How help business owners prepare for the future

Transcription

1 Take Control: How Business Valuations help business owners prepare for the future Four things you will learn from this whitepaper: This whitepaper will have special interest to people in the following groups: 1. Why private companies need a business valuation years before the owner even thinks about leaving the business. 1. Why business valuations should be done proactively, and not when faced with a death, divorce, offer to sell or lawsuit. 3. Why business owners need a business valuation to make better decisions before and after ownership changes. 5. Why business valuations are an integral component to a process that enhances shareholder value Business owners ready to exit the business and don t have a plan. Business owners counting on the value of their business for retirement. Business owners with partners, but no buy-sell agreements (or out-of-date agreements), Business owners looking to establish a succession plan. Private companies developing management incentives based on the value of the business. Private companies experiencing a dispute among shareholders, partners or family members. Business owners going through divorce or other life changing experiences. Business advisors to private business owners. Estate and gift tax planning attorneys.

2 By: Anthony G. Duffy, CPA, ABV, CVA ValuQuest 6 Wembley Court Albany, NY Ph: Fax: aduffy@valuquest.com Table of contents In business, change is inevitable 3 Why all the chatter? 3 Moving beyond reacting to events 3 Reactive vs. proactive 4 Business valuation more than just establishing a price. 5 Start with the end result in mind 5 Using business valuation to maximize value 6 Common value drivers: Where your investment can make a difference 7 Developing a value enhancement process 8 Maintain control of the process 8 Who should do your business valuation? 9 Do you have to sell? 9 After all the hard work involved in growing a business, every business owner invariably comes to a point where they have to decide what s next? At this point, owners need as much information as possible about the value of their businesses. How much is it worth in the real world? Are there ways to improve the value? What kind of succession would be best for the owner s family and employees? What kind of life does the owner want to enjoy after exiting the business? At this point, a good business valuation professional can become an owner s most valuable ally. Here s why. Most private business owners have 50 to 70 percent of their net worth tied up in their businesses. Although they often pay one percent of their portfolio value to manage their securities, they haven t invested resources to determine the true values of their business. Few business owners have the foggiest notion how much their most valuable asset is worth. 2

3 In business, change is inevitable Today, more business owners are looking for ways to transition their businesses than ever before. Consequently, business valuation has enjoyed a much higher profile lately. Mostly this is due to the demographic anomalies explored in books such as The $10 Trillion Dollar Opportunity 1 that explore another in a long line of Baby Boomer trends. Many members of this generation have surprised themselves and grown old with successful businesses and expansive families. Often they still feel like they are 25 years old. They are just beginning to think about transitioning their businesses, if they ve thought about it at all. Why all the chatter? All of a sudden, the world of business valuation has taken on a high profile. Whitepapers and books are appearing everywhere to shed light on the mechanics of placing a value on privately owned businesses. They discuss the differences between adjusted book value, capitalized adjusted earnings, discounted future earnings and cash flow method. You can easily find discussions on whether a good rule of thumb is four, five or six times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). However, discussing the mechanics of business valuation is a bit like talking about auto repair why and when you do it is just as important as how you do it. The purpose of this whitepaper is to explore the why s and when s of business valuation rather than the how-to s. Moving beyond reacting to events Most people think of business valuation as a necessity when reacting to an event like divorce, death, business disputes, retirement, etc. All business valuation professionals have stories to tell about the dozens of calls they receive shortly after a business owner dies prematurely. However, people are beginning to understand the best time to do a valuation is long before a triggering event occurs. There is an emerging consensus among business professionals that business valuation should be the first step in succession planning, rather than the last. 1 Christman, Peter G., & Jackim, Richard E. (2006). The $10 Trillion Dollar Opportunity. Exit Planning Institute. 3

4 Reactive vs. proactive Today much of the conversation concerning business valuation has to do with the difference between reactive and proactive management styles. We place business valuations into two different camps: those that have to be done and those that should be done. Have to s are done in reaction to events like death, divorce and buisiness disputes. Should be s are those done by proactive management looking for ways to develop succession plans, maximize value, make better business decisions and prepare for possible future events. Consider the tale of two companies. One, a nationally known enterprise with an owner who never came to terms with the transitional needs of the business, and another a machine shop whose owner thought he might like to sell the business. The first business is the Miami Dolphins, once owned by the Joe Robbie family. Robbie lived to an advanced age, yet died holding 100 percent ownership of the Dolphins. His family had to sell this landmark business just to pay the estate taxes. Robbie never made the choice between proactive and reactive. He never acted. As a result, the business was lost. Now consider what happened when a certain machine shop owner first started to think about business valuation. After the company s CPA estimated the value at $10 million, the owner wanted to explore his options. Working with the valuation professionals at its CPA firm, the shop s management team began to look for ways to enhance the value of the business. Their first step was an in-depth business valuation to provide a benchmark and determine the key value drivers. During this valuation, they determined how measurable changes in these value drivers would affect the value of the company. They also found problems relating to a plant manager and replaced him. The business valuation provided a roadmap for their future management and, after working for three years, they were able to double the company s value to $20 million, a pretty good return on investment. However, the owners discovered something else they were making 50 percent more money and enjoying the business more than ever before. In the end, they decided their interests were better served by keeping the business, which is not an unusual occurrence. When you think about it, building a business is all about building value. When looking for the most desired end result possible, business owners need to consider other options that might be even more desirable. 4

5 Business valuation more than just establishing a price At the most basic level, a business valuation is a professional review of a business to establish its real-world value. At its most valuable level, a business valuation is a tool for building value and providing owners with greater flexibility. A good business valuation identifies a business s key value drivers and anticipates what effect management decisions will have on value. Unless you are in business to tread water, there is no more important activity than increasing value and perhaps no more important tool than a business valuation. Start with the end result in mind One of the rewards of business ownership is the ability to control your destiny. By providing an accurate, real-world view of where your company stands and how its value can be increased, a business valuation helps you make better decisions in the face of changes in competition, economic conditions, etc. It is the management tool that makes anything possible if used early enough and executed by professionals who understand that a business is more than numbers in a ledger. The question really comes down to what you want...out of the business and out of life. Shareholders should be planning their exit strategy from the very first day the business exists. If the ultimate goal is to transition ownership, then the basic function of a business is to maximize value at the time of transition. The question becomes how? 5

6 Using business valuation as a first step to maximize value Business brokers are adept at bringing buyers and sellers together and developing a price that makes a company easier to sell. A business valuation professional is skilled at finding the actual value of a company and ways value can be improved. To improve value, you have to first benchmark your current position. However, since the ultimate value of a business is how much someone is willing to pay for it, a good business valuation should make real world sense. The professionalism of a skilled business valuation professional can make a real difference. Not all CPAs are well-positioned to perform valuations, for while they may be compliance professionals, they may not possess the tools, training, certifications and practical hands-on experience that a true business valuation specialist brings to the table. Accredited individuals specializing in business valuation know how to really dissect a business, analyze financial statements and project to the future. The goal is to make your business as attractive as possible to a potential buyer. To accomplish this, business valuation professionals, while maintaining their independence and objectivity, can apply their business knowledge and recommend steps the business can take to optimally position it for a buyer. 6

7 Common value drivers: Where your investment can make a difference Most business valuation professionals will tell you that just beginning a succession plan makes a company more valuable. It is one of the first steps toward turning an entrepreneurial enterprise into a lasting business. This is the reason business owners are often pushed by their lenders and investors to start succession planning. They want to know there will still be a business if the owner or key managers exit the scene. By starting the succession planning process with a business valuation, business owners not only get a better view of how their company looks to outsiders, but also the areas where they can create more value by changing the way they currently do things. These common value drivers fall under three main headings: Strategy. Systems. People. Knowing how these value drivers work will prove invaluable to business owners looking to measure their business decisions. Here are some of the most common value drivers in any company: Level of risk associated with the business. Identifying key risk factors and lowering them will make a company more appealing to lenders, investors and potential partners. Growth. Larger companies are especially drawn to top line figures. When considering expanding to a new geographic area with a new sales office, consider the expense in light of the potential effect on value. Management of working capital. Cash flow is king. Managing cash flow by trimming receivables and inventory will increase value by measurable amounts. Margins. Do you know how much more valuable your company would be if you could increase margins 10 percent? Knowing this number could help you sleep better at night when considering a large investment in production equipment to increase those margins. Workplace environment. This soft component can certainly make a company more or less attractive, especially as it relates to management quality. Billionaire businessman Ted Leonsis once said, What a lot of business people don t realize is that there s really only one thing they have to do keep employees happy. We are in the happy business. These drivers are all part of the happy equation and lead to more value for a business. 7

8 Developing a value enhancement process With the baseline established by the initial business valuation, and a better understanding of the key value drivers, you can easily measure growth in company value. This program can be built around a triangular value enhancement chart. At the three corners are the basic areas that affect value: People Strategy Systems People. Sometimes business valuation professionals will work with industrial psychologists as part of an initial assessment. They want to get a handle on the skill sets and Emotional IQ of key managers. Management depth and quality certainly affect a company s value. Establishing good contractual ties with key personnel can immediately improve bottom line value. Systems. A Small Business Administration study of why businesses fail found that financial records were most often the culprits. You can t succeed if you don t know where you are, so financial and accounting systems are critical in assessing a company s value. Strategy. A company that has a vision and a plan for reaching it is inherently more valuable than a company without. For this reason, the very act of doing a business valuation plays an important role in improving value, especially if this valuation uncovers key value drivers and leads to development of a plan to improve your performance of these drivers. The value drivers will be different for every business. Positive changes will impact the bottom line, directly affect competitive performance and improve employee attitudes and customer satisfaction. Depending on the depth of the business valuation, detailed scenarios can be developed in each of these areas. Maintain control of the process As in all things, procrastination is the enemy of progress. There are always benefits to being proactive. Better to find the value of your business before a life-changing event triggers the need. By doing a business valuation years before an ownership transition is imminent, or even contemplated, the business owner maintains control of the process. You can identify the value drivers and develop a plan to maximize value. You can prepare for any contingency and create a better foundation for any business decision. Waiting until events actually happen may be too late. At that point, an owner and management team can only react to the situation. 8

9 Who should do your business valuation? Earlier, we talked about business brokers who want to set a selling price and business valuation professionals who want to help improve the value of your business. Since CPA s most often deal with the raw material that goes into a business valuation, business owners most likely will turn to them first. However, finding a CPA who can serve as a valued business counselor is important because business valuation is about more than numbers. With the growing strategic importance of business valuation, a number of professional organizations have developed training and accreditation programs. These include: ABV (Accredited in Business Valuation) by the American Institute of Certified Public Accountants. CVA (Certified Valuation Analyst) by the National Association of Certified Valuation Analysts. ASA (Accredited Senior Appraiser) by the American Society of Appraisers. CBA (Certified Business Appraiser) by the Institute of Business Appraisers. It is best to work with professionals who view their role as helping business owners to maximize the value of their largest and most personal asset. Do you have to sell? No. However, you do have to improve. This is a fact of business life. Business valuation is an important tool in helping business owners control their decisions and their lives outside the business. Business valuation professionals have no control over whether or not a business owner gets divorced or entangled in a shareholder lawsuit, but they do help people take care of themselves and their families. At the end of the day, owning a business is all about freedom and responsibility. Business valuation, when done in a proactive manner, is all about the same things. All business owners will eventually leave their business, either on their own terms or feet first. How they do so determines the quality of life their family will enjoy and the future success of the business they built. For more information on Business Valuation, contact: Anthony G. Duffy, CPA, ABV, CVA ValuQuest 6 Wembley Court Albany, NY Ph: Fax: aduffy@valuquest.com 9