Adding Value to Your Jewelry Business

May 1998

Managing:Your Business

Adding Value to Your Jewelry Business

What's your business worth? How can you make it more valuable?

BY JOEL PECK, CPA

As a business owner, you are asked often how much your business is worth and how you can make it more valuable. You are asked by your friends, your competitors, your banker, children or estate planner. Regardless of how often you are asked, like most business owners, you really don't know the answers.

But having the answers to these two fundamental questions distinguishes the owners of a business from the employees. Without the desire to know how much your business is worth and how to make it more valuable, you will be limited to running the business day to day without focus and without growth.

Fewer than one-third of all businesses make it to the second generation of owners; fewer than 10% make it to the third generation. This is because most business owners don't spend enough time objectively analyzing their business, looking beyond the short-term.

Think for a moment how much time you've spent recently with your accountant discussing tax planning. How much time have you spent with your bank or other financing partners discussing plans for the upcoming year? How much time you have spent evaluating what it will take for your business to leap to the next level of profitability? If you haven't spent much time on these important questions, today is the day to begin.

Value Is in the Eye of the Beholder
So what is your business worth? The answer depends on who you ask. To you, the current owner, the business is priceless! It's your life. It's your being. It's possibly more valuable than any other possession.

To your creditors, however, it's not worth much more than about 80% of your accounts receivable plus 70% of your inventory less 100% of your accounts payable and secured loans.

To prospective owners, your business is worth what they can make of it. The value of the business to them is less than the value it is to you because they don't want to pay you for what they can do once it is theirs.

To non-working relatives, the business is a cash cow, delivering income and value with little or no effort (and often with little or no investment). To non-working equity partners, the value of your business is a combination of the dividends they are being paid and the growth in value of the company. This group has the clearest idea of the "real" value of your business.

Determining Value
The basic items used to determine the value of a business are:

  1. Net asset value (market value of assets in excess of liabilities).
  2. Current earnings (from financial statements or tax returns).
  3. Earnings potential.

The important factors in valuing the earnings potential of a business are:

  1. The history of the company and the nature of its business, including the risks involved, historical trends of sales and profitability, seasonality and depth and abilities of management.
  2. The general economic outlook for the industry and for the local economy.
  3. The competitive position of the company, including the mix of products and exclusive lines carried.
  4. The ability of the company to survive extended losses or economic reversal.
  5. The ability of the company to generate net profits in excess of the salaries and bonuses of the stockholder employees.

Conclusion
Stock markets constantly report the value of the largest businesses. The most reliable way to determine the value of your small business, however, is to hire a qualified business appraiser who has specific experience with your type of business. The next step is to work on each of the elements of value to keep it rising. Next month's article will focus on the importance of drafting a business plan and using it to keep your company growing.

Joel Peck is the managing partner of Joel Peck & Associates, a public accounting firm devoted to assisting the growth and prosperity of family-owned businesses. The firm's client roster includes businesses from a variety of industries, including the jewelry world. Joel is a frequent speaker and author on the value of building a solid business plan, managing cash flow and the importance of estate planning.






Copyright © 1998 by Bond Communications.


 

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