Know Your Worth
For family-owned businesses, valuations are best done early and often.
Vanessa Brown Claiborne is president and CEO of Chaffe & Associates, Inc., the leading investment bank and trusted valuation authority in the Gulf South serving founder-led and family-owned businesses. Claiborne is a licensed CPA/ABV, accredited senior appraiser-business valuations and advises on mergers and acquisitions.
Statistics show that the typical owner has 80% of their net worth tied to their business. That level of investment merits a studied approach.
In order to transition out of a business or into another one, the first step is to understand its value. Understanding a company’s resale value enables the owners to improve bargaining power during negotiations.
It is never too early to start planning for ownership transition of a business. Even if there are no plans to sell today, by understanding the main drivers of value, the owners will have an opportunity to increase the company’s value and selling price over time. A business valuation can assist the owners in evaluating and planning exit options, including gift or sale to family members, sale to employees, recapitalization using private equity or an outright sale of the business.
Valuing a business, though, is not always a straightforward process. To take advantage of tax minimization benefits related to estate and gift taxes, Louisiana capital gains tax exemption and charitable income tax deductions, owners must seek a qualified valuation. A valuation is also necessary for employee compensation strategies, such as stock options, stock appreciation rights and profits interests, as well as employee stock ownership plans.
A credentialed valuation expert or an investment banker can assist owners in determining value. The process is discreet and confidential. The company owners — or their professional advisors such as attorneys, CPAs and investment advisors — provide the basic information such as financial statements and legal documents. The process includes management interviews with the business owners (or key employees selected by the business owners) to review the company’s history, strategy and prospects. The valuation advisor will come prepared for the interview, having reviewed the company documents and thoroughly researched the industry.
A valuation requires a meticulous analysis of the business. The deliverable will include an analysis of trends in the business income, cash flow and balance sheet. The report will also present industry trends, economic factors that will affect the business, information on customers and competitors, management and employees, and the risks of and opportunities available to the business. The analysis will help identify the most important factors driving the company’s value. These factors can be measured and monitored relative to a company’s value on an ongoing basis.
NOT A DIY JOB
A word of caution to business owners who believe they know how to value their company as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Even this formula with only two elements is complicated. There are numerous factors that determine the correct multiple — including economic conditions, market area, size, nature of revenue, customer or supplier concentration, growth prospects, financing availability and private equity expectations. There are also many ways to measure EBITDA, including last 12 months, an average of some historical period, a current run rate or an estimate of next year. Determination of the multiple and EBITDA are always situation and company specific.
Using a third-party firm for valuation brings credibility to the price and leads to fewer disputes. A business valuation will provide an impartial price with which to transact shares for long time business partners and their family members. Multigeneration families can create an orderly way for shareholders to buy and sell shares.
An independent valuation conducted on a regular basis will identify value drivers and enable management to measure success or identify challenges and make course corrections. It can also highlight areas where revenues can be improved and expenses reduced, resulting in higher profits and improved cash flow.