Business valuation is defined as a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Calculating the valuation of the business is an essential step before buying or selling a business, and many investors require it before putting their money down. Dominic Rinaldi is joined by Steve Mize, a Founding Partner at GCF Valuation, to talk about valuations from a buyer and seller’s perspective. Steve has been an accredited senior appraiser for many years and has been valuing small and mid-size businesses across all industries. Learn how he and his team do their business valuation process, as well as how they interact with banks and deal with bank requirements.

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Business Valuation: What You Need To Know Before Selling Or Buying A Business With Steve Mize

Did you know that for SBA acquisition loans, the banks require a third-party independent appraisal after they approve and underwrite the deal? Even though a bank’s underwriting department may approve a loan, the SBA requires that the bank obtain a third-party business appraisal from an accredited firm to validate the purchase price that has been agreed to between the buyer and the seller. We are being joined by Steve Mize, a Founding Partner at GCF Valuation. As an accredited senior appraiser for many years, Steve has been valuing small and mid-size businesses across all industries. He’s also experienced in litigation support and responsible for all projects requiring expert witness testimony related to business valuations. Having worked with GCF Valuation over the years, I can tell you they are an outstanding firm. Steve, welcome to the show.

I appreciate it, Domenic. Thanks for having me.

I had a chance to interview your brother, Darren. On the show, we talked about valuations from a buyer’s and seller’s perspective. I’m hoping that we can dive in and take it from the bank and the lender’s perspective. Before we do that, please provide the M&A Unplugged Community a quick background on yourself, the firm and then we’ll dive into this meaty topic.

GCF Valuation goes back quite a long way. We first started out as Gulf Coast Financial, which a lot of the readers probably know us as. I started the firm in 1997 while I was still in college. Darren, my brother and now business partner, helped me early on. We decided, “If we can get this thing up and running, let’s go 50/50 on it.” He paid the bills and consulted along the way for the first couple of years. I ran with the business. Once we had enough clients, we were able to go full force, he and I. Slowly over the course of 6 to 9 years, we would add on 1 or 2 employees at a time. We dabbled in a few different markets including M&A, estate tax and litigation.

We fell into the SBA loan side of our business. At a random conference, someone came up to us and asked us if we would do it. We decided, “Let’s get into this market.” We were the first and only business appraiser in the SBA market for a few years until they started requiring the valuations. There’s a ton of competition out there, but we’re still the first and foremost when it comes to business valuation and SBA. We have a strong, family-oriented firm. We’re still considered a small business and we still dabble in a few different industries, but the SBA side represents probably 50% of our business.

Steve, when was it that they started requiring third-party independent appraisals?

MAU 39 | Business Valuation

Business Valuation: Most Baby Boomers that are retiring have service-based businesses that need financing above and beyond the value of their tangible assets.


It was after the Great Recession of 2008, 2009. Loans started to suffer. As we all know it, anyone in the M&A business, no one was making any decisions at all. From 2008 to 2010, the business was set on the back burner. I believe they started the requirement in 2009.

I remember we made our way through 2008 well as an M&A firm, but in February of 2009, the SBA came out with the rules change around how they were going to treat goodwill. The fact that they weren’t going to recognize it and that put a screeching halt to everything.

That’s exactly when the rules started to get relatively strong. We were asked by the SBA once. That was probably a six-month period where they wouldn’t recognize goodwill at all. There was a lot of backlash in the financing and the M&A community. We were one of the ones that stepped up and said, “Goodwill is an asset and in most cases, it’s the most valuable asset in an M&A transaction.” We are able to help write the standard operating procedures for the SBA. That was me and another colleague, a gentleman by the name of Scott Gabehart. We together worked with a few people with the SBA to help rewrite the SBA’s standard operating procedures for business valuation. This goes back quite a long way.

Your firm has been integral in how the SBA views third-party valuations and some of the rules and regulations. That’s great work because to all of a sudden unrecognize goodwill in a transaction, you couldn’t finance anything because every business has goodwill as you well know or it should at least.

Not only that, I always ask lenders, “Would you rather lend on a manufacturing company with 90% of the value in their assets? With high customer concentration, low return on assets, high capital expenditures, and possibly working capital requirements and more of a reliance on that equipment. Would you rather lend to a service or a tech-oriented company with customers across the board, high return on assets, relatively low overhead, low capital expenditures and working capital requirements?” All of them say, “I would rather lend to scenario number two.” Within the last few years, most banks still relied upon collateral and it was collateral-based funding. The SBA is not that. The majority of the value that we see is goodwill and the majority of these Baby Boomers that are retiring have service-based businesses that need financing above and beyond the value of their tangible assets.

Steve, your brother Darren was on. We talked about valuations from a buyer’s and seller’s perspective. We work with buyers in our M&A practice and we try to educate them on what to expect in the process if they’re to be going for an SBA loan. As a reminder to everybody in the M&A Unplugged Community, SBA loans are for loan values $5 million or less. One of the things that we tell them is, “You could go through the bank, you could go through underwriting, you could get your deal approved, but there’s a process on the backend that the bank has to follow to get a third-party independent appraisal.” You can’t be bringing some crazy valuation to the table because there are this check and balance on the back end. I’m shortening that and there’s a lot more involved. I’m hoping you could bring the M&A Unplugged Community through the process, what the thinking is and then how you interact with the banks and what the requirements are.

Goodwill is an asset. In most cases, it's the most valuable asset in an M&A transaction. Share on X

Typically, the SOP requires that the bank engage the appraiser directly. It’s very similar to real estate. Like if you’re going to buy a house, the lender is not going to allow you to use your own appraisal. They have to order the appraisal. That’s usually within about a month of closing. They have already gone through the initial due diligence phase. The business development officer or salesperson for the bank has started that process, information gathering and due diligence. Typically, 75% of the deals have already been underwritten by the time they get to us. Once the bank says, “This is a deal that we can do. This fits in our box of reality. Let’s now engage GCF to do the valuation.” That’s when it happens. For us, it’s a similar process that the underwriter takes. I always tell the underwriters, “We’re a second set of eyes for the due diligence side of things.”

We ask a lot of the questions that they possibly will miss. We ask a lot of the questions that sometimes the salespeople, brokers, buyers and sellers may not want us to ask. We go into a little bit more detail in regards to what makes this company more or less valuable. Our process takes anywhere from 7 to 12 days from beginning to end. We obtain information. A lot of it’s the same information that the underwriters are using to underwrite the deal. I’ll throw out a few things like 3 to 5 years of tax returns, interim statements, maybe a business plan and projections. Any nonrecurring expenses, what we all know as add-backs, any contract, intangible asset or liability that would impact the value of the company. These are things that we look for upfront.

Once we get through that initial phase of information gathering, we start putting together a list of questions. We start from a financial aspect. We’ll spread the financial statements and start writing down our questions about the financials. We’ll then do some research on the industry and the economy, whether it’s local or national and then write questions down about that. We’ll pull some comps. We’ll run a few different projections. From there, put together what we feel is a list of questions that we feel has an impact on the value. I always say, “Tote to our analysts.” I always tell them when writing the report, never tell the underwriter or the client what they can see on paper. I see a spreadsheet and that spreadsheet tells me that revenue is increasing by 10% each year or the cost of sales has decreased by 15% per year.

We want to know why? Give us the detail, not more advertising or market trends have been good. Let’s figure that out a little bit. The same thing with things like customer concentration. That’s a big area of marketability or lack thereof for business valuation. I don’t want to know that I see there’s a 30% customer concentration. Let’s dive into that customer a little bit more and have at least 2, 3, or 4 different questions around that customer concentration. Business valuation dives a little bit deeper than underwriting does. We essentially write a report and tell them about it. I’d say roughly 7 to 10 days later we would give them a report. Let’s say that the value is above the purchase price. They say, “It looks good.” If there is a shortfall, we address the shortfall. We then put it in draft form and say, “What are we missing?”

I want to come back to the shortfall because we’ve had to deal with some of those situations. Before we get off of the process, during this time, is your team only dealing with the underwriter? Might you also be conversing with the actual buyer of the business and maybe even the seller? Is it solely working with the bank and everything goes through them?

We will always make the borrower the first person of contact. We do talk with the underwriter. We get their opinion on the deal, on the business in general, so we don’t have to fly blind going into the deal. We try to learn as much about the business as possible before talking to the buyer and/or then the seller. A few things, a lot of people ask, “Why do you talk to the buyer?” The buyer, in our opinion, is going to be typically the most unbiased person other than the underwriter. We’re always going to get his or her opinion first. If our questions can’t be answered by either the buyer or the lender, by that time we then set up conference calls with the seller and we’ll get the buyer and seller on the phone or the seller’s representation, in this case, would be the broker get them on the phone. In a nutshell, we will try to talk to all parties involved. Some of our competition, they’ll rely upon questionnaires and a blanket or boilerplate questionnaire. We don’t. We feel that every business is a little bit different and the questions are going to always be specific to that business that’s being valued.

MAU 39 | Business Valuation

Business Valuation: Business valuation dives a little bit deeper than underwriting does.


Ultimately, the buyer is paying for it. Even though the bank orders it, it’s a line item on the closing statement that the buyer has to pay for this third-party valuation. It is for their benefit.

It’s like title fees. It’s environmental reports. It’s like any other closing cost. It’s included in that the buyer is paying for it. In the end, it’s the bank’s report. The bank is engaging us. The bank is paying us directly even though the buyer is paying those fees and the bank essentially owns that report.

This valuation is because the bank orders it and because there are SBA regulations tied to this. Is the valuation process any different than if a buyer had come to you directly or a seller had come to you directly and said, “I want to get my business appraised?” Is it the exact same process that you would follow?

It is the same process that we would follow. I think the biggest area that we see that could be different would be the definition of the value and the scope limitations in the report. For instance, if we’re going to be engaged directly by a seller and the seller provides us with the financial statements. Let’s say that they only are willing to give us an internal set of financial statements. They’re not willing to give up their tax returns. From an SBA side, the SBA requires tax returns. A second scenario here is cashflow adjustments. Let’s say we’re doing a valuation for the seller and the seller presents twenty different personal items that are buried in the financial statements.

At that point, it becomes more of due diligence or what CPAs will call agreed-upon procedures. Let’s say they don’t want to pay to have those add-backs verified by a CPA. At that point, we will put an assumption in the valuation that these are correct. We have not verified them. If it ever does get to a financial institution, our government entity, then they would need to be verified. That’s the biggest difference that we see. From an SBA side, typically tax returns are preferred. If there’s a difference between let’s say cash and accrual, then at that point we’ll want to reconcile the tax-based cash returns with the accrual-based internals or CPA-compiled. Also, add-backs or cashflow adjustments will need to be reasonably verified. Sometimes if there are 2, 3, or 4 add-backs, we can hop in and verify those no problem. If it becomes more of an agreed-upon procedures report, then we’ll most likely have to engage an outside CPA firm. The methodology is the same. The process is the same. The evaluation reports look and feel the same but I would say that the financial aspect of it is the only area of difference.

To follow-up on that question, let’s take it from the bank’s perspective. Having done this for many years, I know that every bank has its own approach to getting its free cashflow in a deal. Some banks disallow some percentage of depreciation, for example, arbitrarily. Some have a plug number that they always want to use for a replacement manager’s salary. That number could be different from bank to bank or deal to deal with. Do you change your assumptions in your models based on what the bank is requiring? Do you take a generic approach to that independent of what the bank requires?

The buyer is typically the most unbiased person other than the underwriter. Share on X

We never let the bank dictate what add-backs or methodology that we’re going to be using. We’ll agree on certain things and say, “This is a realistic adjustment,” or the bank may come back and say, “No, and here’s why.” I may agree or disagree, but in the end, we’re a third-party valuation firm. We’re essentially allowed to use what we feel is most accurate. In regards to depreciation, the majority of these small to mid-market businesses are going to be bought and sold by a level of EBITDA or seller’s discretionary earnings. EBITDA is Earnings Before Interest, Taxes, Depreciation, Amortization. Depreciation is added back. We’ll always add it back from a market approach. If we’re going out looking for market multiples and we’re looking at multiples of EBITDA or SDE, that depreciation remains in there. However, if we’re using a free cashflow approach, we’ll add back depreciation. We’re going to make adjustments for normal taxes, capital expenditure requirements, working capital requirements, and get to what we call free cashflow. Getting back to the bank, we develop our own cashflow. The bank has their cashflow and quite frankly, typically they’re quite a bit different.

That’s been our experience and every bank approaches this differently. We find that we constantly have to adjust our approach depending on which bank is looking to underwrite the deal. One bank may work perfectly for one type of deal and it may not for the next based on their assumptions. We always have to feel that out. It’s great to know that you’re taking an approach that is uniform.

It’s a hypothetical buyer and seller. Another question that’s asked is, the scenario comes up all the time. I had this great buyer who already owns a company that is similar to the one that he or she is acquiring. They’re going to be able to have some synergies between the acquisitions. They’re going to be able to take down the costs of goods a couple of points and eliminate top line management. They should be able to eliminate rent or a good majority of the facility expense. This is a great deal for our buyer and the bank. In the end, we still have to look at that business as the hypothetical buyer, hypothetical seller. We cannot make the assumption that every buyer is going to be a strategic buyer. We would have to value that business as-is, not eliminate some salary expense, not eliminate some costs of sales, not eliminate rent and value that business as if nine out of ten buyers were to acquire it.

We get that question all the time, Steve. Sellers coming to us saying, “I think my typical buyer is going to be strategic. They’re not going to have these expenses. I want to value it without those expenses.” We’ve been conditioned over the years because we worked with your firm enough to know that we can’t eliminate a lot of those expenses because you’re going to look at it differently.

There are a few industries that you will make the assumption that the typical buyer is strategic. Most of the time, they’re books of business. You’ll see it in property and casualty insurance. You’ll see it in a good majority of CPA firms because they essentially buy the book of business. Investment advisory, you’re simply buying that book of business. In that particular case, those are three instances where you can make the assumption that the normal buyer is going to be another person or another company that owns a similar business.

We’ve hit this situation a number of times over the years where a buyer and seller have agreed to a price. It goes through underwriting. The bank is good with it. Your firm does the third party, independent appraisal and it comes out less than what the parties have agreed to. What happens at that point in time?

MAU 39 | Business Valuation

Business Valuation: The fewer add-backs or fewer cashflow adjustments that you have, the more credible your financial statements are going to be.


I will say that probably 10%, maybe even 15% of all the businesses we value for SBA do come in under purchase price. There are a few reasons why. The first reason is, let’s say it’s a partner buyout and it’s a disgruntled buyout where the partner being bought out is simply taking cash from the business. He doesn’t work there, but he is taking distributions year after year. At that point, the buying partner is willing to pay above and beyond what the business is worth to get that partner out. We see that quite a bit. The second reason is a strategic acquisition. We see that quite a bit. Third, sometimes the business is plain overpriced. We see a lot of times when there is not a broker, that’s when you see the business is overpriced and they may be selling it to an employee, a competitor or someone who doesn’t know how to price businesses. It does happen.

Once we come to a value below the purchase price, typically what we do is put it in draft form and we supply the underwriter with evaluation and then essentially go over it and say, “What are we missing?” We always want everyone to crosscheck cashflow. The second thing is, are there certain assumptions that we’re missing? Let’s say it’s overpriced at that point. At that time, it’s the underwriter’s decision and the bank’s decision because the SBA and the SOPs state that the value of the business must support the loan amount. It has nothing to do with the purchase price. That’s just the SBA loan. That’s not even considering a seller note or conventional note. If the lender has an internal requirement that says the value must support the purchase price, then at that point, the lender has to go back and ask the buyer and the seller to renegotiate. However, if let’s say the loan is fine, you’ve got 20% equity injection, you have another 10% seller financing and the value more than enough supports the loan amount. Under the delegated authority, if they’re a 7(a) lender, then they do have the ability to close that loan.

It’s important that the first step is you go back to all the parties and say, “Did we miss something here because you’re coming in undervalue?” I know in the time when that’s happened with us, it’s a collaborative process. You get everybody involved and it’s been great to work through that with your firm because we roll up our sleeves, we try to figure out if we missed something along the way, and if there’s a correction that might bridge the gap that we have.

I would say 99% of the deals that we work on will get renegotiated and everybody’s happy. It’s usually if it’s a $2 million deal, maybe it comes in at 185 or 19. It’s not a huge discrepancy in value. There’s only been a handful of times when it’s a massive strategic acquisition and there are some intangible assets that they want to pay for but don’t have a whole lot of value at the moment. Maybe it’s a $2 million deal and we come in at $700,000, $800,000. That’s been the only time when they may not get renegotiated.

Steve, are there any changes that you’re aware of coming down in 2020 or beyond that is going to impact the way that this process works with the banks and the SBA?

We try to stay in tune with legislation. Our governing body in this industry is NAGGL, National Association of Government Guaranteed Lenders. We try to stay relatively dialed into what’s being talked about. The process hasn’t changed much. There have been a few terminology changes over the past years for the SBAs SOPs. They make changes a couple of times, once or twice a year. They haven’t made any changes. Quite frankly, if it’s not broke it’s don’t fix it mentality because a lot is being done. Possibly, we’ll see a slow down here. In 2019, the SBA lending was down 10% or so. We’ll see what happens in 2020. In the end, I don’t see any major changes in the process in regards to a business acquisition.

What advice would you offer up to the M&A Unplugged Community, buyers, sellers and advisors around this process so that when they get into it and they’re looking to sell or acquire, it goes as smoothly as possible?

I would say to the advisors, start the relationship early. I see the most successful brokers and advisors out there are not focused on selling a company for their client. What they’re doing is they get in early. They create that relationship and that foundation. They may help them value that business early and say, “What can we do to help you with this exit strategy in 1 to 3 years down the road? How can we increase the value of this company where all of us will benefit from it?” That’s the first thing. I see the most successful advisors out there start early with their clients. In that process, when we do get involved, I always tell them, “You want to focus on a few different metrics.”

One is going to be cashflow. A lot of people say, “My industry sells for one times revenue or two times revenue or whatever it may be.” Value is a cashflow-driven metric. The definition of value is based upon the discounted value of future cashflows. Cashflow is king. The first thing I say is to clean up your financial statements. If you’ve got a lot of personal expenses, a lot of nonreccurring things, if you’ve done a good job of limiting your tax liability, that’s good from a tax standpoint, but it’s bad from a value standpoint. The fewer add-backs or fewer cashflow adjustments that you have, the more credible your financial statements are going to be. There’s going to be less likely of concern on the financial side of things.

The first thing I say and we’ve done studies in our company where you look at 100 different firms, one where the add-backs consist of EBITDA and officer’s compensation. The others consist of EBITDA, officer’s compensation and then multiple other line items. The more add-backs that you have, the lower the multiple is going to be, not from the valuation aspect but from the buyer’s perspective. When we see purchase price multiples, the higher the number of add-backs, the lower the multiple. The second thing is to diversify whether it’s customer concentration, supplier concentration or product concentration. You want to do everything you can to diversify that business. Everyone looks at customer concentration. I would say that’s the most important but if you rely on one product, that’s typically not a good sign. It may take you a few years to generate new SKUs or new products to diversify your sales funnel. That’s a big item and a supply aspect. Who is your supplier? I would make sure that you have multiple suppliers in case something happens to that person.

The last thing is reliance upon an owner or key employee. You’ll notice that when you look at multiples of cashflow for professional practices like doctors, dentists and those guys, they’re super low. Those multiples are 1.5, 2 times discretionary earnings. The reason why is because of personal goodwill. It’s a heavy reliance upon the owner. A friend of mine was fortunate to sell his company or he’s got a letter of intent, a much larger company, about $80 million in revenue. A few years ago, he decided to step away and hire a few more people to run the day-to-day operations.

It took a while. It took 4 or 5 years but he essentially has been able to step away from day-to-day management. The private equity group that has the LOI on his company recognized that and paid, I would say a good 25%, maybe 35% more than as if he were an owner-operator. It’s certainly reducing the reliance upon the owner, reducing reliance upon any key salespeople or key employees. Those three items are going to be my advice to sellers prior to getting ready to sell and you’d possibly use SBA financing down the road.

Steve, it’s been such a pleasure having you here. Having worked with your firm over the years, you guys are tremendous. You do great work. If people in the audience want to get in touch with you, how could they best reach you?

The best way to reach me is via email. I travel quite a bit. We have a few different offices and I travel between all the offices, so email is typically the best. It’s [email protected]. I usually will get back to people within a few hours. I’m accessible.

Thanks, Steve. I appreciate you being here.

I appreciate it, Domenic. I enjoyed it.

I’m not going to do a big recap here because the messages that Steve delivered at the end, especially the recap, you’ve known time and time again. Clean up your financials. The cleaner they are, the higher your multiple. The more discretionary expenses you load in there, the more you pack in, your multiples are going to go down. In many cases, some of those add-backs can’t even be considered. Diversify your business. Diversify your clients, your vendors and then if the business relies on you as an owner or a key employee, your value is going to go down. In some cases, dramatically that it will acquire an earn-out and a multiple that probably isn’t acceptable. It’s great advice. I appreciated Steve visiting with us. If you would like to learn more about the process of acquiring or selling a business, please visit our website at Feel free to reach out to me at [email protected]. I look forward to seeing you again on the next episode of the show. Until then, please remember that scaling, acquiring, or selling a business takes time, preparation and the proper knowledge.

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About Steve Mize

MAU 39 | Business ValuationSteve Mize is an Accredited Senior Appraiser (ASA) in business valuation and has over 20 years of experience in valuing small to mid-market businesses. His strengths include helping clients focused on value improvement, exit strategies, mergers and acquisitions.

Steve is experienced in litigation support and responsible for all projects requiring expert witness testimony. Steve is a partner with GCF Valuation, which for 22 years has specialized in valuing businesses for SBA lending, M&A, estate planning, and litigation.

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