A company discovers how to become more efficient and profitable by undergoing a business valuation.
Jacqueline Moore, CEO of Ridgaway Philips, a home health agency in Spring House, Pa., wanted to know how much money she could raise to make an acquisition. To find out, she had a valuation of her company done. In the process, she discovered the importance of improving her cash management, making better use of her company's assets, and planning tax-advantaged exit strategies.
Moore hired Fred Roa of Telesis, a valuation specialist in her industry, to do the appraisal for half his $12,000 fee up front and the balance upon completion.
Because of Moore's strong history of earnings, Roa arrived at a $6.8-million price tag by calculating the value of Ridgaway Philips based on its future potential earnings. He also considered recent sale prices of competitors and the growth potential of the market for comparison. Roa had considered using an asset approach to valuation -- which takes into account the future value of a company's assets -- but based on its assets, Ridgaway Philips was worth only $5.7 million.
In the process of arriving at those figures, Roa discovered information Moore really could use. Together they looked at Ridgaway Philips's major hard asset -- its $50,000 computer system -- and found that it was being used a small fraction of its potential. "We thought because the system slowed down whenever we did payroll that it was close to capacity, but we were wrong," says Moore. She's promoted an employee to establish a routine for system maintenance and to develop the computer's sales-reporting and general-ledger capabilities, and a variety of other management reports.
Roa pointed out that Ridgaway Philips's cash was exposed and vulnerable. Only a small percentage of the company's seven-day commercial paper was insured by the FDIC, and its credit line was underutilized. Roa convinced Moore she needed to protect her company's cash.
To prevent earnings from piling up in the future, Moore is researching a number of options, including planned giving as a long-term tax-advantaged exit strategy, and using some of the built-up cash to start a foundation for child-advocacy programs, which she would continue to fund with future profits. Her goal is to reinvest the company's profits in the community she serves, a strategy that has the additional appeal of reducing the company's taxable income.