How Much Is Your Business Worth?
Is it the price of equipment and facilities? Revenue? Net
income? The answer is all of the above and more
Jewelers should know the actual fair market value of their
closely held corporations, partnerships or sole proprietorships,
but in reality many do not. Compounding this problem are cases
where the value of a fractional interest (just part of the business)
is in question. Hiring a professional business appraiser is a
possible solution. Among the many reasons to have an appraiser
conduct a valuation are to complete a traditional sale transaction,
to complete a partnership dissolution or buyout, during divorce
proceedings or when establishing a succession plan where an interest
(or portion) of the business will be given as a gift.
The appraiser will consider many factors when determining
how much your business is worth, including:
- Asset value (book value).
- Value of capitalized earnings (a "multiple" of
income or cash flow).
- Value derived in recent sales or other arm's length
transactions of similar businesses.
In appraiser speak these items are referred to as the
cost, income and market approaches to value.
There also are valuation formulas, which may combine two or more
of these factors. The weight given to any single approach depends
on the business. Is it a viable concern or is it a losing venture
that should be liquidated?
Is it capital intensive (lots of equipment, cash and/or
inventory needed) or labor intensive? (Jewelers clearly
have high value inventory and could have high labor costs
if they have a large business.)
What is the store's location and reputation in the community?
What selection of jewelry does it carry? (Location, reputation
and jewelry selection are intangibles and normally are valued
using a capitalization rate agreed to by buyer and seller.)
Here's a closer look at the three factors listed in the first
Asset value is a controlling factor only when the business
being appraised has mostly hard assets (such as a manufacturer)
rather than assets that are harder to value (such as service oriented
companies). Because most jewelry stores have a large proportion
of their capital investment in inventory, this would be a relevant
Most buyers consider a business' capitalization of earnings,
which reflect profits expected in the future. It's assumed that
past performance is an indicator of future potential. Average
past earnings are capitalized (using a multiplier) by taking
the ratio of price to earnings.
Capitalized earnings, dividends and cash flow values are methods
used in the income approach to valuing a business and are relevant
to valuing most going concerns. These factors are used to set
a purchase price and allow the buyer to know whether he or she
will reach a targeted rate of return on the investment.
Has there been a recent sale of any interest in the business?
Recent sale value would carry a lot of weight, but recent transactions
are rare. Liquidation value is significant only if a forced sale
of a company is anticipated. It might include a discount from
the fair market value because of the forced sale and expenses
These are just a few of many factors to consider in arriving
at an accurate figure for business value. For business owners
wishing to sell or merge their companies, or for those who just
want to know what their business is worth, determining the proper
value is a must. The work should be done by a trained professional
and then backed up with a review by a second professional appraiser
(see box). Simply placing a number on the value of a business
without taking the proper factors into consideration could cost
the owner or prospective buyer a lot of money. And that's just
not good business.
Just as not every car mechanic is the same, neither is every
appraiser. It's often a good investment to hire another appraisal
company to review an appraisal report or scenario for accuracy.
A review might include questioning the appraiser's experience
and technical knowledge of appraisal industry standards.
If there's some doubt about the results, the entire appraisal
is subject to doubt. For instance, a reviewing appraiser can
check for math errors and look for consistent application of
variables that produce adjustments. Perhaps a comparable business
has been listed for sale for an excessive period and no, or minimal,
adjustments have been made.
Meanwhile, an appraisal report should indicate the appraiser
has performed the appraisal in conformance with the Uniform Standards
of Professional Appraisal Practice and that the appraiser gets
continuing education with one of several nationally recognized
When discussing fees, ask the appraiser for an estimate of
the overall cost, not hourly rates. A low per hour fee doesn't
translate into a lower fee if the appraiser takes more time.
Expect completion in two to six weeks, depending on the complexity
of the assignment and a fee typically beginning at $1,500, with
costs sometimes ranging from $3,000 to $5,000.
By Carl Lloyd Sheeler
Carl Lloyd Sheeler is an expert witness in business valuation
and the managing partner of Allison Appraisals & Assessments,
a 45 year old nationwide appraisal company with offices
in Providence, RI, and San Diego, CA. Allison Appraisals &
Assessments specializes in appraisal review, litigation support
and valuation for estate planning. He can be reached at (800)
286 6635 or csheeler@AAppraisals.com, or visit the company's
comprehensive Web site at www.Aappraisals.com.
Copyright © 1999 by Bond Communications.