A Valuation Variety Pack!

Before sitting down to write this article I had a dilemma, a good one, there were so many things that I could write about I couldn’t decide which one to focus on. Then it came to me; why not throw out some quick hits to stimulate, so here goes…

Shareholder/Partnership agreements?

Do you have one? If no, why not? If yes, is it still relevant? I urge my clients to review their agreements on a semi-regular basis because things change and in order for your agreement to serve you it has to change as well.

Is there a valuation formula in it? If yes, is the formula still relevant? I frequently see formulas that dramatically over or understate the value of a business. If your agreement is working, it should protect ALL parties and shouldn’t result in a windfall for the party that actually blows the dust off and reads the document.

Insurance?

Do you have any company owned policies for business interruption, key-person coverage or to fund a buyout upon death? Should you have some? Have you reviewed the amount of coverage to ensure that it is still sufficient for your business?

I’ve seen cases where people were very diligent in getting cross-coverage on the principles of the business only to have the coverage lag behind the growth of the company. For example, one client had one of the principles meet with an untimely death while on vacation and because the coverage hadn’t been updated the insurance payout on death wasn’t sufficient to fund the buyout of the deceased spouse. To say that this resulted in a difficult situation would be a gross understatement.

If you are working with your RAN ONE accountant to maximize your potential there’s a good chance that your insurance is too low – please be careful!

Personal goodwill?

What are you doing to eliminate personal goodwill? Have you started to implement systems to make you, the business owner, redundant? If not, you could be trapping a significant portion of the value of your business into a non-commercial form of goodwill that buyers will not pay you for. Yes, you can attempt to transfer some of it by way of an employment contract but suffice to say you will be leaving money on the table more times than not.

Are you a professional service provider? If yes, you are at the greatest risk of not getting paid what you want for your practice.

I see cases all the time where a retiring professional has an inflated idea of what their practice is worth. There is a raft of professionals nearing the end of their careers as part of the baby boom and in a number of fields there aren’t a large number of new graduates entering the field (granted this varies from industry to industry). If your practice is aging and not evolving with the changes that are occurring with new technologies, processes and systems you could be left behind. The economics of supply and demand dictate that where the number of purchasers is less than the number of sellers, prices will decline. Do you know what the current trends are in your field? Are you working with your RAN ONE accountant to maximize the value of your practice? Why not?

And what if the new graduate decides to forgo purchasing altogether? The new graduate’s decision to purchase an existing practice or hang out a shingle is changing significantly. If your geographical area includes a number of aging professionals that aren’t keeping pace with changes why would somebody pay for the customers they are going to get for free anyway?

Art or science?

I remarked to a colleague the other day that there is no such thing as a simple valuation, and I believe that to be true. Business valuation is more art than science, there’s no magic formula that tells us what a business is worth. It’s not about buying the right software package to get THE answer. It’s about understanding what drives a business, what risks a business faces, what systems and processes are in place to enable the business to carry on without the present owner’s involvement and many, many more considerations. If you ask someone what your business is worth and the answer comes back just as quickly – be careful, be very, very careful! For your own sake protect yourself and seek out an accredited business valuator, the price you pay for their services will pale in comparison to the cost of getting the wrong answer.