How Much Is Your Home Based Business Worth?

If the electronic energy in your body’s hydrogen atoms could be utilized, scientists have calculated that a person could supply all the electrical needs of a highly industrialized country for almost a week. By this estimate, the average person is worth about 85 billion dollars! Never sell yourself short. You are unique and immensely valuable as a human being. The payments you receive from life are what vary from person to person.

Anyone building a business for themselves is actually building a lifestyle regardless of who signs the paycheck at the end of the week. You hold the office of the President of your own corporation, which makes you responsible for success and failure. The members of your team are the stockholders and it is your job to see that the value of the stock increases in the years ahead.

Even though the operations of a corporation are complex, they can be reduced to four basic functions: Finance, Production, Sales and Research. Without proper financing, there would be no production. Without production you would have nothing to sell. Without sales you would have to stop production. Without research you could not keep up with the changing times. All four of these functions must flow in unison in order to have a successful business. How successful you are in meeting these challenges will determine your present and future growths.

You must be concerned with growth because nothing in this world stands still. A body in motion tends to remain in motion until acted upon by an outside force. A company that is growing has a tendency to keep growing. The same goes for a company that is either standing still or falling backwards. All responsible business owners should be able to look into the future and predict how well they will progress based on their current level of activity. Never before in the history of mankind has an individual had the opportunity to make a brighter future for themselves than now.

Stand back and look at yourself and your future objectively, as an intelligent stranger might. Ask yourself what you are worth right now. What is your value to your business and what is the value of your business in the marketplace? If you were an outside investor, would you want to invest in your company? If not, then change the reason why. Give personal attention to the growth of your business so it doubles in one year instead of eight. Find a timely business model that has achieved what you want and follow it. If you do twice as much, you are bound to receive twice as much. It sounds simple, but 95% of business owners can’t grasp it. Knowledge is power.

Sales is more than selling a product or service, it’s the way in which we sell ourselves to everyone who is interested in what we have to offer. It is the way we get along with our associates, our families, friends and neighbors. One extra call a day leads to 250 extra calls in a year. In 5 years that comes to 1,250 calls that you wouldn’t have otherwise made. A person can triple their effectiveness in less than a month. How have you been handling the four basic business functions? How much time are you really putting into moving forward?

Home based business owners have to be harder on themselves than any strict boss at a regular job could ever be. Yes, the reason we want to work from home is the have the freedom of doing what we want, but we can’t build a business with that attitude. You have to put the time in to set your business up first. Then we have to constantly strive to improve our effectiveness so we never have to worry about going back to being a puppet of the corporate giant. It’s all up to you to make these decisions. It’s the difference between being worth an average amount of money and an above average amount.

Tomorrow is a brand new day. Begin to think of ways in which you can increase your effectiveness.

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.

Buy A Business Worth At Least A Million Dollars And You’ll Never Have To Deal With Crooked Sellers

I am always railing on and on about why people should buy businesses worth at least a million dollars or more. That are big, with lots of cash flow and with a management team already in place who know what they are doing — so you can just sort of step in and let things go “as is” and not have to think about it.

However, besides all the financial reasons, there is another — very powerful — reason to only go after large businesses like this. A reason almost nobody ever talks about and yet, is probably a more important reason than any other.

And that reason is, quite simply, people who own large businesses, that have good numbers, and that can prove their business is what it is, are almost always straight-shooters and not crooks.

It’s true. I have been doing this for over 50 years and I can tell you right now, the chance of you running into a person that has a business making a million a year that doesn’t have a good word or isn’t a good person…is almost zero percent. There may be exceptions to this, but I have never, in all these years, run into one that wasn’t a man of his word and didn’t genuinely want the deal to go down fairly, squarely and exactly as we agreed to.

Does this mean they are all going to be your best friend?

No. In fact, I have run into one that I haven’t gotten along with. But at this level, where there’s a lot of money at stake, they’re basically all nice people. They’re easy to get along with. And keep in mind, one of the main reasons they are so nice and friendly is because they know you have cash. When you pay cash (using investor financing) you do all the talking. You’re the one who is really in control, and they know it.