About once a week I get a call from someone interested in having their company valued. Two weeks ago, it was a 35 year old man from Colorado who needed to have his firm valued. He was going through a divorce and the business was going to be part of the divorce settlement.
“I just want to keep it fair for both of us; no need to stretch the truth or come up with a low number, just give me your best valuation,” he asked. I never told him, but I was extremely impressed by his request to “just keep it fair.”
So what was the bottom line? How much was his company worth?
His company was doing approximately $820,000 in annual sales, and after analyzing three year’s worth of financial statements, net profits, take home salary, his equipment list, and a half dozen other items, I came up with a value of $267,000. He did not seem surprised or hurt that the value came in as low as it did. “It is what it is,” I told him.
It’s now in the hands of the attorneys. At about 32% of annual sales, this firm’s value to sales ratio is a bit lower than some valuations, but not by much.
Values Vary Dramatically
There are great variations in this industry when it comes to valuing firms that are similar in sales. One firm can sell for 35% of sales while another firm can sell for 100% of sales. Many firms don’t sell at all.
About three weeks ago, a friend of mine from North Carolina called. He wanted me to value his firm. Why? Bob has reached the end of his rope—frustrated with his inability to find skilled employees to work in his $950,000 a year business.
Bob would love to sell the business to his own employees, but none of them have expressed the slightest interest. Recently, however, he was approached by two brothers from a nearby town. They have been in printing all their lives and they asked him what he wanted for the business.
Bob is great with his record keeping, and he values his firm on an annual basis, if for no other reason than to keep his statement of personal net worth up to date.
One last thing, Bob has always run his business by the numbers, using the ratios reported for “profit leaders” that appear in NAQP’s biennial Operating Ratio Study. The ratios for Bob’s firm seem like they were copied almost directly from the Profit Leader section of this study.
His numbers are as follows:
- Cost of Goods 24.8%
- Total Payroll Costs (excluding his own pay and benefits) 27.1%
- Overhead Costs 23.9%
- Net Owner’s Compensation 24.1%
Combining these ratios with real world transferable net assets (not those necessarily shown on the balance sheet) valued at $180,000, Bob’s firm was valued at $925,000; one of the highest valuations I have ever personally calculated. In fact, I know of only one other firm in the country that has sold for a slightly higher ratio.
Will the gentlemen he has been talking to see the value in Bob’s business? Will they make a reasonable counter-offer? No one knows. In the meantime, Bob keeps going to work day after day, just hoping for the best.
Small Firm, Big Value
Just before the deadline for this column arrived, I received a call from a relatively young couple in Oregon. The wife called and asked me some general questions. She told me that she and her husband had started their business about seven years ago with a master plan to sell in 10 years.
They are a very organized couple, however, someone has thrown them a curveball and they needed my advice. “What are your annual sales,” I asked.
She said, “$725,000.”
“How many employees?”
“Three, including both of us.”
I almost choked when she said that! “Do you broker a lot,” I asked. I was grasping for justification for a sales per employee (SPE) number twice the national average.