Business owners like to think they know what their businesses are worth. In most cases, unaided by professional valuation guidance, the typical owner will overvalue his or her business. We all like to think we are the exception, rather than the rule, or at the top of the value scale. It just isn’t so for most businesses. And it doesn’t matter what the owners think. In light of that fact, we consider what things do matter and why business owners should have a solid knowledge of what their business is actually worth.
In the prior post, we introduced the basic valuation equation and Gordon Model. In this post, we move on to Net Cash Flow and calculating a multiple as part of the equity value of a business. Despite the fact that many business owners don’t think of (Net) Cash Flow quite like this, the relationship between depreciation and capital expenditures and and working capital requirements impact value. Moving a step further, we dig into risk and growth, examining how each (and the change of each) impacts value.
New Book Is On the Way. My last post, Public Markets Provide Context for Private Company Valuation, was actually the first in a series of posts that will eventually be turned into my next book, which will be a non-technical and informative book for business owners. The working title is Business Valuation for Business Owners, but that will likely change before it is completed. This will be the third book I’ve written in installments on one of my blogs. The first two were Buy-Sell Agreements for Closely Held and Family Business Owners and my latest book, Unlocking Private Company Wealth. I’m excited to have another book on the way. Please do share your thoughts by commenting on the blog or directly to me. Now, let’s continue with the expectational nature of business valuation.
The value of private companies, like that of public companies, is based on expectations regarding cash flow, growth and risk. Value is always future-based. There are virtually no external analysts following or even looking at most closely held and family businesses, regardless of their size. Quite large private companies will get attention from their banks and also from investment banks who hope to do business with them in the future. However, other than bank credit analysts who look at loan customer performance, there is little following and virtually no externally imposed management discipline. Value changes for private companies over time and with changes in external and internal conditions, even if no one is watching the change.
In this post, I explain why I believe that fixed price buy-sell agreements are not workable for most closely held and family businesses. This is as true for large companies as well as much smaller companies. However, if you or your client insists on using a fixed pricing mechanism in a buy-sell agreement, take the steps recommended in this post to maximize the probability of success and minimize the potential for future disputes. My text for this sermon lies in Chapters 9, 13, 14, 16 and 17 of Buy-Sell Agreements for Closely Held and Family Business Owners.
Announcing the Ownership Transition Bundle
Announcing a new Ownership Transition Bundle for business owners and advisers.
My book, Buy-Sell Agreements for Closely Held and Family Business Owners, has been available since 2010 and has sold thousands of copies. The book sells for $25 (plus shipping).
My latest book, Unlocking Private Company Wealth, was released in late 2014, and is selling at much higher rate than the buy-sell agreement book. This new book deals with managing private company wealth in ways you likely have not thought about. This book sells for $25 (plus shipping). That makes $50 for the two books.
We are now offering an Ownership Transition Bundle, consisting of both books for only $35 (plus shipping). As they say on selling TV networks, “But wait, there’s more!”
In addition to both books, you will receive immediate downloads of our very popular checklists, the Buy-Sell Agreement Review Checklist, and the Promissory Note Checklist. The review checklist is by far my most downloaded resource, so this is quite a package!
If you are interested in ownership transition for closely held and private companies, the Ownership Transition Bundle will tell you a great deal about managing private company wealth in the process of thinking about ownership and management transitions.
The buy-sell book will tell you about the unexpected consequences for ownership transition, often quite adverse, when poorly written buy-sell agreements are triggered. The free resources are available to help discuss and plan for important aspects of transitions.
Buy it now: The Ownership Transition Bundle.
Baby Boomers own a disproportionate number of the private businesses in America. They are turning 65, or reaching the so-called “normal” retirement age at an astounding rate. Generation X is smaller than the Boomer generation by a significant amount and that means there are fewer of them to take the place of retiring Boomer business owners.
Following the smaller Generation X, the Millenials will exceed the Baby Boomers in numbers by 2016 or 1017. While they are the largest generation in the workforce today, they may not yet be likely purchasers of businesses from Boomers.
So what’s an aging business owner to do? Is the glass half empty and this situation is all bad?
In a business damages trial a number of years ago, the plaintiff was answering questions with a lot of conditional phrases, like if, and but, and however. At the conclusion of his cross-examination, the defendant’s attorney said the following: If “ifs” and “buts” were candy and nuts, every day would be Christmas! The judge immediately […]
Think of where you are now in your business life. This is the present, now, or your current status quo. Now think about where you want to be in the future with respect to ownership and management transition. The future time may not be clearly defined in your mind. But that future is your business end game. It is okay if the business end game is unclear, but it is not okay for it to stay unclear for much longer. You see, our business end games set us up for the rest of our lives, and that can be a very long time for most of us. Consider some of these questions to help begin the discussion about your business end game.
May 18th will be a fun day at the 2015 NYSCPA Business Valuation Conference. I’ll be talking on a panel with Peter Mahler, Justice Scheinkman, and Sam Rosenfarb on New York Statutory Fair Value Issues, or corporate divorce. Peter is the author of the New York Corporate Divorce Blog, Justice Scheinkman will bring the voice of an experienced jurist the panel, and Sam will be the referee.
I’ll also be speaking on the same day about Unlocking Private Company Wealth. As a bonus, I’ll get to have dinner the night before with my son, Zeno, who lives in New York City.
