What Every Business Owner Should Know About Valuing Their Business

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Summary: Good Book For Entrepreneurs Who Want To Learn Valuation
Review: Any entrepreneur who contemplates buying or selling a business or who wonders what their company might be worth should read "What Every Business Owner Should Know About Valuing Their Business" by professional business valuation experts Stanley Feldman, Timothy Sullivan, and Roger Winsby.

Feldman, Sullivan, and Winsby tell us that most small businesses are too small to be sold for anything more than net asset value. We learn that of the 24.5 million businesses in the U.S., 17.1 million are owned by only one or two people and are often part-time endeavors operated from home.

These ultra-small businesses typically have zero value as a going concern, because they are often highly dependent upon the owner's labor and they have limited income potential. These ultra-small businesses have little "goodwill" value beyond the value of their net assets.

Small businesses with several employees and an established client base often have value as a going concern. These companies often sell for more than net asset value. The amount paid above the net asset value is called "goodwill."

Because buying or selling a company is probably the biggest financial decision you'll ever make, you should understand the valuation process and consider utilizing the assistance of professional business appraisers. The authors tell us that professional business appraisal is costly, often ranging from $5,000 to $25,000 to appraise a company.

Using several case studies, Feldman, Sullivan, and Winsby discuss the main business valuation methods used today, including:

1) Valuation based upon earnings, which typically involves adjusting reported earnings appropriately and determining a proper industry-specific multiple of earnings for which the business should sell. Often, "similar" businesses are examined to see the valuations given to those companies.

2) Valuation based upon revenue, which usually involves determining an appropriate number that is multiplied by the company's revenue to determine company value.

3) Valuation based upon discounted cash flow, which involves estimating the future stream of free cash flow the business is expected to provide and then discounting this stream of cash flow to the present. Sometimes, the basic discounted cash flow calculation is further adjusted to allow for a small company's lack of liquidity or other factors.

Feldman, Sullivan, and Winsby write: "There is a growing consensus among professional valuation experts that the discounted cash flow method produces the most accurate valuation results for an ongoing, established business if there are no current transactions of very comparable businesses."

"What Every Business Owner Should Know About Valuing Their Business" shows the valuation of several specific businesses, including an insurance agency, an environmental consulting business, a law firm, and a metal fabrication company.

Each case study provides a current tax return for the business (one company is a C-corporation; two are S-corporations; and one is a partnership), and each company valuation demonstrates several aspects about the valuation of different types of businesses.

For example, for O'Toole Insurance Agency, we learn several things:

1) An important part of valuation is convincing the other party that there is a reasonableness to your valuation.

2) Large expenses can be incurred in valuing a business and preparing it for a sale. In one failed transaction, the buyer and seller collectively spent $44,880 in accounting, appraisal, and legal fees, and, in the end, the deal fell through.

3) Sometimes, it's important to separate different parts of a company for valuation purposes. O'Toole Insurance Agency owned its building and rented space to other occupants. If the potential buyer only wished to purchase the insurance business, the insurance business would need to be separately valued from the property and rental business. Also, because the new agency, sans building ownership, would need to pay rent, the insurance company earnings would need to be lowered by the new rental expense.

4) Discretionary expenses and "missing" expenses must be examined, and adjustments might need to be made to reported earnings when valuing the company. Feldman, Sullivan, and Winsby point out that many business owners incorporate discretionary expenses into their business in an attempt to lower taxation. These expenses reduce taxable income, but can be eliminated without compromising the earnings power of the company. (Some buyers might be willing to accept that the true earnings of the company are higher than taxable earnings due to these discretionary expenses, thus increasing the true value of the business.)

Feldman, Sullivan, and Winsby include a solid chapter about maximizing the value of a business. The authors say business owners planning for the sale of their businesses must start thinking less about minimizing taxes and more about maximizing company value. Over a period of several years, owners should prepare for the eventual sale of their company by making their operations more transparent and disentangling personal expenses from business expenses.

Suppose, for example, an entrepreneur incorporates $30,000 in discretionary expenses in his business, including expensive club memberships, that really aren't necessary business expenses. Assume these "expenses" generate little or no added sales and don't really help customer retention nor benefit non-owner employees. If the business sells for eight times earnings and we use the taxable earnings for valuation, this $30,000 in discretionary expenses will reduce the company valuation by $240,000.

Feldman, Sullivan, and Winsby write: "A dollar saved on taxes can cost $$$ in lost value."

The authors also discuss the possibility that expenses the owner claims are "discretionary" are, in fact, necessary. For example, the club memberships may be crucial to meeting potential clients. The authors tell us that a new owner who does less networking might need to increase advertising expense appropriately. And, thus, it's useful to examine the advertising expenses of similar companies.

"What Every Business Owner Should Know About Valuing Their Business" discusses other "life business events" such as divorce, death, transition planning, and portfolio diversification. There is also an excellent discussion of the different types of business structures, such as S-corporations and C-corporations.

Overall, I highly recommend "What Every Business Owner Should Know About Valuing Their Business" to entrepreneurs buying or selling a business.

Peter Hupalo, Author of "How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners"

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Summary: Very useful information for the small business owner!
Review: I found this book to be logical and informative about many matters that I've had trouble getting good information about. We small business people may often find ourselves going it alone, wandering about in the wilderness, so to speak.

This book offers education and guidance about matters very relevant to the management of one's business in order to make it more profitable and ultimately more valuable at the time of sale. The ramifications of various decisions about what to include as tax deductible necessities are spelled out. I recognized how many times my desire to minimize my taxes had driven my decisions rather than looking at the larger picture--my need for an adequate retirement income. This is an even bigger issue for someone who hopes to ultimately sell their business to fund their retirement than for me as a professional practitioner.

I especially liked the fact that the authors explained the various methods of business valuation and their underlying assumptions. They spelled out the pros and cons of each so that they could be selected for appropriateness as well as weighted if they were all combined to provide a ballpark figure.

The examples were detailed, varied, and interesting. They seemed very realistic. They were effective at illustrating various points the authors wished to make. While this book is targeted more to owners and sellers, it would be very beneficial for any potential business buyers to read. It makes clear many areas to be probed so that there are not unpleasant surprises later on.

... The book is quite inexpensive and the valuation service, although it sounds expensive at ... is inexpensive and fast compared to any other alternatives. The ways in which the information the valuation process yields can be used are amply demonstrated in the various examples. The authors are also available for consultation as part of the package and there are options to tailor services to meet a specific legal need.

This book has the potential to save a business owner a tremendous amount of money if he or she plans to maximize the value of their business for 3-5 years prior to a projected sale, rather than manage their business in their usual way. It's a great resource to help business owners (and/or their families)prepare for transitions! Buy it and read it if you are a small business owner now or are considering becoming one!

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Summary: Very useful information for the small business owner!
Review: I have just completed the purchase of a small business with less than 1 million in sales and 6 employees. Reading and reviewing this book as I went through the negotiation process was extremely valuable in helping to understand the seller's motivations and valuation assumptions.

I am also using this book as a guide for how to maximize the value of the business that I now own. And I expect that it will pay off handsomely in the long run.

Buy this book if you're a seller contemplating sale, or a buyer contemplating purchase.

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Summary: Helpful and Informative
Review: I just picked up a copy of this book because I needed to know the value of a family business. I thought I could just pick a formula and presto that would be the number. After reading this book, and going over the case studies, I now know differently. There is a lot more involved than randomly assigning a value to your company. And this book showed me how. Its straight forward approach and readability will now let me see what I need to do in order to maximize the value of the company. Thanks for the tips!

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Summary: Advertising without real substance
Review: i'm a potential buyer of business with some knowledge of the overall process including valuations after reading Robb's excellent but outdated book on business. I thought i needed to know more about the valuation aspect. However while usefully illustrating the vagueness of the process, this book by Feldman accomplishes nothing substantive other than free advertising. Their dismissiveness of some types of modelling with a continual substitution of their own process, which they do not explain & is i suspect subject to similar criticisms, is patronising. All models have problems & they need to recognise this, as the basic tools used to arrive at complex formulas are common to all.

There are some examples which make you feel comfortable & in touch with reality, useful for one scared by the financial process, but too much is repetitive, & really really this can all be condensed. For those who want the condensed version here goes:

"Plan your business methods well before sale date. Minimising tax also decreases value, because earnings appear to be lower. There are flaws with earnings multiple based valuations. By contrast, & see the appendix to every chapter, our online system is flawless but we're not going to explain it. Brokers also cost more than our system. Go online & buy it."

I know this book has been given 5 stars, but if you have any knowledge at all or are averse to advertising at your own expense try another book first! Whatever happens you should definitely buy another book after you have sampled this one.

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Summary: Some good info, but lots of advertising their service also.
Review: Some good information, like explaining Discounted Cash Flow Approach (DCFA), but the constant sales pitching of their valuation service made me question their objectivity.
All-in-all, I wouldn't buy it again.

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Summary: What Every Business Owner Should Know About Valuing Their Bu
Review: This book about valuing one's business - in my case, an S Corporation; essentially, however a partnership - is worth far more than its cost - exponentially more.

In the few short hours it took me to read it initially, I came to view new angles about our company that I'd not even considered before. As we studied the work further, both my partner and I developed a clearer understanding of how others may evaluate the level of our business success when we reach the point of wanting to sell the company. And, there are real life ideas spread throughout the book that will aid us in valuing the business when that time comes, as well as helping direct us to the kinds of buyers to whom the business would be worth more than to others in the general community.

Several real life-like examples of companies going through the process of being valued, sold and bought were eye-openers, too. We have a more clear understanding of the fact that valuation done by several different firms or accountants will usually yield several different sets of valuation numbers. Now we also know how we might interpret these results. The authors, too, explained in some detail how we could increase our firm's (or anyones' firms) real and perceived value as we ready to transition ourselves to retirement when we sell. Seeing the different results yielded by "value maximization strategies" versus "tax minimization" ones have led us to begin revising part of the fundamental foundation upon which our business has rested the last 15 years.

When the time comes for us to obtain updated business valuations for our firm, we now know where we can go for good information - bizownerHQ - and see how we can effectively use that information when the time comes to act on it.

Finally, I should note that the book isn't completely "dry" as some might expect. Stories of companies undergoing valuation, in the process of being bought and sold, were in some cases amusing and entertaining, probably because the stories describe processes all of us who own businesses have been through on many occasions ourselves! An enjoyable read on top of the big information value make this a terrific buy for any small business owner.