Ray Lampner, manager of valuation and litigation advisory services at Brockman, Coats, Gedelian & Co., says valuations help get a company’s financial record in shape, but they also create benchmarks so the company can compare itself to others in its industry.
“A lot of questions that you answer in a valuation are going to be the same that are going to be asked during a due diligence process,” he says. “When you’re going through the due diligence process and there’re hesitations or you’re finding errors in the accounting, the buyer’s going to start having second thoughts. Either they’re going to walk away or they’re going to want the price lowered.”
Lampner says there are five major issues CEOs miss when determining their company’s value.
- Key personnel issues. Owners of smaller businesses are often so hands-on that their involvement becomes a risk when they attempt to sell because the buyer must replace that person’s knowledge and skills.
- Future capital expenditure requirements. “A lot of people look at EBITDA as being the cash flow number, but what’s missing from that are fixed asset purchases,” Lampner says. “So if you’re in a machine shop or something that’s capital-intensive, you’re going to be spending money on those types of things.”
- The concentration of risk. If a company has one supplier and that supplier goes out of business, another must be found. “There’s no guarantee you’re going to get the same price you’re paying now. You have to be set for the impact of possibly paying a higher price in the future,” he says. “That’s where you get into the risk. It’s better to have many suppliers, many customers and many products.”
- Impact of owners’ compensation and perks. During a valuation process, owners have to justify their compensation and perks. Sometimes it takes a company several years to stop taking out excessive expenses. “You tend to get a bigger bang for your buck (on the sale), and you get fully compensated for the actual income the company generates,” Lampner says.
- Bank financing capabilities. Banks often avoid high-risk industries because many don’t succeed. When determining the value of a company, business owners tend to look at their cash flow, but banks like to see assets. “If you’re in a service-type business, there’s nothing for them to have collateral against,” Lampner says. “So they tend to finance less on those than a big machine shop with tons of equipment they know that they can liquidate.”
Business owners can use their valuation report to compare key accounting ratios to those of competitors. “If their days of receivables, which is how long their average receivable is outstanding, is longer than the industry, then they realize that’s an area they should concentrate on trying to improve,” he says.
The valuation expert and the business owner need to listen to each other. “A lot of (owners) think (the company’s) worth is a lot higher than what they’re going to be able to sell it for. They’re the ones who built it from the ground, and they’ve got a lot of sweat equity into it,” Lampner says. “They look at the business as, ‘I’ve built it up for 40 years, and that’s got to be worth something.’” HOW TO REACH: Brockman, Coats, Gedelian & Co., (330) 864-6661 or www.bcgcompany.com