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A value judgment Featured

7:46am EDT December 31, 2001
What's the largest asset in your portfolio worth?

If you're a business owner, there's a fair chance you don't know.

"Often for the business owner, their investment in their privately held company is the largest asset in their portfolio," says Frank Evans, a partner in Smith Evans Strimbu Valuation Advisory Services, a valuation firm with offices in Sharon and Pittsburgh.

Yet, many don't have an accurate idea of what their company is worth, and that could cost them money or lead them to make unwise decisions about its future, says Evans.

Evans has co-authored a book, "Valuation for M&A," with David Bishop, another valuation expert. The book alerts business owners and professionals to the critical factors in evaluating businesses.

Lots of business owners, says Evans, operate year after year without knowing what their company is worth, what factors affect its value or how much a strategic buyer would pay to acquire it. They don't know what the real return on investment and rate of return are, whether the return justifies the risk they are taking or if they are better off selling and investing the proceeds elsewhere.

Evans gives the example of a company that operates an independent specialty bakery and employs 300 people. The company could have much more value to a strategic buyer, Nabisco or Keebler, for instance, which has large distribution networks and marketing muscle and lower costs, and which could conceivably command a higher price for the products. Without that kind of information, says Evans, the owner might undervalue his company.

Without taking into account factors such as relationships with employees, customers and suppliers and their competitive position, Evans says, owners may go down the wrong path in trying to build value into their company.

The plans, says Evans, will change as the company's objectives change. A young company with growing sales and little competition will have a set of objectives to build value that will differ from one where the owner is nearing retirement and the business represents the bulk of his net worth.

Evans emphasizes the importance of having an effective succession plan and doing long-range strategic planning to build value in your business.

Says Evans, "You want to manage your business as an investment, just as you would manage any of your other investments." How to reach: Smith Evans Strimbu Valuation Advisory Services, www.businessval.com.