Wayne Wilson on Companies in Transition

We live in interesting times

My recent holiday reading included Dennis McCarthy’s Here be Dragons, a primer on biogeography. Biogeography integrates the theories of natural selection and plate tectonics to explain the diversity and dispersion of plants and animals as our physical world has changed radically over the eons.

A few thoughts came to mind, which might put our recent financial and economic turmoil into perspective:

• Stability is an illusion – Change is rampant, overwhelming and usually unpredictable. We often look back with fondness to those “good old days of yesteryear.” The phenomenon probably results in part from our human tendency to remember the good and forget the bad. Life is more like a roller coaster, and sometimes it just leaves the tracks.

• Progress is erratic and uneven – Technological and other breakthroughs often seem to come out of nowhere when in fact they have been preceded by (and often built upon) years, decades, or millennia of effort resulting in miniscule incremental advancement. While we can certainly work on it, we can’t count on it.

• Survival, let alone prosperity, is not guaranteed – Sometimes things just don’t work out. Thousands upon thousands of species have vanished from the Earth in very short periods of time (geologically speaking) upon the breakup of continents or the arrival of periodic ice ages. Remember the dinosaurs?

It’s time to re-prioritize – personally and professionally – on what’s most important to you right here, right now. There’s nothing wrong with letting tomorrow take care of itself a bit.

What’s your business worth?

Every business owner dreams about what his/her business might be worth – the bigger the dream, the better they feel. But what is that business really worth? Only as much as someone will pay you for it.

Here then is the real question: how do you figure out what someone might pay you for your business? Investment bankers would say, “Let’s run a process (quietly put the business up for sale) and see who comes and what they offer.” But that’s not practical if you are really not yet ready to sell or if you are worried about the impact on customers and employees if word leaks out that you are shopping the business around. Such processes can also be time consuming, distracting for management, and potentially expensive.

Another avenue is to ask an investment banker or appraisal professional to prepare what’s called a “range of values” study based on comparable company sales, public company trading multiples, and discounted cash flow analyses. Such studies can provide you with indications of your business’ value under various scenarios. The fees charged for these studies may be modest or significant depending on the size and complexity of your business.

And then there are the “rules of thumb” – those quick and dirty formulas for estimating the value of a business based on the ranges of prices other people have paid for similar businesses over time. [1] To be useful, business valuation rules of thumb should be market-driven, that is the result of actual sales. While valuation rules of thumb do not take into consideration all of the factors which might affect the value of a specific business, they are a useful starting point.

Here are two good resources to consider in your search for appropriate rules of thumb:

• 2010 Valuation Survey of Architecture, Engineering, Planning & Environmental Consulting Firms, published by ZweigWhite is an excellent resource for business owners and managers in those professions.

• For a more general resource, check out the 2010 Business Reference Guide: The Essential Guide to Pricing Businesses and Franchises, 20th Edition.

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[1] In the Introduction to his book Rules of Thumb, Tom Parker calls a rule of thumb “an easy-to-remember guide that falls somewhere between a mathematical formula and a shot in the dark”.