It's that dynamic. It helps you plan for the future and that's the lesson today.

Chris:

Yeah, that's interesting because we always tell our franchisees you know the purpose of this is, you're going to build real wealth through business ownership and, when it comes down to it, brass tacks. This is it right here.

Dennis:

It's exactly what it is.

Chris:

This is where you, all of a sudden, you're building real wealth. You know you could take that money. You know, should I buy a new building? Should I buy a new truck? I don't know, you know. I don't know if I have the business just yet, but when you do do these things, you know you're building this real wealth. Where you could put that money in the stock market or you could put the other thing too is, let's say, the example that you just used.

Dennis:

I was meeting with one of my franchisees the other day and we had this very conversation. He is at the point where he's currently approaching maximum capacity in his current facility and I really would like to see him go to 4,000 square feet with an additional 1,000 square feet, with an additional thousand square feet of office space, because I know that that platform can take him to four to six times of what he's doing now. That'll take him six, seven years, eight years into the future. Also, parking spaces, like all these little things.

Dennis:

The restaurant owner he needs parking. He wants to increase sales. What does he need? He needs more tables and more chairs, but he also probably needs more parking spaces. And if he can take a certain amount of money and invest it into these things now, right away, now, his building is worth more and that makes his balance sheet a little stronger. Building is worth more and that makes his balance sheet a little stronger. Also, if he has 20% more parking and 20% more tables and chairs, he can increase his sales 20%, which puts more cash in the bank, which builds your balance sheet. It all comes together on the balance sheet.

Chris:

But it can be scary. You're going to have to step off the ledge. You have to have faith in these numbers and have faith in your balance sheet, and then you can kind of move forward without it. What are you going to use to, you know, to give you that little kick, that amount of courage? You're going to need to spend that money, maybe spend that build that building just before you actually need it, you know, maybe a year in advance.

Dennis:

We have some clients that there's two or three in particular that come to mind. They do exactly what I tell them. It's almost scary because I'm afraid if it doesn't, you know, come up roses, it'll make me look bad. It'll be on you of mine for three or four years now and he really adheres to the I don't want to go to where the puck is, I want to go to where the puck is going to be. When I get there, he's always looking six, eight, 10 months out and his company is very strong. They had a great year last year and a lot of it is based upon him seeing the big picture, and one of the things he does is he asks my advice on certain things, and that's one of the things I would like to see. All these small business owners have an advisor. Talk to your banker, your financial planner, your attorney, your accountant. Surround yourself with some good people who are going to give you good, solid opinions.

Chris:

And again, this is a reoccurring theme. On our last at least three podcasts, we've been saying this over and over again Surround yourself with good people. You know, you're the measure. What is it?

Dennis:

You're the measure.

Dennis:

You're the average of the five people that you're mentally and emotionally closest to. Yeah, and it's so true. It's so true, and to me, that's the lesson for the day. Put together these financials every year, your profit and loss statements, your sales growth statements and your balance sheets, and over time you're going to have an incredibly valuable set of tools that you're going to use all the time. I pull one or two of these sheets out at least a couple of times a week when I'm working on sales forecasts or growth in certain areas, and I use it all the time. It becomes second nature to you.

Chris:

It's like a hammer. Yeah, that's so important. And then you have the trust in the numbers. You've experienced the numbers over the years. You have trust in it. You've made a few calls based on those numbers. It worked out. So now you have even more faith in it and so you can really really throw yourself behind it, your decision making.

Dennis:

Okay, I think that's the lesson for today. That sounds good.

Chris:

No monkeys were harmed in the making of this podcast. That's right. That's right and we'll see you next time, episode eight. We'll dive a little deeper into some of these topics going forward, but thanks for listening. See you next time. Bye, thank you for tuning in to Monkey Business Radio. If you enjoyed today's episode, please make sure to subscribe, like and follow us wherever you get your podcasts. It really helps us reach more aspiring entrepreneurs like you, and if you got a question or topic you'd like us to cover, leave a comment or reach out to us on social media. We'd love to hear your thoughts and keep the conversation going. Don't forget to leave us a five-star review if you found the episode valuable, and make sure to share it with anyone who might benefit from our tips and stories. We'll see you next time. This podcast is produced by American Gutter Monkeys LLC. Build real wealth through business ownership. For details, visit us at AmericanGutterMonkeyscom.