Read the summary and watch or listen to the interview here: https://www.crowleylawllc.com/podcasts/maximize-your-companys-worth-valuation-compliance-exits-with-andrew-mackson/
Voiceover: Welcome to the From Lab to Patient, Garage to Market podcast with your host, Phil Crowley. In each episode, we discuss professionals serving the tech startup market and various issues important to those companies. You can find this show on all major platforms, including YouTube, LinkedIn, Facebook, Apple Podcasts, Spotify, and on our website, CrowleyLawLLC.com. Now, here’s your host, Phil Crowley.
Phil Crowley: Welcome, and thanks for tuning into our podcast. We focus on bringing you valuable insights into life sciences, technology businesses, startups, and related topics to help you drive your business to success and avoid common mistakes.
Meet Andrew Mackson: Business Valuation Expert
Phil Crowley: Today, I’m pleased to have as my guest, Andrew Mackson, a partner and co-founder of Intellect Business Advisory, specializing in business valuations. Andrew is involved in valuing privately held businesses, which should be of great interest to our audience of entrepreneurs. At the end of our discussion, I’ll ask Andrew to give you tips on how to choose the right valuation expert for your business. Welcome, Andrew!
Andrew Mackson: Phil, thank you for having me. I’m excited for our discussion today.
Phil Crowley: Great! Can you tell us a little about Intellect and what led you to choose this path in the financial services industry?
Understanding Business Valuation
Andrew Mackson: Sure, Phil. My background starts at UBS in wealth management, where I developed a strong understanding of asset allocation. Working in wealth management gave me a holistic view of a business owner’s investments, especially the privately held business, which is often their most valuable asset. After some time in wealth management, I ventured into the tourism industry, which we might touch on later, and then co-founded Intellect Business Advisory about six years ago. Initially, we offered a broad range of services, but we quickly saw a strong demand for high-quality business valuations, especially during COVID, which we were able to execute digitally. We noticed a gap in the market for reliable, independent valuations, and we decided to focus on providing that service.
Phil Crowley: I think your service is invaluable, even if the parties don’t ultimately accept the valuation. It provides a benchmark that can help rationalize decisions, rather than just going with whatever a buyer and seller agree upon. I’m especially familiar with this in the pharmaceutical area, where discounted cash flows are often used to assess a company’s or product’s value. It seems like your services would be extremely valuable for companies trying to market themselves or assess the value of a target for acquisition. There are also tax considerations, like Section 409A of the Internal Revenue Code, which requires companies to value their stock at an appropriate level for certain tax benefits. How do you handle these issues, particularly for U.S. companies?
Valuation for Compliance and Tax Purposes
Andrew Mackson: Yes, that’s a great point. We see a significant demand for valuations related to compliance purposes, making up about 40% of our workflow. For example, when companies need to comply with IRC 409A, which is important when issuing stock options to employees. The IRS requires that stock options be issued at or above fair market value. The challenge is that companies raising capital often value their business based on “investment value,” which can be much higher than fair market value, since it’s tied to a specific buyer, such as a strategic investor. Fair market value, however, is defined as the price between a hypothetical willing buyer and willing seller—not one specific investor. This discrepancy can be a problem if companies use their last capital raise valuation for tax purposes without getting an independent appraisal, potentially issuing stock options at too high a value.
Phil Crowley: That can definitely disadvantage employees, especially if they’re using a valuation that’s too high for tax purposes. From what I understand, a valuation expert like you can provide a lower, more realistic valuation for issuing stock options while still maintaining the investment value needed for investors. That’s a great tip for entrepreneurs to keep in mind.
Andrew Mackson: Exactly. It’s all about education and helping business owners understand the different standards of value. Many people don’t realize that there isn’t just one value—it depends on the context. Fair market value, which we often use for compliance, is typically lower than the investment value used for raising capital. It’s important to educate employees and investors on this so they understand why the valuations might differ.
Phil Crowley: That’s particularly relevant in biotech, where small companies with innovative products can quickly reach proof of concept and enter human clinical trials. They may then be acquired by larger pharmaceutical companies that have the resources to scale these products. The value for a strategic investor can be much higher than the fair market value. Distinguishing between these values is crucial for setting appropriate equity compensation levels, ensuring employees and management have the right incentives.
Andrew Mackson: Absolutely. Getting the valuation right is critical, especially when issuing options or stock. If it’s too high or too low, someone’s going to lose out. And, as you pointed out, it’s key to explain these differences to employees so they feel properly incentivized. If they don’t understand the valuation, it can hurt morale and motivation.
Phil Crowley: What have been some of the most interesting valuations you’ve worked on?
Andrew Mackson: It’s usually driven by the purpose of the valuation. For instance, in litigation situations, like divorce or shareholder disputes, it can be challenging because the parties are often not on the best terms. One side might have full access to information, while the other has none. In those cases, one side may overstate the business’s future potential, while the other side may say it’s on the brink of bankruptcy. Our job is to come up with a fair and defensible valuation, despite the conflicting stories and information.
Phil Crowley: That sounds really challenging but also fascinating. It seems like those types of valuations require a lot of careful thought and attention to detail.
Andrew Mackson: They definitely are. While challenging, they make the work interesting, as we have to navigate a lot of conflicting information to come up with a fair valuation.
Crowley Law: Helping Entrepreneurs
Phil Crowley: Let me take a brief moment here, Andrew, to introduce Crowley Law. Our firm is passionate about helping growing life sciences and other technology entrepreneurs realize their dreams—taking great ideas from the lab to the patient’s bedside or from the garage to the marketplace to improve the lives of thousands or even millions of people.
I’m a former research physicist who decided to transition into law because I wanted to see a more direct application of my work in helping people. As a physicist, I understand how hard it is to discover new knowledge and make technology work, and as a lawyer, I know how difficult it is to bring that technology successfully to market. My associates and I focus on helping founders realize the value of all their hard work.
I invite you to visit our website, CrowleyLawLLC.com. We have a wealth of free resources, and we’d love the opportunity to chat and learn about the things keeping you up at night. We’re here to help.
Andrew’s Entrepreneurial Journey
Phil Crowley: Andrew, let’s get back to discussing your entrepreneurial efforts. Not only are you a business valuator, but you’ve also started and run a business in the tourism industry. I find that fascinating because you’ve walked the walk of an entrepreneur. Tell us how you got involved.
Andrew Mackson: Thanks for the question, Phil. It’s an interesting background. I worked in corporate finance for Swiss Bank UBS until 2016. After that, I pursued one of my passions—travel. I’ve always loved traveling, and being from Australia, I’ve spent a lot of time traveling, especially to the U.S., which became a primary market for me.
Before I ventured into business valuations, I traveled through Central and Latin America. What was meant to be a month of travel turned into a year. During that time, I started learning Spanish and immersed myself in the culture. Halfway through that year, I decided I didn’t want to return to corporate life. Instead, I thought about becoming an entrepreneur and doing something for myself.
I had expertise in travel, so I moved to Medellín, Colombia, and bought a hostel I had stayed at as a tourist months before. It was my first entrepreneurial venture, and while I was seeking financial return, it was also a passion project. Running a business in Colombia was challenging, but I learned a lot. I ended up selling it in 2020 during COVID, which, as you can imagine, was a tough time for tourism.
I had started the sale process in January 2020, with two letters of intent signed. But when COVID hit, both buyers backed out. I eventually sold the business in September 2020, but for about 95% less than those initial offers. The pandemic decimated tourism in Colombia, especially with strict lockdowns and border closures.
Though the financial outcome wasn’t ideal, it was a valuable experience. As you mentioned, Phil, many appraisers—even those with more years of experience—have never transacted a business themselves. I went through that process and got to understand firsthand the impact of market conditions like COVID, the difficulties of selling a privately held business, and the heavy discounts often applied in such situations.
Preparing Your Business for Sale
Phil Crowley: That’s an incredible story. You’ve valued so many companies over the years. What advice would you offer entrepreneurs about preparing their businesses for sale? How can they maximize the value of their business before an exit?
Andrew Mackson: Great question, Phil. The best way to prepare a business for sale is to go through a mock due diligence process with an independent party. This helps identify any weaknesses or areas for improvement before you go to market. When we value a business, we ask the same questions a sophisticated buyer would ask—financial and non-financial.
A common piece of feedback we get from business owners is that by going through the valuation process, they uncover issues they hadn’t considered before. They may need to get their documentation in order, understand discrepancies between tax returns and accounting statements, or replace a bookkeeper who wasn’t doing a good job.
The process uncovers what’s holding the business back in terms of value and makes the business more attractive to potential buyers. If an owner commits to this process, they’re more prepared when the time comes to sell.
Now, there are three key factors that drive business value: revenue, profitability, and risk. These are what buyers care about when evaluating a business. Most buyers want to know what will happen in the future—future revenue, future profitability, and future cash flow. So while historical performance is important, future expectations are what truly matter.
A common issue in privately held businesses is incomplete or messy financial statements. If buyers can’t trust the financials, they will perceive the business as riskier, and that decreases its value. Having clear, accurate, and defensible financial statements—ideally audited—is crucial. This is particularly important if you’re selling to a private equity firm, which often looks at trailing twelve-month EBITDA or similar metrics.
Phil Crowley: That’s great advice. It’s clear that doing self-due diligence before selling a business is crucial. It helps identify potential risks and allows business owners to address them ahead of time.
Conclusion and Final Thoughts
Phil Crowley: Andrew, the time has flown by, and I really appreciate you sharing your expertise on valuations and providing valuable tips on increasing the value of a company for potential acquirers. For those tuning in, I encourage you to visit our website, CrowleyLawLLC.com. We’re here to help.
Andrew, thank you so much for joining us today.
Andrew Mackson: Thanks, Phil. It was a pleasure chatting with you. Thanks to all your listeners for tuning in.
Voiceover: You’ve been listening to the From Lab to Patient, Garage to Market podcast with your host, Phil Crowley. You can find this show on all major platforms, including YouTube, LinkedIn, Facebook, Apple Podcasts, Spotify, and at CrowleyLawLLC.com. If you found this information helpful, please subscribe, leave a positive review, and share it with others.
