Reality check Featured

9:54am EDT July 22, 2002

If you had to put a price tag on your business , what would it be? Rand Curtiss, President of Loveman-Curtiss Inc., has watched many people walk through the front door of his Pepper Pike office during the past 13 years looking for an answer to that elusive question.

It is a slippery issue because it cannot be answered by simply tallying up the value of property, equipment and inventory. Other factors have to be weighed, many of which cannot be easily measured, such as the value of the company’s work force, business reputation and the state of the market.

So it’s no surprise that most business owners only have a vague idea of what their company is worth. And very often, the answer is an eye-opener.

“I think most of the time, clients are surprised at how low our valuations are for their estate purposes and they are also surprised how low our valuations are in contemplation of sale,” says Curtiss. “They like the former and they’re not as happy with the latter.”

Experts estimate that between 1990 and 2015, more than $10 trillion worth of assets will change hands as the World War II generation passes its wealth onto its sons and daughters. A significant portion of that is held in the form of family businesses, which will likely need to be professionally appraised. Other reasons for companies to seek out business valuations include the dissolution of business partnerships, company buy-outs, litigation and divorce.

It’s not only good business to find out what your company is worth, it could be vital to its future success, and ultimately, its survival.

There are common pitfalls that business owners discover when the value of their company is not properly formulated. Ramifications vary from mere embarrassment to financial loss to total ruin. However, a business valuation by an accredited appraiser can help business owners stay on a clear path and avoid the dangers of heading out into the market with only a notion of what their company is worth.

Trying to sell for too much

The eternal optimism of the entrepreneurial spirit can have a downside when business owners try to sell their companies without a proper valuation. At times, owners’ emotional ties to their business can lead them to try to sell for too much, a move that can lead to disappointment and a crushed ego when the market does not respond.

“I have never met a business owner who did not think that his or her business had infinite potential,” says Curtiss. “Small business owners are by nature optimists, and they tend to have very high expectations for how their businesses can perform, and therefore, how it ought to be priced.”

One of the biggest advantages a business valuation can offer owners is a reality check, a glimpse of how their business will perform in the market before taking the crucial step of putting it up for sale.

“If they think that their business is worth $10 million, and in reality it’s only going to bring in may be $1 million, it’s better that they hear it from us privately,” says Curtiss.

Valuing your company on paper

A straightforward and seemingly logical way to value a business is determining what it owns and what it owes. Charting physical assets and liabilities would seem to give a very concrete picture of a company’s value. But that’s only part of the equation, and not going further may leave out some of the biggest factors to the success of the business.

The value of a company’s reputation, history, work force and customer relationship are not recorded anywhere, but have to be measured somehow when trying to determine the value of a business.

“You know they are there, but you can’t see them, you can’t touch them and you can’t measure them,” says Curtiss. “A lot of people tend to forget about these things. They just look at what the business book value is and look at its accounting statements.”

The problem with this is that it assumes the business is simply going to be liquidated, when most businesses are bought because people want to continue operating the company as it is.

“When most people value businesses, and the way most buyers and sellers think about valuing businesses, is by determining what a business earns and applying some multiple of earnings to that business,” says Curtiss. “The appraiser’s job in a case like that is to say what are normal earnings and what is an appropriate multiple.”

Undervaluing your business in estate planning

The most dangerous threat to the survival of a business is being undervalued during estate planning. Although it does not happen as often as it did 10 years ago, business owners need to be aware of the harsh consequences that can befall them if they do not get their business appraised by a firm that can hold up to scrutiny by the Internal Revenue Service.

With estate taxes in Ohio scaling as high as 50 percent, it can be a fatal blow if the IRS comes back with a figure much higher than what the owner believed it was worth. If a business owner believes his company is worth $100,000 and the IRS values it at $1 million, there’s trouble.

“It’s a big problem if you’ve got to pay taxes on that and you don’t have the liquid cash available to do it,” says Curtiss. “It could force the business to be sold or worse, and in a forced sale, you don’t get a very good price.”

You’d be hard-pressed to find a business owner who is not aware of the need for estate planning, but with the very real threat of estate taxes, it is one eventuality for which all business owners must prepare.

“I think most businesses fully recognize the fact that estate taxes are a big issue,” says Curtiss. “And if they want to continue their business, particularly if it is a family business, they have to do estate planning, and the sooner they do it, the better. Not to do it is risking ruin.”