Business valuation, an analysis of risk

3 08 2012

Analyzing risk is the predominate factor in valuing a business.  The appraiser must analyze every aspect of the business and quantify his or her analysis of the company’s risk into value.  A study of the significant risk factors in the business must be identified and then rated as to the degree of risk each carries.  The following are some of the factors to analyze in a business.

 Labor

There are many key factors to analyze as far as labor is concerned. Are employees hard to find? What educational skills or level is required and is the labor pool such that they could be replaced?  If the company is highly technical, there may not be many individuals in the area that have those skills and thus make it difficult for the company to grow. On the other hand, many of these companies can outsource or use virtual offices with employees in any part of the country.

Are key employees and management due a significant salary increase? Again, many employees are faithful to the owner and feel that once the company grows a little more, they will be rewarded both in salaries and advancement.

What are the ages of the employees and key management?  If many of the key managers are close to retirement age, they may just retire when ownership changes. After many years on the job and very close to retirement, many in management don’t want the changes they perceive with new ownership.

What is the liability risk with the employees? Are the jobs they are performing such that accidents are a normal occurrence in the industry?  If this is the case, have the employees been trained sufficiently in safety procedures?  Is safety an on-going program for the employees?  If the company has delivery vehicles, a check of the accident history is in order.

 Management

Will key employees’ stay once the company changes ownership? It is not uncommon for key employees to leave the company for a more lucrative position with a larger competitor.  Many times, the key employees stay with the company  as they are close to the owner and are in a position to contribute to the company’s growth and success and feel they will be rewarded heavily someday.

Has management been efficient?  Are they up to the challenges of the future?  Many companies have employees that grew up with the business but now the company has outgrown them.  They do not have the education or expertise to take the company to the next level. 

How many of the key managers are relatives?  If all or most of the key managers are relatives, and will be gone after the company sells, there is no management.

Who is responsible for the majority of sales? Does the company have a sales force or is the owner responsible for most of the sales and if so, how hard would it be to replace him. 

Financial Strength

Is the company solid or are they in a cash crunch?  Some ratio analysis can tell you what kind of financial position the company is in and how it compares to other companies in its industry.  An analysis of the company’s account receivables is necessary to see how they are getting paid.  An abundance of slow paying customers can drain the company’s working capital.  Insufficient working capital can prohibit the company from growing because it can’t buy enough raw materials or inventory to meet an increase in sales. 

Does the company have the ability to buy from several suppliers or are they enslaved by one that can raise prices whenever they want?  Another question that pops up is how stable is the supplier?  Cost of sales is usually the largest expense for a company.  If you have no idea what the future costs are going to be, you can’t make any kind of meaningful future projections or budgets.

 Facilities & Location

What is the length of the lease? Is it likely to increase? Are the facilities sufficient for the business and possible expansion? What about the company’s location? Are any major roadways or changes in the area likely to affect the company?

 Diversity of Accounts

If the company loses one or two accounts will they be out of business?  Many companies have one account that equals a large portion of their business.  Unless these large accounts are under contract for several years, a buyer may be hard to find.  Will the accounts stay with a new owner is the heart of the analysis for the appraiser.

 Competition

How strong is competition? What is the level of ease of entry into this industry? Are technological changes going to give a major competitor with more cash a significant advantage?

 Predictability

What has the historical financial picture shown? What would it tell a buyer as to what he or she can expect in the future?

 Marketability

How hard would it be to sell this company? How many buyers would be interested in this type of business?  Does the company have a really unique niche? What is the future of its customer base?  Do they manufacture sewing machines or medical equipment?

 Future Outlook

Always remember that a business is bought on the assumption of its economic benefit to its owner. The more stable the financial future, as well as other factors like technological changes, environmental regulations, and public attitude, can have an effect on a buyer’s emotion. This relates to how long the buyer is willing to risk his or her money and therefore how fast he or she would want it back and thus the multiple of earnings he or she is willing to pay.

In business appraisal, value has its basis in “anticipated future benefits” (earnings).  What the company will do in the future is what its value is based on.  The risk factors mentioned in this article are the key to the projections that have to be made in the appraisal process and are all critical points that the appraiser must consider. Image





Business Value Drivers

3 08 2012

Business value drivers are those aspects of a business that can and do add value.

Today’s business environment is not just about survival, it’s about focusing on and creating sustainable value. But, which elements of a business are capable of creating value? Equally important which elements of a business are capable of destroying value? Proper business planning is the process of uncovering and identifying what creates and drives value.

ImageStart by using the SWOT Analysis – Strengths, Weaknesses, Opportunities and Threats – this will help you identify the “value drivers” for your business. With this approach, you can focus on key value drivers.

There are many Value Drivers that have been identified in businesses. But, typically no more than 8-12 are critical in any given business; here are the most common 8.

 

 

Financial History:  

Are your books accurate and up to date? Over the last few years are there patterns of growth or decline? If in decline, are there good reasons for the decline?  Accurate and current financials are important to determine how the company fares in its industry and amongst competitors.  A comparison to industry ratios can identify strengths and weaknesses in the business.

 

Management Depth:

Can the company operate without the owner, for more than a week or two? Is there any cross-trained management to fill in if you were gone?  What is the average age of management?  Will they retire soon? What levels of experience and education do they possess? Having a good management team can add value to the business.

Customer Diversity:

Do you have one or two major customers that account for more than 25% of your gross sales?  What would happen to the value of your company if you lost one? Are most of your customers considered “blue chip”? A good overview and a rating analysis of the customer base can be beneficial not only for added value but is crucial for where, how and when you advertise, not to mention a much better understanding of your accounts receivable and aging.

 

Owner Involvement:

Are you the ‘rainmaker’ in the business? Does everything from sales to

production revolve around you and your decisions? How difficult would you be to replace? The more the business depends on you, the owner, the more likely the value will be lowered.  One of the things I see the most is that over the years, the business owner and number one sales person, is now an office manager.  Maybe it’s time to get back out in the field with your sales people or provide on-going sales training.

Competition:

Does your company compete in a clearly defined market niche which is

defensible? Or, have your products or services become a commodity that is becoming more difficult to defend?

Customer Satisfaction:  

Are your customer relationships based on great products and service, or lowest price? How long and what type of history have they had with you? Are they satisfied or loyal? Do you have systems in place to identify your customers and communicate.

Loyal Employees:

Outside of ownership, are there people in place who you can rely on and are

capable of doing their job day in and day out? Are they considered knowledgeable for your industry? Again, what levels of experience and education do they possess?

What is the average length of employment amongst your staff? A responsible business buyer will be looking for opportunities where the current staff, especially management, will remain in place, following the current owner’s exit from the business. Having key employee contracts, non-competes, but more importantly a loyal, dedicated staff that is committed to the company’s success regardless of ownership change will be highly valuable to a prospective buyer and thus reflected in a business valuation.

 

Proprietary Technology:

Has your company developed a unique application, tool or technology as part of its

Ongoing operations? Does it give you a competitive advantage? If so, this proprietary innovation or intellectual property can be positioned as a key value driver for your business. Technologies or processes do not have to be patented to carry value but privacy and confidentiality must be maintained. It is critical that non-compete and confidentiality agreements be strictly adhered to and enforced by the company, before and after a transfer of ownership. The benefits, application and purpose of your proprietary technology should be explained to a business valuation consultant.

Intangibles (intellectual property) and human resources (who go home at night) can be protected and leveraged through a combination of business strategies and legal protections. Business strategies include incentive compensation plans to recognize, reward and retain high performing employees. Legal protections include requiring key employees to sign non-compete agreements, registering Trademarks and Copyrights, and taking steps to protect proprietary information/trade secrets such as recipes and formulas. Contracts with key players, including partners, customers and suppliers, are also important.

In conclusion, it’s easy to be distracted by all the demands competing for the business owner’s time and attention. To maximize the value and profitability of your company, you need to focus on the key value drivers – which may be intangibles and employees – in addition to having up-to-date equipment and systems.





Measuring Enterprise and Personal Goodwill

3 08 2012

By: George D. Abraham

CEO & Chief Appraiser

Business Evaluation Systems

 

 

In the state of Texas and several other states, appraisals for divorce, requires the appraiser to consider and analyze personal and enterprise goodwill in the dissolution of marital assets. Personal goodwill is not considered part of the marital assets to be divided.

The American Journal of Family Law states that Goodwill is “that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.[1]  It can be separated into two parts, defined as follows:

  • Personal goodwill is the value of earnings or cash flow directly attributable to the individual’s characteristics or attributes.  Personal goodwill, sometimes referred to as professional goodwill, is a function of the earnings form repeat business (customers) that will patronize the individual practitioner as opposed to the business, new consumers who seek out the individual, and new referrals who will be made to the individual. 

 

  • Enterprise goodwill is the value of earnings or cash flow directly attributable to the enterprise’s characteristics or attributes.  Enterprise goodwill, sometimes referred to as practice goodwill is a function of earnings from repeat business (customers) that will seek out the business (as opposed to the individual), new consumers who will seek out the business, and new referrals who will be made to the business.

Most appraisers approach the allocation by simply dividing the attributes into personal and enterprise, but you can take it one step further which offers a reasonable position if challenged and provides a consistent method and a defensible bases for your opinion.  

Once the appraiser has a solid goodwill value, the analysis of personal and enterprise goodwill can begin by analyzing the attributes that make up goodwill. The appraiser must keep in mind that the process requires several key factors:

  • The attributes that impact personal goodwill are a percentage within a range.
  •  Enterprise goodwill is the reciprocal percentage.
  • Does the presence of this attribute add to the earnings of the business? The greater the impact on earnings, the greater is the presence of the attribute.
  • The difference between total goodwill and personal goodwill is the enterprise goodwill.

Goodwill Attributes

Personal Attributes

These are attributes that relate directly to the ‘goodwill subject”. This is the person for whom the goodwill allocation is being performed (physician, architect, accountant, etc). Personal attributes reflect the efforts by the goodwill subject and are inherent in the individual.  These personal attributes indicate personal goodwill, including:

 

 

  • Ability, Skills, and Judgment.  These attributes focuses on the “doing” by the goodwill subject;        e.g., the ability to perform at a level to generate sufficient earnings to establish goodwill.  The            goodwill subject’s education, training and demonstrated ability will almost always be important             personal attributes.

 

  • Age and health.  These are significant as they help determine the longevity of the subject’s   impact on earnings. Underlying all value is the time frame for cash flow or earnings.  Older and less healthy subjects could mean a shorter and more uncertain stream of future earnings, and      thus, a lesser personal goodwill allocation.

 

  • Personal Reputation. This is the customer’s perception about the person’s ability, skills and judgment.

 

Business Attributes

These are the result of decisions that affect the business organization, operations, finances, and image.  If the goodwill subject makes decisions that improve enterprise attributes, this increases enterprise and not personal goodwill. Examples of business attributes to the enterprise include:

  • Location, location, location.  There is a multiple location attribute and the business location attribute. Keep in mind that multiple locations do not mean a strong indication of enterprise goodwill. The appraiser must understand how the locations are being used.

 

  • Systems and organization.  This encompasses the management decisions that determine how the business performs. These are well defined and maintained systems that make the business strong are a good indication of enterprise goodwill, even if the goodwill subject created the systems.

 

  •  Business reputation. If the customer’s perception about the product or service, including price, customer support, quality and satisfaction are on the business, the characteristic is enterprise.  In some cases the customers commonly associate a business with an individual, but it is the business reputation they are counting on.  Keep in mind that some businesses have both personal and enterprise attributes that the appraiser must separate and analyze.

 

  • Staffing. Staffing encompasses all the employees of the business, other than the goodwill subject. Usually employees are associated with enterprise goodwill, but there are times when employees may seek a position because of the personal reputation of the goodwill subjects training that would add value to their own resume.

 

  • Personalized business name.  This is the most misunderstood attribute as it is automatically assumed that if the business carries the subject’s name, all is personal goodwill. However, many businesses are sold and carry on with the personalized name and others change the name sometime after the purchase. The question to address is:  “Would the customers abandon the business solely because it changed its name?”
  • Closeness of contact. Sometimes the goodwill subject’s work habit includes more contact with the customer, and the more direct contact, the more likely the subject will have personal goodwill. (Dentists have close contact, while radiologists do not.) However, it is not so much the closeness of the contact as it is the personal nature of the contact.

 

  •  Closeness of contact. Sometimes the goodwill subject’s work habit includes more contact with the customer, and the more direct contact, the more likely the subject will have personal goodwill. (Dentists have close contact, while radiologists do not.) However, it is not so much the closeness of the contact as it is the personal nature of the contact.

 

  • Referrals. Referrals to a goodwill subject often indicate a high level of respect for one’s abilities and are personal in nature and increase the individual’s personal goodwill. However, referrals can certainly be made to a business and those referrals would support a greater enterprise allocation.
  • Repeating revenue stream.  This attribute deals with the specific nature of the revenue stream and is the heart of goodwill. Repeating business can be due to either enterprise or personal goodwill.  However, some businesses are more likely to enjoy repeat business by the nature of their industry and are not concerned with the reason for the repeating business, such as a great location.

 In summary, the appraiser will analyze and separate each of the attributes into personal and enterprise goodwill by establishing a range with each attribute weighted according to its importance (impact on earnings).  Each attribute is then given a weighting as to its degree of existence.  The value of an attribute established by multiplying the degree of existence by the degree of importance represents a percentage of  100%.  As personal goodwill increases, enterprise goodwill decreases by the same amount. 

 


[1] Article: An Allocation Model for Distinguishing Enterprise Goodwill from Personal Goodwill,” American Journal of Family Law

 

 

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Comparing Comparables

3 08 2012

Comparing Comparables 

By: George D. Abraham CEO & Chief AppraiserImage

Business Evaluation Systems  

The Direct Market Data Method (DMDM) relies on the principle of substitution. A buyer will not pay more than the price at which he can obtain an equally desirable substitute.

 

The DMDM method uses parameters of comparison in the form of income multipliers.  They can be multipliers of income, either gross net or discretionary cash flow.  The three most popular databases which supply the transactional data are; Institute of Business Appraisers (IBA), BizComps and Pratts Stats.

 

When attempting to value a company using the Direct Market Data Method (DMDM), it is not uncommon to experience a wide range in value between the Price to Discretionary Earnings (P/E) and Price to Sales (P/S). In using the transactional data, one must remember that we are comparing businesses and in most cases, these are complex entities.  Unlike real estate, whereby land and improvements can be measured fairly accurately using a comparison of price per square foot, businesses are much more complex and have many variables that can have a significant impact on value. There are several reasons for the wide ranges that occur between the two multiples when using the databases.

 

The three databases obtain their data mainly from business brokers and other intermediaries.  The reporting systems for each of the databases are not standardized and some are limited regarding details of the transactions. The fundamental problem in collecting data is the reporting forms supplied to collect the data.  Business sale structures can be very complex, forcing the broker to elaborate on the form in order to describe the input, especially when it comes to the selling price.  Many sales contain exchanges, earn-outs or an additional price based on some contingency and forces the business broker to elaborate when the reporting the selling price of the business. The person inputting the data into the database is faced with deciding the selling price.   Unfortunately, the industry lacks consistency in common terms such as owner’s discretionary cash flow and net income (before or after tax).  The BizComps database removes the inventory from the selling price, but many times sales include inventory and is not mentioned or if mentioned, no inventory value is given.  Inventory values given to the other databases and included in the price, have usually not been valued or even counted for accuracy. In my experience, the Sellers value of the inventory is almost always incorrect as it does not include adjustments for slow moving, never moved or dead inventory. Adding to the dilemma on inventory is FIFO and LIFO accounting.

 

The sales contained in the databases were sold as asset sales and generally do not include current assets or liabilities, but many times to make the sale, the owner will include the receivables and/or allow the buyer to assume some of the liabilities.

 

Another problem with reporting the sales consistently are real estate and improvements.  Companies in the databases do not include real estate and improvements and a fair market rent has been deducted from the company’s earnings, but was the rent used really fair market?

 

Location of business is given only in terms of general geographic area which could have a significant effect on value for some businesses whereby location is paramount to success.

 

In other cases, the sales with high multiples are not arms length and the business was purchased based on acquiring a valuable location or a competitor paying over market value to eliminate a major competitor.  As many Baby Boomers are retiring, they are transferring the businesses to sons and daughters and these may also not be at arm’s length.

Another problem, which in my mind is significant, is that prior revenues and earnings are not provided. Without a history of the company’s historical performance we do not know if the Company was in rapid decline or significantly increasing in revenues and earnings. Despite the reporting problems inherent in the databases, if analyzed correctly, the data is very valuable. The least it can do is set a range of multiples that you can narrow down. 

Business appraisers will sort the sales in the databases according to revenues and then choose a group which contains sales that are close to the company or a sales range which would not change the operating ratios significantly.  Once the comparable group is established, the companies in the group need to be carefully analyzed to their closeness to the subject company.  Companies whose sales to earnings ratios are significantly different than the subject should be discarded. A close look at the location should be made if that is important and the date sold.  I think it is safe to say that most people feel that there was a world of difference in business after the beginning of 2009.  However, before you form this conclusion in your analysis, take into consideration that all values are derived from anticipated future performance.  As we all can remember, interest rates were extremely high back then and required return on investment had to compensate for this, this and the higher the return required, usually the lower the value.  Currently interest rates are at an all time low and the required return is much lower so in some cases the older sales may not be that different.

 

 





Factors that Increase or Decrease Business Value By: George D. Abraham CEO & Chief Appraiser Business Evaluation Systems

24 02 2011

There’s a range of key factors that can affect the value of a business. While some of these factors are outside of the owner’s control, steps can be taken to make the business as valuable as possible. Start planning well in advance and consider inserting an exit strategy into your original business plan. Then start implementing the factors that increase value and eliminate the factors that decrease the value.

Financial Statements

Just how good are your financials. Are they minimal or do they show an in-depth look at your business. Can you easily track the flow of revenue and expenses flowing from the invoice to the financials to the tax returns? Can your track the sales of your top 5 customers? Can you easily prove all of the perks you receive from the company? Today’s accounting software easily lets you do all of this and much more. When a buyer is interested in a company, the ease at which the owner can prove the financial performance of his or her business has a direct impact on value. Incomplete or inaccurate financials tells the buyer that no one is watching and tracking the Company’s performance and therefore the future performance (of real importance to the buyer) is unpredictable. Value is created or destroyed by the ability to see the Company’s future. The longer the buyer can see that the Company will perform in the future as represented, the more secure they are and less risk is perceived. To the contrary, when the future is a guess, risk is increased and value is decreased.

Performance

Obviously, small increases in revenues over the year’s shows a different picture than equally decreasing sales and the same is true with large increases and decreases. The key to value is the owner’s ability to explain the precise reason. Many times declining sales, if explained does not affect value as negatively as one might expect. Retiring doctors decide to work less, firing unprofitable customers and price increases that result in increased earnings do not impact the value of the business as negatively as one may think. Again, the key is the explanation of why revenues and/or earnings have dropped.

Management

The big question is what would happen to the business if ownership changed. Obviously, if the Company’s management and sales department are you, the owner, expect a decrease. On the other hand, if the sales are made by the sales department and the Company has department managers that report to the owner, value increases. Another factor is the longevity of the management team and in general all of the employees. Have the managers and employees been with the Company for several years, or is constant turnover the norm? These people have key knowledge of the internal workings of the Company, products and services and relationships with suppliers and customers. A well trained (and cross trained) knowledgeable management team and employees with longevity greatly reduces risk to the hypothetical buyer and thus increases value.

Appearance

When you look at your operation, do you see a busy, organized facility with well maintained equipment? A facility that is busy, appears to be unorganized, with dirty equipment, reflects the same image for the management and employees. Well maintained, clean equipment and vehicles tells the buyer that regular service and good maintenance records are the norm and this increases value. The opposite portrays, short lived equipment and vehicles with higher amounts of capital expenditures in the future that reduce earnings and lowers value. One has to imagine that the kind of appearance the Company has, may represent the kind of customers it has.

In General

First impressions are important! A clean organized business with well maintained assets and good financials portrays a good well managed, solid business and reduces the risk level in buyers. It reduces the depth of the financial due diligence process, questioning asset and inventory values and creates a more secure atmosphere for the buyer.

Good financials, formalized business and marketing plans, well trained and knowledgeable management and employees with longevity add up to value.

Competition is always a risk to a buyer. The more you know about your competitors and why they will not affect you is extremely important to a buyer. If your company has intellectual property, valued or not, be able to explain (even better to calculate it) the advantages your company derives from it. Start an exit plan a couple of years in advance, to address any of these factors that may pertain to your business. A business owner that knows the strengths of his or her business and can reasonably prove it, has a large effect on the appraiser and the buyer.





EBITDA Pro’s and Con’s

1 02 2011

EBITDA Pro’s and Con’s

By: George D. Abraham

Business Evaluation Systems

 

EBITDA, an acronym for “earnings before interest, taxes, depreciation and amortization”, is an often-used measure of the value of a business.

EBITDA is calculated by taking operating income and adding depreciation and amortization expenses back to it. EBITDA is used to analyze a company’s operating profitability before non-operating expenses (such as interest and “other” non-core expenses) and non-cash charges (depreciation and amortization).

Critics of EBITDA claim that it is misleading due to the fact that it is often confused with cash flow and factoring out interest, taxes, depreciation and amortization can make even completely unprofitable firms appear to be fiscally healthy.  Looking back at the dotcom companies, there are countless examples of companies that had no hope, future or earnings and the use of EBITDA made them look attractive.

Also, EBITDA numbers are easy to manipulate.  If fraudulent accounting techniques are used to inflate revenues and interest, and taxes, depreciation and amortization are factored out of the equation, almost any company will look great. Of course, when the truth comes out about the sales figures, the house of cards will tumble and investors will be in trouble.  In the mid-nineties when Waste Management was struggling with earnings, they changed their depreciation schedule on their thousands of garbage trucks from 5 years to 8 years. This made profit jump in the current period because less depreciation was charged in the current period. Another example is the airline industry, where depreciation schedules were extended on the 737 to make profits appear better. When WorldCom started trending toward negative EBITDA, they began to change regular period expenses to assets so they could depreciate them. This removed the expense and increased depreciation, which inflated their EBITDA. This kept the bankers happy and protected WorldCom’s stock.

Another concern is that EBITDA does not take into account working capital. It could be helpful to also point out that EBITDA is not a generally accepted accounting principal.

Because EBITDA can be manipulated like this, some analysts argue that a it doesn’t truly reflect what is happening in companies. Most now realize that EBITDA must be compared to cash flow to ensure that EBITDA does actually convert to cash as expected.

To sum up the cons:

 

1. EBITDA ignores changes in working capital and overstates cash

flow.

 

2. EBITDA can be a misleading measure of liquidity.

 

3. EBITDA does not consider the amount of required investment.

 

4.  EBITDA ignores distinctions in the quality of cash flow resulting

from different accounting policies.

 

5. EBITDA deviates from the GAAP measure of cash flow because it

fails to adjust for changes in operations-related assets and

liabilities.

On the plus side, EBITDA makes it easier to calculate how much cash a company has to pay down debt on long term assets. This calculation is called a debt coverage ratio. It is calculated by taking EBITDA divided by the required debt payments. This makes EBITDA useful in determining how long a company can continue to pay its debt without additional financing.

Overall, EBITDA is a stripped down, uncomplicated look at a company’s profitability. It eliminates the subjectivity of calculating amortization and depreciation. Depreciation and amortization are unique expenses. First, they are non-cash expenses – they are expenses related to assets that have already been purchased, so no cash is changing hands. Second, they are expenses that are subject to judgment or estimates – the charges are based on how long the underlying assets are projected to last, and are adjusted based on experience, projections, or, as some would argue, fraud.

EBITDA takes out interest which is a result of management’s choices of financing. And, it removes taxes which can vary greatly depending on numerous situations

 





Business Value Drivers

1 02 2011

Business Value Drivers

By: George D. Abraham

CEO & Chief Appraiser

Business Evaluation Systems

Today’s business environment is not just about survival, it’s about focusing on and creating sustainable value. But, which elements of a business are capable of creating value? Equally important which elements of a business are capable of destroying value? Proper business planning is the process of uncovering and identifying what creates and drives value.

Start by using the SWOT Analysis – Strengths, Weaknesses, Opportunities and Threats – this will help you identify the “value drivers” for your business. With this approach, you can focus on key value drivers.

There are many Value Drivers that have been identified in businesses. But, typically no more than 8-12 are critical in any given business; here are the most common 8.

Financial History:

Are your books accurate and up to date? Over the last few years are there patterns of growth or decline? If in decline, are there good reasons for the decline?  Accurate and current financials are important to determine how the company fares in its industry and amongst competitors.  A comparison to industry ratios can identify strengths and weaknesses in the business.

Management Depth:

Can the company operate without the owner, for more than a week or two? Is there any cross-trained management to fill in if you were gone?  What is the average age of management?  Will they retire soon? What levels of experience and education do they possess? Having a good management team can add value to the business.

Customer Diversity:

Do you have one or two major customers that account for more than 25% of your gross sales?  What would happen to the value of your company if you lost one? Are most of your customers considered “blue chip”? A good overview and a rating analysis of the customer base can be beneficial not only for added value but is crucial for where, how and when you advertise, not to mention a much better understanding of your accounts receivable and aging.

Owner Involvement:

Are you the ‘rainmaker’ in the business? Does everything from sales to

production revolve around you and your decisions? How difficult would you be to replace? The more the business depends on you, the owner, the more likely the value will be lowered.  One of the things I see the most is that over the years, the business owner and number one sales person, is now an office manager.  Maybe it’s time to get back out in the field with your sales people or provide on-going sales training.

Competition:

Does your company compete in a clearly defined market niche which is

defensible? Or, have your products or services become a commodity that is becoming more difficult to defend?

Customer Satisfaction:

Are your customer relationships based on great products and service, or lowest price? How long and what type of history have they had with you? Are they satisfied or loyal? Do you have systems in place to identify your customers and communicate.

Loyal Employees:

Outside of ownership, are there people in place who you can rely on and are

capable of doing their job day in and day out? Are they considered knowledgeable for your industry? Again, what levels of experience and education do they possess?

What is the average length of employment amongst your staff? A responsible business buyer will be looking for opportunities where the current staff, especially management, will remain in place, following the current owner’s exit from the business. Having key employee contracts, non-competes, but more importantly a loyal, dedicated staff that is committed to the company’s success regardless of ownership change will be highly valuable to a prospective buyer and thus reflected in a business valuation.

Proprietary Technology:

Has your company developed a unique application, tool or technology as part of its

Ongoing operations? Does it give you a competitive advantage? If so, this proprietary innovation or intellectual property can be positioned as a key value driver for your business. Technologies or processes do not have to be patented to carry value but privacy and confidentiality must be maintained. It is critical that non-compete and confidentiality agreements be strictly adhered to and enforced by the company, before and after a transfer of ownership. The benefits, application and purpose of your proprietary technology should be explained to a business valuation consultant.

Intangibles (intellectual property) and human resources (who go home at night) can be protected and leveraged through a combination of business strategies and legal protections. Business strategies include incentive compensation plans to recognize, reward and retain high performing employees. Legal protections include requiring key employees to sign non-compete agreements, registering Trademarks and Copyrights, and taking steps to protect proprietary information/trade secrets such as recipes and formulas. Contracts with key players, including partners, customers and suppliers, are also important.

In conclusion, it’s easy to be distracted by all the demands competing for the business owner’s time and attention. To maximize the value and profitability of your company, you need to focus on the key value drivers – which may be intangibles and employees – in addition to having up-to-date equipment and systems.