|Valuing Your Business: An Owner’s Litmus
When business owners ask that familiar question –
“What is my business worth?” – they might find the best answer in the
mirror. Of course, there are always the financials to consider, but
numbers fail to tell the whole story. Goodwill is important, but value
cannot be based on it alone. The true value of a business can best be
determined by looking at the person at the helm – the business owner.
As the owner of a business, you will want to ask
yourself some hard questions. How do you measure up when it comes to
attitude, management strategy, customer-service smarts, and community
relations? Take the following litmus test and see if you make the
1. Do You Think
Are you so focused on the bottom line that you forget
to look at the clouds from time to time? Owning a business is the
acknowledged American dream, yet many business owners allow themselves to
get bogged down by the harshest sort of reality. They neglect to keep the
dream alive, to think positively about the business today and tomorrow. In
our technological world, it’s easy to forget the importance of having the
right attitude. If business owners aren’t positive, how can they expect
customers and employees—and at some point, prospective buyers—to be
positive? The owner who sees only the downside of the business will
probably not see a turnaround. Of course, there are always the real-life
factors: banks that won’t lend, customers who stop buying, services that
become obsolete. However, if these problems didn’t exist, the
negative-thinkers would find a whole new set of problems to fret about.
If you feel you could do with some positive
polish, begin with just that. Spiffing up the place of business with fresh
paint, newly cleaned carpeting, well-stocked shelves, a cheerful potted
palm or ficus – just to name a few suggestions – will speak volumes about
the state of the business.
Less visible, but equally key, is a positive plan
for the future of the business. Business owners should be prepared to
spend what it takes to generate new business, and they should take the
time to explore new possibilities for long-range success. If the company
currently has no mission statement or business plan, creating one will be
evidence of the owner’s enthusiasm for the future and for the ongoing
success of the operation.
2. Are You a Macro
or a Micro Manager?
In today’s workplace, with a manager
hovering at every corner, who has an eye on the big picture of the
business? An owner who manages every manager and spends the rest of the
time shuffling paperwork all day is estranged from the big outside world
of the business. Owners should occasionally get out of the office to work
the floor, drive the delivery truck, or sell the product. Owners who put
themselves in the trenches are in touch with the business, and this
first-hand understanding will be evident to anyone who assesses its value.
Part of being a macro, big-picture manager is
preparing for contingencies. The value of a business increases
dramatically when the owner demonstrates appropriate delegation of duties
and provides a backup managerial plan. If the owner is the business, and
personal disaster should strike—the answer to “What is the business
worth?” is not a pleasant one.
3. Do You Smile
When You Say “Customer Service”?
Do you avoid treating a
customer like a number? Follow the lead of successful mail-order
operations, such as L.L. Bean, who ask for the proper pronunciation of a
customer’s name and who do not automatically address the customer by first
name. Basic up-front courtesies are important, but they do not supplant
other customer service virtues such as patience and willingness to problem
solve. Whether products and services are sold by phone or on the floor,
employees should be up to speed on what they’re selling. Nothing sparks a
sale better than a salesperson with hands-on knowledge and expertise. This
works for companies as large as L.L. Bean (whose employees seem to have
Ph.D.s in every item in their catalog) or as small as a neighborhood
bistro, where the waitperson can explain every nuance of sauce or vintage
of wine. Every hour spent training employees in the product pays huge
dividends for the business’s long-term success.
4. Are You “Out
There” with Community Relations?
Business owners need to keep
their company’s image “out there” and visible to the public. Advertising
can build image at the same time it attracts business. Anything from a
display ad within the yellow pages’ listings, to a monthly newsletter
(hard copy or on-line), to the offering of free seminars, positions the
business as more than just the sum of its products. An example of a
business owner with multifaceted image-making skills is a caterer in
Asheville, N.C. This caterer dishes up the city’s best lunches and
dinners, whether for takeout or to eat with obvious relish at the small
tables she sets out on the sidewalk. She sends out a monthly newsletter
with recipes and manages to snag appearances on radio programs to talk
about her commitment to buying local food. When Garrison Keillor’s
“Prairie Home Companion” (a production of Public Radio International) came
to town, she volunteered to cater for the cast and crew. They ended the
program by having her stand for a huge ovation. Her small store-front
operation had a line the next day that wound around the block.
For the less adventurous, or conspicuous, there
are plenty of more conservative ways to promote the business and its
owner. Taking an active role in the Chamber of Commerce, getting involved
in trade or service associations, and sponsoring worthy local events all
contribute to great public relations. In addition to the more traditional
public donations – providing kids’ sports team uniforms, taking out ads in
yearbooks – employees can join hands for walkathons or volunteer to work
the phones for public TV or radio fundraisers. Being a good community
partner is good for the business, good for the workers, and it’s great for
that reflection in the mirror that takes us back to where this discussion
See a Penny, Pick It Up and ‘Honey, Get the
“Like many penny hoarders, she was never sure
what to do with all of them -- until she and her husband bought a roadside
bar and cafe in this speck of a town in California oil country near
Bakersfield. Why not, she asked her husband, Mike, festoon the bar with
the pennies? And he dutifully obliged the crazy idea, using regular
Elmer’s glue to affix them from one end of the bar to another …
“It was his task to complete the job, penny by
painstaking penny, six years of gluing, gluing, gluing, and gluing …
“Now, one million pennies later -- from Annie’s
cans, customers with loose change and not a few trips to the bank for
exchanges -- Mike & Annie’s Penny Bar is a sight to behold. The
pennies, like a swarm of copper ants, cover nearly every surface: the
floor, the walls, even the sides of the pool table …
“Still, the Moore’s are preparing to give it all
up. They have put the place up for sale, asking $899,999.98 ‘as is,’
pennies included …”
The above was excerpted from an article in the
New York Times, Sunday, January 7, 2007. Mike & Annie’s Penny Bar is
in McKittrick, CA.
As many pennies as there are glued to the
business, they only add up to about $10,000. Thus, the price of the bar is
truly $889,999.98, unless you want to remove all those pennies to get the
additional $10,000 out of it. If you think it was tough for Mike to glue
those pennies, wait until you have to remove them.
And, you thought you had heard all there was to
hear about small business!
Insurance: A Dull Subject -- Until You Need It
Most business owners faithfully renew their business
insurance policies every year. Unfortunately, too many of the business
owners have never read the policies. This means, among other things, that
they don’t know whether the policies are current or not. For example, is
the new expensive computer system covered? Are all the weather
contingencies covered? Is the employee health coverage up to date with
today’s medical costs? Does your company have business interruption
insurance? If so, when was the last time you reviewed it?
Now might be a good time to review all of your insurance
Liability Policy – Is it high enough? Does it cover all
the needs of your business in today’s economy?
Errors and Omissions – Do you have it? Do you need it?
If you have it, is the coverage sufficient for today’s
Workman’s Compensation – Is it current so that all
employees are covered?
Disability Insurance – Are your key people covered? How
about you? Who is going to pay these people in the event of long-term
sickness, accident, etc.?
Business Interruption Insurance – Who pays the bills if
your building burns down and business comes to a standstill until you
Key Man Insurance – What would it cost to replace one of
your key people? To replace you?
Health Insurance – Does it work in today’s medical
Automobile Insurance – Is the coverage high enough for
today’s needs? Are you covered if an employee is driving on company
business in his or her personal automobile?
Perhaps it’s time to sit down with your insurance agent and
get answers to the above questions and any others you can think of. Your
insurance agent should be a big help in providing what you might need to
keep up with today’s costs in our litigious society.
Why a Seller Needs a Professional Business
A successful transaction usually requires
overcoming many obstacles. Most of these obstacles are minor and easily
resolved. If the parties want the deal to work, talking it through can
solve almost any routine problem that arises. Outside advisors can be a
real advantage in these negotiations.
However, there are more serious issues that do
not resolve so easily and can be fatal to the closing of the deal. Below
are just a few examples:
The seller may be unwilling to agree to some
of the conditions presented by the buyer. Many times these conditions
provide too many loose ends for the seller, or they weren’t part of the
original agreement. No one is willing to bend; there appears to be no
solution, and the deal craters.
Due diligence uncovers problem areas
such as environmental concerns or additional liabilities. Another problem
area involves competitive information. The buyer asks for a list of
customers and wants to contact them. The seller doesn’t want this done and
an impasse results.
During the negotiations, the buyer, or the
seller, discovers that there is a lack of chemistry. This can
complicate the two agreeing on any other problem that develops.
There is a breach of confidentiality or a
loss of credibility by either or both parties. Either one of these is
usually a deal-breaker.
The buyer may ultimately decide that the deal
is too big a risk, or an outside advisor, or even a friend, suggests
that the business is not a good one.
Some of the information presented is not
accurate or is incomplete. The financials may contain too many
deviations from the figures presented by the seller. There are also times
when the seller’s records have not been maintained properly, or the tax
returns don’t support the financial statements.
There are also times when a seller decides
mid-way through the deal that he or she really doesn’t want to sell
and either pulls out of the deal or stops cooperating. As a result, the
deal falls apart.
The sale of any business involves change on both
the buy and sell sides. This may threaten some of the participants or
their advisors – or even family members. It is important that all parties
directly involved in the selling and buying process be in agreement. No
one wants either a participant or internal mischief threatening the
Unfortunately, after it looks as if everything is
under control, one side or the other often suddenly comes up with some
last-minute demands. When this happens, these last-minute demands may
cause the deal to fall apart.
The possibility of any of these issues makes it
critical that a professional business broker be involved in every step of
the transaction. They have been through many of the events outlined above
and their experience and knowledge may offer the best antidote. Business
brokers are trained to anticipate many of the factors that can sour the
deal and thereby solve the problems before they develop.
This newsletter is not intended to
render accounting, legal or other professional service; the
publisher and sponsors assume no liability for a reader’s use of the
Copyright © 2008 Business Brokerage Press, inc.