What is your business really worth? Most business owners are so busy working in the business, they never stop to think about the value of the business, and that is a mistake, says Gary W. Herviou of A. Neumann and Associates, an Atlantic Highlands-based business brokerage.
Herviou will discuss business valuation at the next meeting of the Shore Region of the New Jersey Association of Women Business Owners (NJAWBO) on Thursday, April 4, at 6 p.m. at Chelsea at Forsgate, Jamesburg. Cost: free. Reservations can be made online at www.NJAWBO.org. Herviou will address important items that small and family business owners need to know about business valuation, including how to value a business for resale, how to present it, and some of the key elements that are used in valuing a business.
A. Neumann & Associates (ANA) is a professional mergers and acquisitions and business broker firm that assists business owners and buyers in the business valuation and business transfer process. Herviou joined the company four years ago after spending more than 25 years working in a family business with his father, Andre Herviou.
“My father opened Graphic Arts and Design in Red Bank, in the 1970s,” says Herviou, who joined the company after graduating from college in 1985. He received his bachelor’s degree in business administration and marketing from Seton Hall University.
“After the recession everything changed in the business. My father was ready to retire, and we decided to wind down the business and focus on the real estate aspects of leasing the building to tenants to give my father a retirement income,” says Herviou, who also has a commercial real estate license. He joined ANA as director of public relations to help the company grow in the face of the recession. ANA has now expanded into five states.
While his experience with his own business did not directly affect his decision to work with a business valuation company, Herviou says “if I knew then what I have learned at ANA I would have made different decisions in my own business and for my father, starting at least 10 years earlier,” he says. “Instead of selling, we ‘wound down,’” he explains.
Valuation Myths and Realities. As a former business owner himself, Herviou says he understands “where business owners are coming from. Too often we are cruising at just 1,000 feet, taking care of the pressing day-to-day items like employee issues or satisfying clients. Instead we need to elevate ourselves to the 10,000-foot level and look at the bigger picture — take the time to do the long-range planning.”
Many business owners believe they know the true value of their business, but they are usually wrong.
The first mistake many business owners make is to use anecdotal information. They use a “rule of thumb” they have heard, such as basing the value on yearly sales, or assume that because a colleague or competitor has sold a business for a certain amount, that their business is worth the same.
Business evaluation is much more complex, Herviou says. You cannot assume that because someone else’s business is worth X, yours is also.
Key Elements in Business Valuation. When seeking a business valuation, most business owners use tax returns or financial statements prepared for tax purposes as the basis for the financial presentation of the business. As a result, the market value of assets is not truly reflected because of depreciation or acceptable deductions that are written off for tax purposes. While this may be good for tax purposes, it does not reflect the years of hard work involved in accumulating business assets, according to Herviou. While an expert certainly looks at the books and the sales when valuing a business, there are many other factors that can both increase and decrease the value.
The business goodwill and other intangible value, which represents a major component of what the business is worth, is not a consideration for income tax purposes and, therefore, not addressed in financial statements for tax purposes.
To evaluate a business you must first look at the total benefit to the owner. You must also evaluate the strengths and weaknesses of the business, including such things as the capability of the management team.
“Can the business owner take three weeks off and go to the Bahamas without the business falling apart?” Herviou asks. If the business completely relies on the owner, its value is less. Conversely, a great management team adds value to the business.
An expert will also look at the business’ supply chain, its clients, and its employees. Does the business rely too heavily on one client, and what happens if that client leaves? What about the supply chain?
Can needed materials be purchased from a variety of sources? Or only one? If the supply chain is limited, what happens if there is a problem with that manufacturer? What about employees? Again, if a company relies too heavily on only one or two people, what happens if they leave? These are a few of the less tangible and more strategic questions Herviou looks into.
An independent business valuation ensures that the business is not undersold. But it is also good to have a valuation made for long-term strategic purposes. “One of the values I bring to my clients is that I can say to them, ‘learn from what I did in my own business.’ A business valuation is a unique way of looking at a business that is designed to enlighten and establish a big picture mindset,” Herviou says. “The message I want business owners to hear is that you need to know the true value, not just guess at it.”