BIZTIPS - May 4, 2008

by Art Hill

BIZ TIPS: Know the Value of Your Business

Sunday, May 4, 2008

Stephen Covey gave us the memorable words “Begin with the end in mind.” But suppose you’re now approaching that end and would like to consider selling your business? If you began with the end in mind, you have been planning this sale for years.

Maybe your plan was very precise. You built the business so it would grow in seven years to a sale value that would let you to retire. Or maybe your plan just evolved. Sales grew faster than projected because your market heated up. Whatever the reason, you’re now wondering what your business is worth. This is one of those “don’t try this in your living room” moments when you should get professional help. Not a psychiatrist, but a CPA or business broker.

What are you likely to learn? In a recent workshop, Kip Moggridge of Arthur Berry & Company in Boise listed ways of valuing a business from both seller and buyer points of view. Just like selling your home, you’ll want industry-wide comparisons of actual sale prices for similar businesses. These “comps” may available through brokers, trade associations, franchise services, or on-line industry databases through your library.

Then you can use proven accounting methods to assess the value of your business assets and earnings. But remember that buyers may take the same approach. In their eyes, your inventory may be worth only half what you estimated, or your equipment may be in need of replacement and not worth much to them. So base your financial estimates on at least three years’ history and conservative valuation, because your buyers will. According to Moggridge, the majority of approximately 1,100 businesses sold for between 0.7 and 2.2 times earnings plus fair market value of assets.

Perhaps the worst way to determine your company’s value is on anecdotal evidence or emotional attachment. Buyers won’t care how much you have to get because that’s how much you owe. They won’t care whether you paid the bills with your credit card when business was slow, or how many nights and weekends you spent at your desk. They won’t care how much your brother-in-law in New Jersey got for his business. However, they will care how much your business assets are worth, and what it will earn for them.

When all is said and done, the value of your business will be driven by quality, track record, risk, industry, market, customers, financials, and the profile of the buyer.

In 1993, June Morris and David Neeleman started Morris Air, a low-fare, regional carrier in Salt Lake City. Eighteen months later, Southwest Airlines bought Morris Air for over $130 million. Morris and Neeleman had built their business on the Southwest model in a market Southwest needed. Same planes, same pricing, same customers. You may not get $130 million for your business, but its value will be determined by the same factors.

Your Small Business Development Centers have tools for business valuation and succession planning. Use them whether you’re just starting out or getting ready to sell. Morris and Neeleman began with the end in mind, and the value of their business proved the value of their plan.

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