Know Value Before You Sell Company
After more than 20 years in the construction equipment business, Byron Romig thought he wanted to sell his company. So three years ago, he paid an $18,500 fee to a firm to value his business and try to sell it.
The consultants interviewed employees, reviewed his financial statements and produced a 50-page report on Anaheim-based Bymac Inc. Based on market research, they suggested he set the price at $3.4 million. Although he felt the research was somewhat superficial, Romig agreed to solicit offers.
“A small businessman has very few yardsticks to measure his business by,” said Romig, who once worked as a business broker himself.
Even if you don’t plan to sell your business, it is important to know how to fix a value on it. Figuring out what your business is worth requires a good deal of digging, but experts say that the process will help you plan for growth in the short term and a possible sale in the future.
“A valuation can be used for estate planning, to borrow money, to set up an employee stock ownership plan, or if you think you might want to merge,” said Romig, who eventually decided not to sell his business and is now seeking acquisitions with the hope of growing and going public.
Before calling in expensive consultants, Romig recommends that a small-business owner first figure out what he thinks his company is worth.
A value can be calculated by reviewing past and present company financial statements, reading industry reports and studying public information about competitors. The value of equipment and supplies can be determined by monitoring price lists and seeing how much used equipment sells for at auctions, he said.
While a do-it-yourself approach may work in a specialized field such as the selling and leasing of construction cranes and elevators, financial advisers caution small-business owners against selling without some kind of professional guidance. They say there are too many variables, including the emotional attachment to a business built from scratch by an entrepreneur.
“Even when a company is teetering on the brink of insolvency, the owner thinks, ‘It’s my company and it has value,’ ” said Edmond Freiermuth, a Santa Monica financial consultant who specializes in rescuing troubled companies. Freiermuth said he is “constantly amazed at the difference in the value placed on a business by the owner” compared to an outsider.
In most cases, small-business owners only consider selling when times are tough, but Freiermuth said even the most content owner “can be persuaded to sell if someone makes them an incredibly good offer.”
So what if you decide that 1989 is the time to sell the business you have lovingly nurtured from its inception?
“The first rule of thumb in appraising the value of a privately held company is: Don’t use rules of thumb,” said John Johansen, an Arlington, Va., business broker. “Each business has its own way of operating.”
In a recent article in In Business magazine, Johansen suggests looking at four important factors when attempting to value your business:
1) Historical profits and future profit potential.
2) General condition of the company, including facilities, staff, record keeping, etc.
3) Market demand and economic demand for the particular type of business.
4) Ability to transfer the business’s good will to a new owner.
Small-business owners can also find a wealth of practical information in a new book co-authored by Lisa Berger, a Washington, D.C., journalist.
In “Cashing In, Getting the Most When You Sell Your Business,” published by Warner Books, Berger suggests “sprucing up” your business long before you talk to a buyer.
“Get your financials and your building in shape,” said Berger. “Start holding on to some of your earnings rather than paying for salaries or perks.”
She said a marginally profitable small business operated mainly to provide its owner with a nice life style will not appear attractive to an outsider.
Although the book provides a glossary of terms, excellent tips on negotiating and sample contracts, Berger strongly recommends hiring professional help.
“Don’t try to do it by yourself,” she said. “Some business owners are not very good negotiators.”
If you want to sell a publicly held business, there are strict state and federal requirements, such as providing fair value to shareholders. But setting the actual price may be easier. Daily stock market quotes provide some reflection of the market’s perception of what the company is worth, according to James M. Needham and K. Dunlop Scott, accountants working for Arthur Young International.
“One of the most difficult steps for some sellers is actually putting the company on the market,” they write in their booklet, “M&A; Strategies.”
“You must be bold enough to seize real opportunities to sell your business, yet cautious enough so as not to make your company appear to be shopworn or damaged merchandise.”
Every seller needs a report or “selling memorandum” outlining what his business is about and what it is worth. Needham and Scott recommend that the memorandum include a confidentiality clause. Such a clause seeks written assurance from a potential buyer that any information he learns about your business will not be used to your company’s detriment.
They also suggest keeping a low profile during negotiations to minimize anxiety among suppliers, customers and employees. “A good rule of thumb is to announce the sale of the company only after it is completed,” Needham said.
Starting at Home
“How to Start and Promote a Home-Based Business” is the subject of a Feb. 4 seminar at the College of the Canyons in Valencia. The course is taught by Beth Smith, publisher of “Business Line,” a newsletter devoted to home-based business.
The cost is $28 for tuition, plus a $5 materials fee. Pre-registration is required. For information contact: College of the Canyons, 26455 N. Rockwell Canyon Road, Valencia. Phone: (805) 259-7800, ext. 421.
Learning to Manage
Managing your small business is the focus of a weekend course to be offered Feb. 18 and 19 and March 18 and 19 by the University of Redlands Whitehead Center for Lifelong Learning.
The two-unit, four-day course meets each day from 9 a.m. to 4 p.m. at the university. Topics include legal problems, location, staffing, financing and marketing. Tuition is $400. For registration information, call the University’s weekend course office at (714) 793-2121, ext. 2281.
