What is Your Business Worth'

As a shop owner, your manufacturing business is one of the most important investments you'll make in your life. Over time, the business grows and so does your initial investment. How much is your initial investment worth today?

You'd probably say it is worth more, but how much more?

Although manufacturing operations tend to have substantial capital assets, there is far more to the value of the business than is apparent in the numbers on the balance sheet. Business value also includes the sweat equity, the time and devotion an owner contributes. This is commonly referred to as goodwill, an intangible asset that substantially increases a company's worth and attractiveness to an outside buyer. In a nutshell ? shop owners must look beyond the tangible assets to know the value of the company.

WHAT IS A BUSINESS VALUATION?

The share value of publicly-traded companies is easily accessed by looking in the business section of the daily newspaper, locating the stock tables and multiplying the closing price by the number of shares owned. However, no convenient stock table exists to access the share value of privately-held companies. That value can only be accurately determined through a business valuation.

A business valuation assesses the worth of an enterprise from several perspectives. It examines the business on its own merit, how it compares to similar companies in the industry and how it rates in the marketplace. A valuation also takes into account tangible and intangible assets. Goodwill and intangibles are arguably two important value drivers for privately-held companies. For fabricators, goodwill and intangibles include:
? Established relationships with suppliers and other man-ufacturers
? A sales and marketing plan that provides sufficient orders to run machines throughout the day and have enough orders to cover multiple shifts
? A strong engineering staff and technology team, includ-ing certified technicians and experienced journeymen
? Employee training, both preventative and ongoing (including safety training), to gain skilled workers and reduce equipment repairs and waste
? Proprietary processes, patents, trademarks, and research and development

A business valuation can also quantify value enhancers derived from established operational history, successful bidding history, product and service diversification, established market share and repeat business. Conversely, litigation, union disputes, workers' compensation claims, and high employee turnover deflate goodwill value.

KEY BENEFITS OF A BUSINESS VALUATION

Think of the business valuation like a multifunctional tool. Although this tool is more expensive than a metal cutting tool or a metal forming tool, it can do the job of both and more. Hence, a valuation is a multifunctional planning tool that enables an owner to answer important questions such as:
? What if I get an unexpected offer from a potential buyer? If you receive an unsolicited offer to sell the business, you may not have time to wait to have an appraisal completed. Having a current valuation will enable you to make informed decisions quickly.
? What's my exit strategy? Options may include sell to a third-party, transfer to a family member, or sell to a key employee.
? Do I have adequate life insurance for my business needs? Knowing the worth of a business is a prerequisite for assessing the required amount of life insurance to fund buy-sell agreements.
? What's the return on my investment (ROI)? Establishing a benchmark value to compare to the owner's original investment provides a reasonable estimate of the ROI.
? What is my company's intangible value? Correctly assessed intangibles can increase a manufacturer's total market value by up to 50 percent.
? Will I be able to obtaining financing? A valuation assists lenders in the process of qualifying applicants.
? Will proceeds from the sale of the business fund my retirement? Knowing the value of the business facilitates ease of retirement planning.
? How much is my estate worth? An accurate determination of the business' value enables an owner to implement estate tax minimization strategies.

EXPERIENCE IS ESSENTIAL

Every industry is unique. Some can be more complicated than others to value. Therefore, it is essential to engage only an experienced industry valuation professional who knows the key manufacturing industry valuation issues, such as:
? Machinery. How often is machinery purchased or updated? Is the company able to purchase new equipment regularly? Does the machinery require highly experienced technicians?
? Certifications & Education. Is the company ISO certified? Are employees regularly educated on new techniques?
? Litigation. Do litigious claims or events, such as workman's compensation or environmental issues, exist?
? Employees. What is the required skill level? Is the company union-affiliated? How are experienced journeymen retained? What benefits are offered, and can the company afford to maintain those benefits?
? Pricing. How has the rise in material costs affected the company?
? Competition. How are new clients gained and existing clients retained?
? Without proper experience, someone other than an industry specialist might not apply the correct valuation method, resulting in an inaccurate assessment of worth. This can lead to some of the most common mistakes made when valuing a privately-held business such as:
– Using an industry formula to determine value.
– Thinking the sale of a competitor's business is a good indicator of value.
– Failure to consider the tax implications of improper estimates.

KEEP IT CURRENT

Update the business valuation every two years to ensure a current, accurate assessment of ownership value. Or, if the business grows substantially over one year or experiences a significant event, re-assess more often. For most fabricators, their business is their most valuable investment, yet very few are able to say with any level of confidence what it is worth.

Approximately 75 percent of business owners invest their own net worth in the business, and many never see the materialization of the full investment again. In the manufacturing sector, savvy business owners know their business' worth to maximize their ROI and have answers to important questions that can help make that happen.

Erin Hollis, AVA, CM&AA, MBA is the director of valuation services for Accountancy Associates, LLC, a related company of International Profit Associates, Inc., 1250 Barclay Boulevard, Buffalo Grove, IL 60089, 847-495-6786, erin.hollis@ipa-iba.com, www.ipa-iba.com. IPA is the largest privately-held business development company for small to medium size businesses in North America.