What’s Your Business Worth?

At least once a week a dealer will ask me what I think his business is worth. A business broker friend of mine tells his clients that “your business is only worth what someone else is willing to pay for it … and that may be a whole lot less than you thought.” Concerns over decreasing values of wireless businesses are real but don’t have to be cause for panic. Unfortunately, the days of getting multiples of revenue with a cursory glance of the balance sheet are gone.

The failure of so many “dot-coms” has given new meaning to the words, due diligence. The process has become much more complicated and the computations much more intricate. The factors that now determine the overall “worth” of a business in today’s climate reach well beyond the scope of the businesses’ bottom line.

Our organization doesn’t sell businesses, but we do help them get ready to sell. The good news is that there are steps you can take to dramatically increase the value of your business. The criteria and questions below represent a great exercise for all businesses, regardless of whether they are considering looking for a buyer or not.

We find that most businesses don’t really know the answers to a lot of the questions, but some can quickly double or halve the perceived value of their business in the mind of a potential buyer by putting some relatively simple practices into place. These items are critical to the overall health of the business. When someone asks us to help a business increase its net worth, we begin by looking at the following areas:

Profit & Loss Statements

Most financial analysts will look at the “quality” of your data and “trends” over the last two or three years to determine if your business is on the rise, or on the”demise.” First they’ll look at the bottom line to see if there is one. Then they’ll look for trends, and most importantly, if your net profit as a percentage of revenue is rising or falling. The final test is to determine if the percentage is healthy enough to make a buy recommendation to a potential purchaser.

Portfolio of Products and Services

Do you have a mix of products that makes sense for your business? Is each category profitable? Some dealers think they need to carry every wireless carrier to be able to serve the needs of every customer that calls or walks in. This is more often than not a very unprofitable way for a dealer to go to market. Instead of having an outstanding relationship with one or two manufacturers or carriers, they diversify their business to the point of having very little leverage to negotiate or receive additional support because they demonstrate no loyalty in return. In most cases, we recommend that dealers pare back the number of products and carriers they represent as a means to INCREASE their sales and profitability.

Expenses

Are your expenses in line with revenues? A major red flag goes up if your trend shows expenses growing faster than revenues. This signals trouble to potential buyers. Look at your key expenses as a percentage of revenues and compare them with the last two years. Keeping fixed and variable expenses in line is critical to business valuation.

Revenue Areas

Today, most buyers are interested in businesses that are growing. If your sales and margins have been steadily increasing, you pass the first test. Next comes a look at whether your manpower levels are appropriate and productive. Retention and experience counts too, as expertise is valuable to both customers and buyers of your business. What are your “costs of sales” as a percentage of revenue? There are a lot of things you can be doing to drive sales up in your operation from providing sales training to performing sales meetings. A management and motivation process similar to the popular CDI Beat Your Best(TM) program demonstrates structure, measures results and adds value.

Customer Base

One of your most valuable assets is your customer database. The number of “active” customers and the average value of a relationship over time are key ingredients for determining the “worth” of a business. Thus, the business with processes and procedures for maintaining and growing customers over time are worth more. These are some of the most important criteria for determining a business’s worth and we could certainly spend a lot more time on each category and how to build it. Other items such as fixed assets, real estate, infrastructure and recurring revenue streams are also important considerations. This outline will provide you with the basis for creating a written plan for improving each one of these areas. Buyers today are a lot more critical about the value they place on your business. The more you can do to impact each of these areas, the more your business will be worth to a potential suitor. As my friend says: “Your business is worth exactly what someone else is willing to pay for it.” Now that you have a better look at what someone else will see, “what’s your business really worth?”

Buy A Business Worth Over A Million Dollars-Even If You Just Filed Bankruptcy Yesterday

If you’d like to know how you can buy a large, multi-million dollar business — one that pays you a fat, six-figure salary year in, and year out — and be able to do it even if you have rotten credit with a recent bankruptcy on your record, then this article will show you how.

Listen: People I talk to about buying businesses always hear me rail about how it’s actually faster, easier and cheaper for you to buy large businesses (worth a million dollars or more) than small businesses, and that the reason why is because of this thing called investor financing — as opposed to owner financing, bank financing, government loan financing, etc.

In other words, say you filed bankruptcy last year. If you go out and try to do something under your name, you’re never going to be able to do anything. The business brokers, bankers and other bureaucrats won’t touch you with a ten foot pole, especially if you have money problems on your record. But if you walk in with an investor…who is putting up cash…then they won’t give a hoot about you or care one iota if you just filed bankruptcy yesterday.

And that’s why investor financing is so powerful. However, there are certain criteria an investor bases his decision on before working with you. And if you don’t understand these criteria, you’re dead in the water as far as getting investor financing.

Luckily, the key thing an investor’s going to want is information on the company. And what you’re going to find is the average investor is spending 99.9% of his time on the business because that is his main thing. And one of the first things he will do is make sure the business you want to buy has a strong management team in place. That way, he isn’t all that worried as far as how much management experience or money you do or don’t have.

Of course, there are other things investors will need before financing a business for you. But the main thing (besides you having a good business plan) is that the business you want to buy already has a competent management team in place.

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.