What is My Business Worth?

Syracuse, NY – March 17, 2006 – Small-business owners want and need to know what their business is worth.

The short answer is it depends. It depends on the purpose of the valuation, the standard of value, majority or minority interest, going concern or liquidation. There are many factors that affect value, and experts differ in their analysis. In addition, the IRS will often be looking at the valuation results, and these results can generate significantly different values for the same entity. The outcome often leads to business owners scratching their head in confusion.

The more common purposes for valuation are estate and gift taxes; buy-sell agreements; divorce; buying or selling a business; dissenting stockholder actions; and Employee Stock Ownership Plans (ESOPs), according to “Valuing a Business” by Shannon Pratt, etal.. The standard of value used depends on the purpose of the valuation.

Standards of Value

Fair market value (FMV), the most commonly known standard of value, is the amount at which a property would change hands between a willing buyer and seller, where neither party has a compulsion to buy or sell, and both possess knowledge of the relevant facts. FMV will typically include discounts for minority interests and lack of marketability. It is the standard of value for estate and gift tax valuations and ESOPs, among others. ESOP valuations also have to comply with Department of Labor ERISA regulations.

In cases of divorce or dissenting stockholder actions, Fair Value typically applies. Fair Value differs from FMV in that it is defined by state laws and its definition varies from state to state.

Investment value or strategic value is the value determined in the eye of the beholder. In this instance, the buyer or seller has an individual preference or strategic reason for the transaction. Investment Value is most relevant for purchase and sale transactions, and is typically higher than FMV.

In buy-sell agreements, the parties usually negotiate the standard of value and can use any of the value standards stated above. However, the buy-sell price can be challenged in situations of divorce, dissenting stockholder or estate and gift transactions, etc., if it does not conform to the standard of value applicable to the circumstances.

Practical Application

Let’s consider the situation of setting a price to sell the business. The standard of value in this instance is typically investment value because the prospective buyer will have a specific purchase motivation, e.g. a job, elimination of a competitor or perhaps expansion in an industry. Sellers generally sell on past performance; buyers buy on the future performance.

What approach or method can be used to calculate value?

There are three – asset-based approach, income approach and market approach. The asset-based approach uses the fair market value of the NET assets of the business, and is relevant for companies that have significant capital investments and modest profit performance. The downside is that it can understate goodwill the owner has generated in his or her company.

The income approach derives company value using a multiple of company earnings/cash flows. It is relevant for service companies, among others, and reflects the company’s unique performance results.

The market approach is similar to determining the value of your house to sell or challenging a property assessment. The business is compared to other comparable privately-held businesses and/or public companies, and the value is extrapolated from those comparisons. The difficulty using this approach is finding truly comparable data for private companies (e.g. my insurance agency is worth the same as an agency in Peoria, which sold in 1999?) or using public company stock prices as a proxy for small business (e.g. if Google is worth 80 times earnings, so am I).
Finally, there are “rules of thumb” for many industries that may ignore the unique value items about your specific company, but can be a handy sanity check.

For this example, the income approach is useful because it takes into account the unique performance characteristics and operating results of the company, plus the actual reported data is available from financials and tax returns. The valuator typically analyzes the previous five years of profit/cash flows performance and adjusts for unusual, excessive or non-recurring revenues and expenses to determine the prospective future earnings/cash flows.

The future earnings/cash flows is then converted into an estimate of present value using a capitalization rate or multiple. Investment in small privately-held companies is risky and requires a greater return, which reduces the multiple (the higher the multiple, the higher the value). Using a broad generalization regarding multiples, we’ll say the small business owner can estimate his or her value using a multiple of between 3 to 8 times the earnings/cash flows, depending on the company’s management, performance and industry. The higher multiple is more appropriate for extremely well-run companies in growth industries.

In cases where an owner intends to gift, rather than sell the business, he or she can take the value above (investment value) and apply discounts for lack of marketability, minority interest, key man, etc., which results in the fair market value. If this was a case of divorce, statutory adjustments would be made to determine a fair value standard.

The previous information is a very simplified and generalized example of what would be done in a valuation. Calculating value is not a static, uniform process. It requires small business owners to remain active and informed when deciding with their financial advisor/valuator what approach or method best suits them, considering they know their business operations better than anyone. The best way to determine value weighs on the owners ability to understand and take part in the process. The results depend on it.

Is Building a Network Marketing Business Worth It?

If you are not sure whether starting and building your own network marketing business is worth it, let me ask you this. Do you know how much it costs to start a regular business or franchise and how much the expenses are every month for these people? Let alone all the paperwork that needs be filed for the state, the employee insurances and taxes, etc.

If you want to learn about the costs involved in starting a franchise, you have to consider the franchise fee which is normally around $20,000, plus legal fees, build-out costs, inventory, supplies and your working capital, or the day-by-day cash that you will need on hand to run your business. As far as starting your own business, I can tell you from watching my husband closely who started his own business a couple of years ago that the start-up prices are quite high as are the monthly expenses, the paperwork is at times overwhelming, and if he doesn’t work, he doesn’t get paid.

However, one good thing these three ways of doing business have in common is that you get a tax-break. The government rewards those who decide to start their own small business and gives them many tax-breaks, whether they work from home, or they work from some type of locale or business building. However, many businesses that are self-started or franchised are noted to fail within a few years because the expenses are so overwhelming and they don’t find it worth the effort. However, those who see the value of building a network marketing style of business succeed.

Let’s look at some of the positive things Network Marketing offers us which is the reason motivated entrepreneurs succeed in this type of business. First of all, when you build your home-based business network marketing style, the start-up cost is very low compared to the other two ways aforementioned. The cost is normally between 40 and 200 dollars. The monthly expenses are low as well and normally are just to maintain the websites and back-office the company we partner with offers us, which have a ton of tools and training for us. A serious builder will also get business cards made up and get some DVDs and brochures that the company offers for their success, since we all may not be experts at the company or products, “but everyone can be an absolute master at using tools”, as Robert Butwin states in his book Street Smart Networking. There is no paperwork to be filed with the state, the shipping and handling services are handled by the company we partner with, and normally there is no inventory that we need to keep in our home. In addition to this, we can build our business as we go about our daily lives – continuing the job we already have whether it be stay-at-home parent, secretary, doctor, nurse, personal trainer, banker, etc. No matter what your occupation is, or what degree you may have gotten in school, or what gender and race you are, you can build your own business without tremendous risk and without having to take out a big loan or cash in all your savings.

Now let’s look at some of the frustrations we need to face at network marketers. The market has gotten a bad rep over the years because of all the people that simply signed up to get rich quick but were not really motivated and therefore quit before they experienced any real success. In addition, many people think that just the people on the top get rich, but those who sign up later will never make as much. Let me ask you this: when was the last time you noticed that the owners of a regular company – the company you currently work with or have worked with in the past – are those that make the most money, whereas the employees, you included, are simply getting paid a small paycheck, without any tax breaks?

Other frustrations may include telling people about the business (especially friends and family), approaching strangers about the products or business opportunity, not seeing quick results, and not knowing exactly what to do to make your business grow. Let’s approach each of these frustrations individually since they are all valid. First of all, if you have your own business, no matter what type it is, you NEED to tell others about your business. If you have started your own business non-network-marketing-style, who would you tell first? Strangers or your family and friends? I’m sure the answer would be a resounding family and friends. Well, approach your NWM business in the same way; you don’t want your family and friends to find out LATER that you have a business, so you? No… you want their support right off hand. Let them know your store is simply online, not offline, like many other companies have (which also have retail stores in your area). Secondly, we have approaching strangers, so let me ask you this: Do you have thousands of family members and friends that you don’t need to tell anyone else about your business and the products you offer? You believe the products are excellent and that is why you offer them, right? So tell others about them. If you don’t tell others, if you don’t advertise with whatever method you want, you will not be getting any business. You can’t just expect people to come knocking at your door or calling you if you don’t tell them you offer something, can you? As far as not seeing quick results goes, let me assure you that those who start their own business traditional style do not usually get quick results either, and yet their expenses keep piling up. And as far as not knowing exactly what to do to make your business succeed, I encourage you to simply look at and follow the roadmap that people that are in a rank above you have followed and succeeded. These people, and even the company itself, have taken the time to put together a roadmap, so all we need to do is follow it; it’s as simple as that. When you start your own business traditional style, there truly is no real roadmap to follow; you simply have to get out there and tell people about your business and talk to other entrepreneurs who have successful businesses of their own to see what they have done.

So, to answer the question “Is building a network marketing worth all the frustrations”, I would say it is, but you need to answer that question for yourself after reading this article in which I have written the positive things to consider, as well as addressed the frustrations that most people face. What do you think? Would you invest your time and effort in building a network marketing business yourself? Why or why not?

What Makes a Business Worth Investing In?

You have always been interested in investing in a business, however you always hold back because you are scared of making a bad choice and losing your investment. However, there are some ways to evaluate businesses to reduce the risk you are taking when you invest. Of course, risk is never eliminated, but when you properly evaluate what makes a business worth investing in then you will more than likely have your answer whether the company will be a success or failure before you invest your dollars. The following tips will help you make the right investment.

Investment Tip #1 Management

When deciding whether a business is worth investing in or not you need to evaluate the management because a business really is only as successful as its management. Because of this you want to evaluate if the management is knowledgeable, rational, and able to make the right choices to make the company money and prevent it from losing money. Of course, this is an easy question although the answer is a little more difficult.

Investment Tip #2 Business Plan

A business plan that is well laid out and shows positives, negatives, and how the company and management will handle problems within the business is very important. A good business plan shows that management knows where the company is, where it wants to go, and what it needs to do to get there. Be sure you take a look at a company’s business plan before you invest.

Investment Tip #3 Return on Investment

The ROE, or return on investment, is also crucial when you are considering making an investment in a company. Of course, the ratio of equity to debt can be confusing, but if you evaluate the ROE and other economic factors you should be able to tell if the company is bringing money in or losing it.

Investment Tip #4 Room for Growth

Making sure the business has room for growth in its market is also important. A company that has little competition is preferable, but a company with a moderate amount of competition and a plan to be number one is OK as well. Just do your research.

When you are interested in investing in a company you need to take your time and evaluate the company, look over financial statements, talk to management and have all of your questions answered to your satisfaction. After all, it is your money and you aren’t going to give your money to just any company. So, be sure and confident in the company and have that backed up with proof and you will decrease your risk investing in a company.