His secret weapon? For the past 15 years, he's kept an annual tally of his company's worth, hiring professional appraisers when plans are afoot, and updating their models in more stable periods. "It keeps you out of trouble," he says. "It keeps you from being out there, believing what isn't true. And it gives you a better sense for using what resources are there. Leverage is a two-edged sword. You need to know whether you have the equity to support it, so you need to know what the equity is."
MacRae isn't bashful about his wealth. Like Jerry J. Moore, he shows it to his lenders to secure credit lines, and he shares it with his spouse to help her manage the family budget. And he has valued his own business using three different techniques -- by assets, earnings, and cash flow -- for comparison. "You frequently make decisions that are not short-term in nature," says MacRae, "and it's helpful to be able to rely on an appraisal process to make better long-term decisions."
For all-too-many private business owners who aren't looking to sell or raise new equity, valuation questions tend to come in three instances: first, if a partner or stockholder leaves and either demands a fair-market buyout or invokes a buy-sell clause. Second, if a principal is going through a divorce. And, third, because of death or estate planning, when the taxman descends to see if the government deserves a cut and the heirs pull out calculators to add up what they get. All these scenarios have one thing in common: They're a mandatory response to outside circumstances, designed to come up with a number that solves a dispute.
Such business appraisals, reacting to external events, prove less a tool than a mop. Ponder for a minute a case approaching the court system on the West Coast. It involves a closely held construction company that has a buy-sell agreement among its partners -- nothing unusual there, except that the price hadn't been updated in about a decade, according to an accountant familiar with the situation. When one of the partners died recently, the company conducted a belated valuation. The surviving partners found a windfall -- they can buy out the late partner's estate for a fraction of its true worth. But they also bought a lawsuit filed by the surviving relatives.
Proactive knowledge, meanwhile, can prevent headaches. And when it's time to sell, it yields money. How much? That depends, but for San Jose-based Teleparts, which started as a semiconductor parts firm, the figure was about $250,000. Teleparts' business soared with the invention of wafer cleaning used in the fabrication of semiconductors. Sales shot past $20 million, and the company went public in 1995. The original parts business was still chugging along, however, with about $600,000 in revenues.
An obvious candidate for sale, the company had to figure out how to value an entity that wasn't a standalone. "When you get into the harder values to assign, the goodwill and esoteric, when you get into the fuzzy area, we don't understand those numbers," says Patrick O'Connor, the former chief financial officer of parent company OnTrak Systems. "As a CFO, we understand the inventory and the receivables and fixed earnings." So it hired Robert Laversin at American Business Appraisers.
Privately, O'Connor and his team had previously decided that about a half million dollar price for the division would be a big win. When appraiser Laversin came back with a valuation at $775,000, however, the goals changed. Teleparts wound up selling for that exact price. "I used his report as the value," he says. "It was fair and independent." That seal of approval was worth a good $250,000 to Teleparts -- quite a return on the $15,000 investment for the valuation. "It was a very good deal," says O'Connor. "We were very happy."
Still, O'Connor's process was somewhat akin to slapping a new coat of paint on a house for sale. At least he got the valuation before he'd settled on a sale price, but it would have been more proactive and effective to secure a valuation several years before a potential sale. Joe Maskrey, former CEO of InfoGraphic Systems, a $20 million annual revenue electronic security equipment manufacturer in Garden Grove, Calif., hired USBX in January 2001 -- a full 22 months before he sold his company to General Electric this past November. The USBX valuation, which came in at $18 million, set off a process that led to the eventual sale. "It gave an idea of what would be a really good scenario for us to go for as an exit strategy," says Maskrey, now president of the new company, GE Interlogix, InfoGraphics. Under its current business model, Maskrey's company would be valued by a multiple of earnings. But by adopting a somewhat different business strategy, geared more toward growth, Maskrey could put himself in a category of companies valued by a multiple of sales. Thus armed with a plan, Maskrey positioned InfoGraphic as a strategic rollup, and sold for a price Maskrey characterizes as "a lot more" than the $18 million 2001 appraisal.
For Linda Graebner, who last year sold Tilia Inc., a San Francisco-based vacuum-packaging company (manufacturer of the FoodSaver), valuation knowledge proved much more than a part of her exit strategy; it was also a tool for rebirth. When she took over as CEO of Tilia in 1993, it had less than $10 million in revenue and was basically insolvent. The best recapitalization route seemed to be a combination of Chapter 11 and new investment. But how do you value a company in bankruptcy? Graebner hired an independent appraiser to develop a rationale, in this case a discounted cash flow model based on anticipated future earnings.
The model worked, and Graebner grasped the value of valuation. As Tilia grew, Graebner had her finance department conduct regular internal valuations so that company stock-option packages could be priced correctly. By the late '90s, Tilia had $80 million in revenue and Graebner wanted to restructure the company into subsidiaries. She was especially curious about the value of the intellectual property Tilia had accumulated, and how the subsidiaries would charge licensing fees to each other for the IP. Again, she called in a valuation expert, in this case a consulting arm of the now-defunct accounting firm Arthur Andersen. Andersen valued the company and "it reinforced how valuable our intellectual property was," says Graebner.
