Quick Consultant: Business Valuations - The Sooner the Better!

Your wife just hired a 21-year-old pool boy even though the pool won’t be completed until next summer.

Your husband has suddenly taken a great interest in exercise and is taking Pilates classes five nights a week.

Your spouse recently traded in that expensive iPhone for a collection of $19.95 disposable cell phones.

You just discovered a large folder containing monthly bank statements from St. George’s Bank in the Cayman Islands.

While these scenarios are meant to poke fun at some of the more extreme signs of marital infidelity and a pending divorce, they also suggest something far more serious. It’s never too early to develop a method for valuing what, for many in this industry, is the single largest asset owned jointly with your spouse (or your partner)—your printing business.

Unfortunately, other than casual discussions with your brother-in-law who owns a pizza parlor or suggestions from your accountant about future tax planning, the subject of how to value your business and how much it might be worth rarely comes up in day-to-day conversations. Let’s face it, most of the time you’re too busy putting out fires!

Many printers don’t have the faintest idea of how much or how little their business is worth. In fact, there are days so bad that they would gladly pay someone to take it off their hands. On good days, of course, they think it is worth twice its annual sales.

Getting Your Finances in Order

Some days, all I have to do is look at all the colored folders sitting on my desk to get an idea for a column. Other days, I will be scanning news summaries from AOL or Yahoo and I will spot an article that suggests a future column. This month both of those events seemed to occur simultaneously. As it turned out, three of the six valuations sitting on my desk involve either a pending divorce or the break up of a long time partnership.

Then, just a couple of days ago, I was scanning the AOL News page when an article titled, “Heading for a Divorce? First, Get Your Finances in Order” caught my attention.

Both of those factors strongly suggest that the best time to prepare a valuation of your firm is when there is no apparent need to do so. On the other hand, the worst time to obtain a valuation is three months after you’ve been served with divorce papers or when you discover—not suspect—that your partner has been stealing from the firm.

Agreeing on a valuation method and then taking the time to value your own company is money and time well worth spending. It’s sort of like buying a $1 million term life policy on yourself, hoping that your beneficiary will never collect.

The AOL article noted the often quoted statistic that 40-50% of all marriages end in divorce. “Second and third marriages,” according to the article, “have an even worse track record—with more than 60% of those unions ending in a separation.”

With statistics like these, it doesn’t take a genius to suggest that some pre-planning just makes sense. I believe every couple and every partnership needs to agree on a specific method to be used for valuing the business, and this agreement needs to done early on. The last thing you want to do is find yourself being forced to value your firm for the first time with a pending divorce settlement or dissolution of a partnership staring you in the face.

A Funny Story

A few years ago, I took on a consulting assignment in the Northeast. The owner and his wife ran a quite successful business. She was the “doer” and he was the “thinker,” and it seemed to work out quite well for both. They were married for 25 years, a small record in many quarters.

A few months after the visit, my client told me he had adopted many of my suggestions and was now doing better then ever. At some point after my visit, possibly for self-gratification, he decided to obtain a valuation of his firm and he hired a local business appraiser. He sent me a copy.

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:

  • “The Small Business Valuation Book” by Lawrence W. Tuller
  • “Sell Your Business Your Way” by Rick Rickersten
  • “The Complete Guide to Buying a Business” by Fred S. Steingold
  • “How to Buy & Sell a Business” by Garrett Sutton

 Conclusion

Two things are worth closing with. First, I would love to be a fly on the wall observing printers who have just finished reading this column and then to be able to follow them into the office next door where their spouse or partner is working.

Second, in case you were wondering, Mary and I have not discussed valuing this firm. As I understand it, years ago trusts were drawn up, wills were rewritten, and the corporation redistributed its stock. The long and short of it, as Mary tells me, I own nothing but the box of change sitting in the bottom drawer of my closet. I figure I have probably $78—mostly in nickels, dimes, and quarters.

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