I was impressed. It was one inch thick, 108 pages with charts and graphs, cost him $3,200, and valued his company at about 94% of its annual sales. Two things struck me after seeing it. First, I was charging way too little for my services. And second, the value placed on his business was far too high, in my estimation—certainly based upon what I knew of his company.
Okay, three years or so have passed and two weeks ago he contacted me. He tells me that he and his wife have drifted apart and they are now separated. His wife is now seeking a divorce (my guess, she is probably is seeing the pool boy). He now wants me to prepare a valuation of his firm. “I want this to be fair for both of us, but I really don’t think the business is worth what she thinks it is worth, and I am hoping you can prepare a valuation for the business.”
“What is she using as the basis for what she thinks it is worth?” I ask him. Well, you guessed it, his wife is using that $3,200, 108-page, one-inch thick appraisal and is demanding top dollar for her share of the business.
If you’ve never done a valuation of your firm, you should prepare for some ruffled feathers and raised eyebrows. It’s going to be very hard for a husband, wife, or partner, who just finished reading this column to suddenly raise the subject for the first time without the possibility of some suspicion as to motive. Well, blame it on me if you need to, but it must be done. Forget the humorous references to pool boys and disposable phones, there are many other valid reasons for seeking a current valuation of your firm.
You’ve spent half your life building up what was supposed to be a nest egg for when you and your spouse retire or your partner wants out. You need to be able to pull out that “valuation folder” you started a few years ago (or maybe the one you prepared this week) and follow the agreed upon valuation process.
Available Valuation Methods
There are four basic approaches for valuing a small business:
1. The Income Approach measures current and projected streams of income.
2. The Asset Based Approach relies primarily on the net asset value of the business and relies upon book value, not liquidation value.
3. The Market Approach compares the subject company to similar size companies in the same industry and market.
4. The Excess Earnings Method is a combination of the first two approaches, which blends the value of current and projected income together with the assets used to produce that income. (This is the method I rely upon for valuing most printing businesses.)
Each of these methods can be further broken down, resulting in literally dozens of techniques and formulas for establishing value. Some of these techniques and formulas can get quite complex. Each method has its supporters and detractors.
Some approaches are used primarily to value large, publicly held corporations while others are more appropriate for valuing small, closely held family businesses. Whether the business is getting ready to shut its doors or is experiencing a banner year also plays a role in determining the approach to be used.
The most important thing that needs to be right done now is to start doing your homework and spending whatever hours are necessary to adopt some basic valuation method that not only makes sense to you but can be easily defended and explained to others.
A Special Caveat
If you think this column was written to promote the “Print Shop For Sale,” the book authored by me and Larry Hunt, you are wrong. I would love to be promoting our book, but we are down to the last couple of dozen books. We are currently debating whether we should revise the book and then print, or just place an order for reprints with no changes. The former will take more time and the latter may end up being short-sighted. The decision is not as easy as you might think.
If you haven’t purchased “Print Shop For Sale,” and you are unable to find a copy, there are other good books and articles out there to choose from. A few of my favorites include: