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University of Massachusetts Amherst

Family Business Center

Numbers Can be Flexible

by Shel Horowitz

What is your business really worth?

That was the question Phil Steckler of CBI, a business brokerage, acquisition and financial services firm, addressed in the Family Business Center's November gathering at Chez Josef.

And his answer was "it depends."

The first step is to fully understand the financial implications of the business - the real level of income generated from the business as well as the actual underlying tangible asset value (not depreciated book value) of the company. This serves two purposes. It enables him to much more accurately estimate the market value of the company; and helps position the business to realize the best possible price in the marketplace.

It turns out the number one reason why family businesses sell is not to generate capital, or even to extricate themselves from personal financial guarantees - but because they're tired of the grind. 57% of the businesses which are sold are due to boredom and burn.

Depending on the seller's goals, Steckler will use a number of different steps to value a business: stabilized income statement, updated appraised tangible asset value, cost of capital, excess earnings (subtracting various requirements from recast earnings), developing a multiplier, and then using all these factors to determine first the intangible value and than the total value of the business.

Historical statements should set a firm foundation for future projections - and these projections should reflect improvements to the business that will increase the bottom line.

The multiplier, which you multiply by the excess earnings to determine the intangible value, can be based on several factors: risk, competition, industry-specific factors, company profile, growth factors, and desirability.

There are times when it's in your interest to decrease underutilized assets, especially if they're not really necessary. For instance, if you can sell off your $300,000 warehouse and lease it (or another one) back at $12,000 per year, the cost of capital has decreased far more than the added expense of leasing, which increases excess earnings and therefore the intangible (goodwill) value. The result is an increase in net proceeds for the owner.

"It's not what you sell it for, it's what you get to keep". Steckler indicated that Uncle Sam can be an unwelcome silent partner in the sale of a business. He stressed that prior planning can keep the tax bite to a minimum. A qualified professional team experienced in business transactions can increase the proceeds of a sale to a business owner.

Of course, if you're lucky enough to find a "synergistic buyer," one who wants your company for specific purposes and who is going to come calling no matter what, you have even more room to negotiate a premium price.

And if the math is to favor the seller, there are tricks. For example, value the owner's compensation not on the basis of what the current CEO took out, but what it would cost to replace that person on the job market (often a much lower figure). By using this kind of calculation, Steckler was able to take one business that showed a $27 thousand deficit and recast it (a word he uses a lot) as showing a $185 thousand profit. Another recast brought the net worth of a business from $440 million all the way up to $2.5 million - and then Steckler located a buyer who paid $3,600,000.

Not a bad rate of return. Now all you need to do is go out and find that buyer!

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