Corrections or additions?
Valuing Technology Firms:Steady Growth Counts
These articles were published in U.S. 1 Newspaper on November 18,
1998. All rights reserved.
Gillespie’s employees walked away with a pretty penny
from the sale of their firm to an $11 billion holding company (U.S.
1, November 11). The employees of the advertising agency hold
one-third
of the stock, so they could have received as much as $7 million in
a combination of cash and publicly traded stock. Surely that started
other entrepreneurs and employee-owned firms thinking about whether
they could (or would) profit from also selling out. Two meetings in
the next month will address that question.
“The positioning issue is really interesting,” says Patrick
Gaughan of Economatrix Research Associates. “What if you are
not selling your company now,” says Gaughan, “but would like
to get your money out in five years, how can you run your company
differently over the next five years to get the most value?” He
will discuss “Measuring and Managing Company Value,” on
Thursday,
November 19, at 2 p.m. at the Fairleigh Dickinson University’s Rothman
Institute of Entrepreneurial Studies, 285 Madison Avenue, in Madison.
Cost: $65. Call 973-443-8842.
Because technology businesses have little or no revenue, and because
their chief assets are technology-based, they are particularly
difficult
to value. “Determining the Value of Small, Technology-Based
Businesses,”
is the topic for Howard A. Scribner and Geoffrey D. Dennis
of the valuation services practice of Arthur Andersen LLP on Thursday,
December 10, at 8:30 a.m. at the Rutgers Biotech Center on Cook
Campus.
The forum is sponsored by the Technology Help Desk & Incubator. Cost:
$30. Call 732-545-3221.
Fairleigh Dickinson’s session is for business owners who might want
to sell a business or buy another business. How should they position
themselves over the next five years to buy or be bought? Gaughan will
be joined at the seminar by Henry L. Fuentes of the Silberman
College of Business, who will talk about how accountants do due
diligence,
Robert E. Massengill of Menke & Associates, who will discuss
sales of employee-owned firms. Richard M. Slotkin of Hannoch
Weisman will talk about the legal due diligence process, and Daniel
R. Stella of Summit Commercial will give case studies showing what
financing issues banks consider when loaning money for a purchase.
When it comes to selling a business, the same business can have
several
different values, depending on the circumstances, says Gaughan.
“If
I run the business and take money out of it, the business has one
value,” Gaughan says, “but if I sell it to someone else, the
company can buy me and get my revenues, but not necessarily assume
all my costs.” The buyer might be able to eliminate some
redundancies,
perhaps in payroll or inventory systems. “Then my revenues would
be more profitable to the buyer than they are to me.”
A business can be valued, he says, by choosing one of three kinds
of numbers:
Discounted cash flows. Project the cash flows into thefuture, then bring them back to the present value by using a”discountrate.”Comparable multiples. “Each industry has its ownuniquemultiples applicable to that industry,” says Gaughan. One industrymight use 14 times earnings. Another could use six times earningsbefore interest and depreciation. “A multiple is the number oftimes a financial measure that a business sells for. All are uniqueand different but they are standards, available in databases.”Asset oriented methods for such asset-oriented businessesas real estate or banking. When a business is not earnings oriented,the net asset value represents assets minus liabilities.Businesses usually sell for more when:They grow quickly. In general, Gaughan says, he valuesbusinesses more highly if they grow more rapidly.They grow steadily. “If the growth is volatile, weproject a higher discount rate. Jumping up and down is risky forme.”They have little debt. “With high debt we would applya lower multiple or a higher discount rate,” says Gaughan.”Thehigher the debt service, the more risky the proposition is.”– Barbara FoxTop Of Page$50K to $250K: Apply NowTechnology companies can apply for a total of $2.3millionin technology transfer funds to be distributed by the New JerseyCommissionon Science and Technology, says David Eater, acting directornow that former executive director J. J. Brandinger has retired.As repayment, the recipients are expected to pay royalties onsuccessfultechnologies.”A major advantage to the Technology Transfer Programfunding,”says Eater, “is that the investment is neither debt nor equity.Debt must often be repaid independent of the company success. Anequityinvestment gives the investor certain ownership and managementrights.”Most awards will be from $50,000 to $250,000 for projects that willbe finished in 12 months or less. To encourage entrepreneurs to seekcollaborators, preference is given to projects that have third-partyinvestors or collaborators. Whether they have third-party investorsor not, entrepreneurs must match state dollars on at least a 1:1basis.Eligible companies will have fewer than 500 employees and be locatedin New Jersey or be willing to move to New Jersey. They are supposedto stay in New Jersey for at least five years after the funding ends.They should be conducting product or process development in a marketarea that is likely to succeed by stimulating economic growth andcreating jobs.The scientific/technical part of the proposal must tellWhat the product does.How it operates.What key technical decisions were made.What unique feature of characteristics differentiate it fromcompetition.What specific technical tasks will be performed togetherwith the schedule for their completion.Where they will be performed.The commercialization discussion is even more detailed. Callfor a “request for proposal” (RFP) at 609-987-1671 or fax609-292-5920, or E-mail njcst@scitech.state.nj.us.Proposals are due on Monday, January 25, and after peer evaluationthe awards will be announced on April 27.Top Of PageBiotech’s FutureEach year Robert S. Esposito and Gordon V.Ramseier, a dynamic duo on New Jersey’s biotechnology landscape,psych out what is really happening with biotech in the state. Thisyear’s “State of New Jersey Biotechnology Industry Report”will be presented at the annual meeting of the Biotechnology Councilof New Jersey on Thursday, December 3, at 5:15 p.m. at the NassauInn.Esposito is national director of biotechnology and life sciences withKPMG Peat Marwick LLP at 989 Lenox Drive. Ramseier is executivedirectorof the Bridgewater-based Sage Group and former CEO ofOncoTherapeutics,now Biomira U.S.A., at 1002 Eastpark Boulevard in Cranbury. Cost:$75 ($85 for walk-ins). Call 609-890-3185.Top Of PageAdvanced EngineeringFuture biomedical engineers can get started as earlyas their high school years, with a program started by the New JerseyInstitute of Technology (NJIT). NJIT received a five-year, $2 milliongrant from the New Jersey Department of Education to develop anarticulatedcurriculum in pre-engineering and engineering.Engineering life sciences, which includes biomedical and biotechnicalengineering, is one of the five curriculum areas. The others aremechanicalengineering and technology, chemical engineering and environmentalscience, electrical and computer science and technology, and civilengineering and technology.When complete, this program will allow high school students who seekcareers in any of the engineering professions to move smoothly througha streamlined curriculum of courses that will be taken in high school,community colleges, or at a four-year college or university. Studentswill be better prepared for employment in New Jersey’s competitiveand technology-based economy.The program will be phased in over five years, with the first areaof study, mechanical engineering and technology, ready for studentsto use next fall.NJIT is a public research university enrolling nearly 8,200 bachelors,masters, and doctoral students in 76 degree programs through its fivecolleges.Top Of PageHandheld Windows?If the “demo demon” does not appear, MikeRauch will showcase Microsoft’s newest operating system, WindowsCE, at a Princeton ACM/IEEE Computer Society meeting on Thursday,November 19, at 8 p.m. at the Sarnoff auditorium on Fisher Place.For information, call 609-924-8704. There is no charge, students withparents are welcome, and refreshments will be served. A pre-meetingdinner with the speaker is at the Rusty Scupper at 6 p.m., butreservationsare needed for this.The “demo demons,” of course, are those gremlins that seemto surface at most cutting edge computer demonstrations. Rauch, oneguesses, has seen his share of them. He bills himself as a”softwaredevelopment ronin” and “vice president of pointers andsemicolons”at the Cranbury Software Development Center Inc. He is developinghigh performance communications servers under Windows NT and VisualC++. Currently he is involved with network management systems forfiber optic networks. In another area he develops games — threecasino games for Windows CE hand held computers. These PhillipsElectronicscomputers are being distributed by MobileSoft.Rauch will talk about Windows CE applications and platforms. If thatproverbial demo demon is not present, he will develop a sampleapplicationand load it to a hand held PC. Next month’s IEEE meeting, on December17, will feature Mike Keith discussing “Algorithms,Computers,and the Art of Constrained Poetry and Prose.”Top Of PageSales and Use TaxSales tax, as complicated as it was, is even more sonow that transactions are being made on the Internet. In general,only the state in which a sale occurs is entitled to tax a sale, andout-of-state sales are exempt from tax, says Susan A. Feeney,an attorney with McCarter & English. She will discuss “CurrentIssues in New Jersey Sales and Use Tax” at the seminar organizedby the New Jersey Society of CPAs on Tuesday, November 24, at 5:30p.m. at the Forrestal. Cost: $40. Call Henry Murphy at 609-258-1550.Feeney will discuss interstate sales, Internet sales, and recentrulingsand taxpayer concerns in these areas. A graduate of Seton HallUniversityand Fordham Law School, she completed a clerkship in the New JerseyTax Court before joining McCarter & English in Newark.A vendor may not be required to collect a sales or use tax unlessit has a “nexus” or connection with New Jersey, says Feeney.”A vendor needs sufficient connection with the state in orderfor the state to assert its jurisdiction.”However, Feeney warns, businesses should not lure customers byclaimingthat transactions are tax exempt. “A vendor may not advertiseor hold out to the public in any manner that the tax is not an elementof the sales price, amusement charge, or rent,” she says. “Vendorsmay not indicate that they will pay the tax, that the tax will notbe separately charged, or that the tax will be refunded to thecustomer.”With regard to mail order sales, the U.S. Supreme Court, in the 1967National Bellas Hess v. Department of Revenue ruling, held that inthe absence of any retail outlets, solicitors, or property of thestate, a foreign mail order company could not be required to collectand remit use tax on sales made to residents of that state. This isstill the law today, says Feeney.Are Internet sales regarded in the same manner? Feeney points outsome state and local tax concerns:Multiple taxation: Who has the jurisdiction to tax, theselling state or the delivery state? Where is the product consumed?Physical presence: Do the out-of-state electronicmerchantshave a physical presence in the state of the buyer?Property or service: Is the sale of a digitized producta sale of tangible property or a service subject to tax? Possibleservices are Internet access services, consulting services using videoconferencing, on-line information databases, stock trading, banking,and gambling opportunities.Feeney also explains the New Jersey position regarding varioustypes of Internet sales:Nontaxable: Charges for Internet access billed eitheron an hourly or lump sum monthly basis are treated as nontaxablechargesfor sale or use of information.Nontaxable: Website storage charges are not taxable sincethey are a charge for advertising space which is not an enumeratedtaxable service.Nontaxable: Consulting services charges are generallyexempt as professional services.Nontaxable: Domain name registration charges are nottaxableservices.Taxable: If the Internet Service Provider (ISP) ischargingfor transmission-related services, like dedicated phone numbers andtelephone connect time, such charges are taxable telecommunicationservices for New Jersey service addresses.Taxable: Website design advertising services are taxableadvertising services.Feeney also offers some suggestions for entrepreneurs andcorporatemanagers on how to plan for or deal with a sales and use tax audit.For instance, expect to keep your records for at least four years.Conduct periodic self audits to ensure that sales tax compliancemeasuresare in place.”Many businesses, particularly those with multi-state locationsor those which have grown substantially over the years, may find thatno internal programs are in place for accurate sales compliance,”says Feeney. “Those business could benefit by having a sales anduse tax manual prepared detailing the taxation of particular purchasesand sales made by the business.”While dealing with the auditor, Feeney says, use the”hard-on-issues,soft-on-people approach. Be cordial, cooperative and firm.” Agreeon procedures, required documentation, audit location, and any specialneeds up front. Designate a specific work area for the auditor.Controlaccess to corporate facilities and personnel.Feeney offers some tips for entrepreneurs to protect themselves:Company phone list: Do not make it available to auditor.Workers: Do not allow anyone other than designatedpersonnelto directly answer auditor’s questions.Control of data: Carefully control access to all yourdata. Allow only one auditor to visit your workplace at a time.Answering questions: Channel all information requeststhrough the individual designated as auditor coordinator. Do notvolunteer”any” information not specifically requested by the auditor.Do not volunteer information regarding any corporation in the groupother than those under audit.Preparation: Do your homework — be aware of issues,”skeletons,” and audit “hot spots” for the particularstate, and estimate your company’s potential exposure before the auditprocess begins. Be sure filing positions are well documented.Don’t be afraid to negotiate with the auditor. “Reasonableanswers and logical approaches to getting the job done will oftenbe accepted,” says Feeney. “For this reason, anticipatingpotential issues before the auditor encounters them, and formulatingreasonable solutions or compromises for presentation to the auditormay result in significant tax savings.”And stalling tactics sometimes can work. As Feeney points out:”Remember,the auditor has time constraints.”– Teena ChandyNext StoryCorrections or additions?This page is published by PrincetonInfo.com— the web site for U.S. 1 Newspaper in Princeton, New Jersey.
