Know What Your Business is Worth

Know What Your Business is Worth

Chart A

Over the years, I've suggested to business owners that they should always have a clear understanding of what their business is worth. Consistently, however, I find that kitchen and bath dealers do not have a clue as to the value they have created with their enterprises. Not having a clue about such an important detail could result in a lifetime of work and achievement never realizing its full potential.

As business owners, we do more than sell kitchens. We do more than meet payroll. We do more than work 10 or 12 hours a day.

As business owners, we create value.

I've told the story many times about the first time someone approached us about buying our business. It was 1986, and our design firm was only 3-1/2 years old. I remember that we were working 80 hours a week, always running behind and, then, out of the blue, someone wanted to know if our firm was available for purchase.

I'm sure that my reaction to the question epitomized what is known as the "deer-in-the-headlights" look. Luckily, I didn't verbalize what was racing through my mind You want to buy THIS business?

I was just as surprised when we retained a business evaluator and he presented us with his calculation of what our business was worth. How could our business be worth that much? Did he seriously think that someone would pay us that much for this business? But, the fact is, someone did pay us that much. More importantly, I came to realize that they weren't crazy at all. The business we'd created was worth every penny they had invested.

Understanding value
Since that time, I've made sure that I'm always aware of what our business is worth. I suggest that this be a priority for every business owner.

It's always better to retain an outside professional to prepare a business valuation for you. A trained professional understands the marketplace and will be able to determine a defendable, accurate value.'

If you would simply like to know the value "range" for your business, try this formula, which we've worked with for a number of years.

Start by getting two pieces of paper. Label one "tangible assets," and list, using your best estimate, the current market value for your hard assets things such as computers, fax machine, displays, etc. On the second page, tally every dollar that you, the owner, take out of your business. Include salary, payroll taxes, fringe benefits, etc. Make sure to include anything that was paid out of the business checkbook but was actually personal in nature. You should also note items from your financial statement that wouldn't be the responsibility of a new owner, such as interest and depreciation.'

All of these will be added back to profit and are termed "adjusted expenses." When you're done, your recast income statement should look something like Chart A (note that we're leaving some money in the business for a new owner salary and some capital for the new owner to operate with).

Developing a multiplier, the way to estimate the value of those items that produce the profits, is also something that you can do on your own. These items could include mailing lists, business reputation, years of doing business, trained staff, marketing materials, etc.'

Using a scale of one to six, answer the following questions (I have given response examples):

Risk: Is there risk to the investment into your company? Is there a reasonable chance that income will continue to be produced? (Ex: 3)

Competition: Are competitive pressures such that continued income is in question? (Ex: 2)
Industry: Is this a growing industry? (Ex: 4)

Company Standing: Is the company stable, and does it have a solid earnings history? (Ex: 3)

Company Growth Potential: Is the company a growing concern? Will it continue? (Ex: 2)

Desirability: Is this an attractive and appealing place to work and conduct business? (Ex: 2)
Take an average of all of the answers to these questions (Ex: 2.83)'
To calculate the value of your company, get out your list of tangible assets. Our valuation formula looks like this:

Multiplier x Adjusted Earnings = Going Concern Value

Going Concern Value + tangible assets + inventory + receivables = Total Business Value

Be prepared
Even though it happened to us, it's fairly unlikely that someone will walk in one day and want to purchase your business. Normally, a broker would be retained and a confidential marketing plan would be developed and put in place.

According to business brokers, the average length of time for a business to be on the market is 10 months. That means that the good ones are snapped up quickly and the others take a while. More significantly, brokers nationally are successful in selling firms they represent less than 50% of the time. Brokers say that the biggest hindrance to sales are businesses that demonstrate poor record keeping and inattention to their financial statements.

Knowing what your business is worth is critical when you're seeking any type of financing. It is also an essential component of estate planning. Understanding the value of your business is also the best motivator I know of when you're sure you can't stand to work with one more customer. So, start planning.

Steve Vlachos is a well-known industry author and educator who also serves as an instructor for the 'Managing for Profit' seminar series co-sponsored by K&BDN and NKBA. Vlachos heads Vlachos & Co., which assists firms with business and evaluation issues. He can be e-mailed at: