Want to Know How a Business Appraiser Looks at Small Business Value?

Want to Know How a Business Appraiser Looks at Small Business Value?

Factors that Increase or Decrease Business Value
By: George D. Abraham
CEO & Chief Appraiser
Business Evaluation Systems
There’s a range of key factors that can affect the value of a business.  While some of these factors are outside of the owner’s control, steps can be taken to make the business as valuable as possible. Start planning well in advance and consider inserting an exit strategy into your original business plan. Then start implementing the factors that increase value and eliminate the factors that decrease the value.
Financial Statements
Just how good are your financials. Are they minimal or do they show an in-depth look at your business.  Can you easily track the flow of revenue and expenses flowing from the invoice to the financials to the tax returns?  Can your track the sales of your top 5 customers? Can you easily prove all of the perks you receive from the company?  Today’s accounting software easily lets you do all of this and much more.  When a buyer is interested in a company, the ease at which the owner can prove the financial performance of his or her business has a direct impact on value. Incomplete or inaccurate financials tells the buyer that no one is watching and tracking the Company’s performance and therefore the future performance (of real importance to the buyer) is unpredictable.  Value is created or destroyed by the ability to see the Company’s future.  The longer the buyer can see that the Company will perform in the future as represented, the more secure they are and less risk is perceived.  To the contrary, when the future is a guess, risk is increased and value is decreased
Obviously, small increases in revenues over the year’s shows a different picture than equally decreasing sales and the same is true with large increases and decreases.  The key to value is the owner’s ability to explain the precise reason.  Many times declining sales, if explained does not affect value as negatively as one might expect.  Retiring doctors decide to work less, firing unprofitable customers and price increases that result in increased earnings do not impact the value of the business as negatively as one may think.  Again, the key is the explanation of why revenues and/or earnings have dropped.
The big question is what would happen to the business if ownership changed.  Obviously, if the Company’s management and sales department are you, the owner, expect a decrease.  On the other hand, if the sales are made by the sales department and the Company has department managers that report to the owner, value increases.  Another factor is the longevity of the management team and in general all of the employees.  Have the managers and employees been with the Company for several years, or is constant turnover the norm?  These people have key knowledge of the internal workings of the Company, products and services and relationships with suppliers and customers.  A well trained (and cross trained) knowledgeable management team and employees with longevity greatly reduces risk to the hypothetical buyer and thus increases value.
When you look at your operation, do you see a busy, organized facility with well maintained equipment? A facility that is busy, appears to be unorganized, with dirty equipment, reflects the same image for the management and employees.  Well maintained, clean equipment and vehicles tells the buyer that regular service and good maintenance records are the norm and this increases value.  The opposite portrays, short lived equipment and vehicles with higher amounts of capital expenditures in the future that reduce earnings and lowers value.  One has to imagine that the kind of appearance the Company has, may represent the kind of customers it has.
In General
First impressions are important! A clean organized business with well maintained assets and good financials portrays a good well managed, solid business and reduces the risk level in buyers.  It reduces the depth of the financial due diligence process, questioning asset and inventory values and creates a more secure atmosphere for the buyer.
Good financials, formalized business and marketing plans, well trained and knowledgeable management and   employees with longevity add up to value.
Competition is always a risk to a buyer.  The more you know about your competitors and why they will not affect you is extremely important to a buyer.  If your company has intellectual property, valued or not, be able to explain (even better to calculate it) the advantages your company derives from it.  Start an exit plan a couple of years in advance, to address any of these factors that may pertain to your business.  A business owner that knows the strengths of his or her business and can reasonably prove it, has a large effect on the appraiser and the buyer.

It’s a new year, winter is raging and opportunities await….

This time of year I like to take several days away from my day-to-day business, hide out somewhere cold but with a good fireplace and sort through the current opportunities and challenges of my business. I make it a point to seriously limit email and phones so I can think more clearly without the usual “noise” of day to day activity.

I’m always curious about how (or if) other business owners do the same and what approach they take to an annual review or plan. Please let me know your routine and your success with it.

Here’s my approach:

  • I spend very little time comparing what I planned to do with what I actually did. This seems to be an exercise with little benefit. What I do is focused on what surprises I had last year and try to figure out if I could have done something so that the surprises weren’t surprises
  • Next, I try to forecast areas of my business that could create surprises, both good and bad, this year. For example, I’ve spent some time on interest rates. Interest rates are low now but if they suddenly jumped up it could have a bad effect on my business. Is there anything I can do now to mitigate the effects if higher rates do materialize? I think so.
  • Next, I look at changes in my industry during the last year to try to determine if our people need training or education in areas where the industry has gotten a little ahead of us. For this year, I’ll be doubling our efforts in SEO and social media…but we’ll need some help.
  • Another area I look at is my personal productivity. Have I gotten sloppy anywhere, in what areas can I support our people better?
  • Lastly, I try to focus on approaching opportunities and try to figure out if we can get ahead of the curve. There are huge advantages in all businesses to be first..but not to early. That’s a delicate balancing act.
Drop me a line on how you approach the strategy side of your business and what you do to make sure your thinking is clear.

Why would someone sell me their perfectly good business?

Often small business buyers wonder about this. There is an all too frequent buyer attitude that says “If it is a good business they wouldn’t be willing to sell it to me!”
Here are some reasons we see business owner want to sell:

  1. Divorce of husband and wife owners
  2. Partnership disputes
  3. Owner health issues
  4. Kids don’t want the business and the owner has gotten to retirement age.
  5. The business has gotten bigger than the skills of the owner
  6. The business needs professional management
  7. The industry is changing faster than the owner wants to change (in this case the owner is always convinced the market is wrong and he is right).
  8. The business is totally debt free and the owner doesn’t want to take on debt to grow.

There are many other reasons that make sense to the seller, even if it doesn’t always make sense to the buyer. the tricky part is, because confidentiality is so important it takes some work to locate a good business to buy. Finding a good business for sale and buying it from a seller who has a good reason to sell could be a formula for success in a business acquisition.

A New Year’s resolution list for small business owners……

In the spirit of the holidays I’ve decided to give small business owners a ready made, no assembly required, New Year’s resolution list. It’s only 5 items and it’s designed for every business owner.

Here’s your list………… yes that means you!

  1. Smile more – business life is never as bad as it seems when things aren’t going well. From a business perspective there is always a way out…always.
  2. Read more – I don’t care how long you’ve been in business nor how smart you think you are…you can learn something from someone else. I suggest that you read things that are not directly related to your industry. Skimming your trade journal every month to see who got fired is not real reading.
  3. Plan more – Set aside specific blocks of time, away from the office, where your only job is to think about your business 6 -12 months in the future. In spite of what you may believe, planning is not the same as updating a to do list.  
  4. Say thank you more – to your spouse, your parents, your kids (yep, I said kids), to your customers, to your employees, to your vendors, etc. You get the idea, right?
  5. Wish less, Do more – I recently read (see #2 above) that the best productivity tool in the world is to do something. Makes sense to me, we can talk about doing something or we can actually do something. If we’re talking about doing something it’s still on the to do list, if we actually do it…by golly the list is shorter.
There’s your ready made, easy to use list. And by the way it’s my list also for 2011. And… thank you for reading this blog, I’ll try to make it better than ever in the new year.
If you don’t use this list I’d love to see your list! 
Happy New Year!!!

Holiday Reading Ideas for a Better Business

My New Year’s resolution (well, one of them anyway!) is to provide more tools for small business owners to start or buy a business, then grow it profitably and sell it! As part of that I am kicking off the New Year with a specific book recommendation. Although I can’t say I agree with everything in this book it is loaded with ideas that might help get you focused on creating a business that you run, instead of a business that runs you.

Making Money is Killing your Business contributes greatly to the argument that running a business by the seat of your pants is not always a great idea.

A core and unique concept of the author Chuck Blakeman is that a business should throw off money and time. If you start thinking about your business this way I think it will change some of your decision making. In an earlier post, ‘Tis the season…  I warned about creating an atmosphere in your business where you are cynical about your business and you lean on an “it’s me against the world” view of ownership.

This book gives clear ideas and examples of how to mange that natural tendency.
Don’t get hung up in the references to a specific industry. Analyze the concepts and I think you’ll be able to apply improvements to your business quickly. Good luck and let me know what you think about the book.

‘Tis the season for presents…..want to give yourself one?

This post is for all the hard working business owners and those who one day hope to become business owners.

Far too many business owners live in a constant state of stress. Their reasoning is “it’s a good stress”. I’m no doctor but I doubt that stress 24/7 is really good for your health.

What do small business owners worry about most? Here’s my list based on discussions with thousands of business owners:
  •  Cash flow – too many bills at the wrong time.
  •  Employees – too many need baby sitters, not bosses!
  • Customers – Is perfection a reasonable expectation?
  •  Family – Why doesn’t my family appreciate me working 7 days a week? After all, I’m doing it for them.

Ok, here goes. You knew it was going this way didn’t you. The Uncle Joe talk…..you know, the uncle who told you exactly what he thought about your hair brained thinking when you were 12 years old. Well, I’m your Uncle Joe.

Here’s my recommendation for your New Year’s resolutions for 2011.
  1. Stop feeling sorry for yourself.
  2. Stop using your business as an excuse for not doing the family things that you just don’t want to do. Helping your family hate your business is not a good plan.
  3.  Start thinking about your cash flow problems before you have them instead of waiting until you have them.
  4.  Give your employees written and detailed systems so they know what you expect and how to do it. Believe me, they’d rather not listen to your rants any more than you claim you don’t want to give your rants.
  5. Only promise your customers what you KNOW you can deliver… then do it. Most unhappy customers are created by you. Did you tell the customer what to expect? Did you deliver? Did your employees deliver (see #4 above)?

There’s your simple 5 step program to giving yourself a Christmas present that will benefit you, your family, your employees and your customers.

Merry Christmas and Happy Holidays!