Valuations 2003: What's Your Company Worth Now?

 

Is there any good news here? Well, yes. A close study of the numbers indicates that valuations seem to have bottomed out. The deal figures in 2003 have held up to 2002. More telling, look at the cash percentages in these acquisitions. According to a recent report by JPMorgan, which crunched numbers from Thomson Financial, the average acquisition in 1998 was financed 68% with stock. By 2000, it was 57%; in 2001, 45%; and last year, excluding one deal, the Pfizer-Pharmacia merger, that figure fell all the way to 24% -- the smallest margin in a generation. Cheap stock fueled the valuation run-up: As the cash portion has risen, prices have dropped. But with cash now constituting three-quarters of the typical deal, it's a good sign that we've hit a turning point.

Given this new landscape, taking stock of your company, as Michael Gorun did, can offer a window into potential opportunities for improving your valuation.

Over the 23 years Terry MacRae has owned San Francisco-based Hornblower Yachts, it's hardly been smooth sailing. He's gone through virtually every type of small-business transaction: subordinated debt offerings, equity-leveraged acquisitions, partner buyouts, division selloffs. But in the end, he's thrived. Hornblower, which handles charters and dinner cruises along the California coast and has an affiliate that manages casino boats in the Midwest and Bahamas, owns 25 boats and boasts revenue of $30 million, along with a healthy profit margin.

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.

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