Business Valuations
Reduce Risk to Enhance Value
How much control does an owner have over the value of his or her business? As always, it depends on the business. Value is based on a combination of marketability and risk factors. Traditional wisdom dictates that more risk equals less value.
Business valuators consider a number of standard financial and business risks for each company. Think about your specific company — are there steps you can take to reduce risk in these areas?
Financial Risks
This category refers to the debt associated with the company as well as other financing issues. The less debt, the more cash flow available. More cash flow means less risk.
In assessing financial risk, the business valuation professional will compare the company to its peers in terms of leverage, liquidity and turnover ratios. Is debt causing increased exposure? Is inventory too high? Are fixed assets performing?
Two obvious ways to enhance value are to increase the income stream and reduce debt. Consider receivables, inventory and equipment. There may be some easy fixes.
Business Risks
When it comes to business risks, the business valuation expert will consider those that might influence a buyer’s interests in the future performance of the company. The following list, developed by Practitioners Publishing Company in PPC’s Guide to Business Valuations, provides a good overview of business risk characteristics:
Stability of historical earnings: The stability of historical earnings is probably the most important factor the business valuator — and potential buyers — will consider. The less stable the earnings, the more risk involved in the company.
Business and industry growth prospects: Most buyers are interested in future growth, so it’s important to look at any forecasts available for the company and its industry, as well as history, background and trends.
Type of business: Businesses that are easy to launch and don’t require a lot of capital are generally less valuable than those that require specialized licensing and lots of investment.
Quality of location and facilities: Everyone knows the “location, location, location” mantra of retail businesses. But even for non-retail businesses, potential buyers might be turned off by questionable neighborhoods or poor facility maintenance.
Stability and skills of employees: Staff can make or break a business. Companies with well-trained employees and low turnover rates are generally more attractive than others.
Competition: Competition can have a negative or positive effect on a business. The business valuator will consider whether the company’s specific competitive situation is a plus or a minus.
Diversification of products, services and markets: Generally, the more diversified, the better, because diversification means less risk.
Desirability and marketability: What are buyers willing to pay? Are there many prospective buyers or just a few?
Management depth: If the business’ success is tied to its owner, it’s obviously less valuable than a business that can thrive with new management. Another consideration is business structure. Does the entity provide for the transition of management to others in the company?
Availability of capital and/or terms of sale: Even the best deal won’t go through if a buyer can’t get financing — which can be difficult to obtain for small businesses.
Depending on the specific company and its industry, certain business and financial risk factors will have more impact than others. The better you understand how these risk factors affect your business, the better you can reduce risk and enhance value.
Interested in enhancing the value of your company? Our valuation professionals can help you assess the risk factors relevant to your business.
The Benefits of Joint Appointments
Money is often a core issue in family law cases. So the idea of saving money by hiring one valuation expert for both parties is becoming increasingly popular around the country.
These arrangements, called “joint appointments,” typically happen one of two ways. Sometimes the court will engage an expert to offer impartial advice to the court itself — to present an opinion that will help the judge make a decision. The court hires the expert, but both parties must agree upon the choice and pay for the expert’s services.
In other cases, the parties themselves agree on one expert to hire. They also must agree to the scope of the engagement. Either way, a joint appointment streamlines the process, saving money and time.
One Head Better Than Two?
When jointly retained, the valuation expert seeks input from both parties but advises neither. Often the expert can interview and communicate with both parties simultaneously, creating an open environment which may ease tension and move the process along.
Some people believe that this joint communication enhances the expert’s impartiality and objectivity because he or she isn’t having to “choose sides.” On the other hand, critics of joint appointments contend that these arrangements diminish private conversation between expert and client so much that the expert’s ability to get the full story is diminished as well.
Typically the engagement agreement includes a clause prohibiting the expert from representing either party in court if a settlement can’t be reached. This ensures that the expert has nothing to gain from the engagement in the future.
While not standard practice everywhere, joint appointments are gaining acceptance. This trend is likely to continue as clients look for ways to save time and money in legal disputes.
If you are considering a joint appointment, please let us know.
For more information about our business valuation services, Contact:
Freddy Thomas, Senior Manager, Business Valuations at 972.448.6937.
The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.