Later, the company decided to investigate a sale in 2000. Graebner ordered another valuation, this one focused strictly on market value for Tilia, which now had revenue close to $150 million. The M&A market was tanking at the time -- the company's likely range of pay-out multiples, Tilia discovered, had gone from high-end estimates of eight times EBITDA to some as low as three and a half. Tilia's EBITDA for 2000 was $25.2 million, yielding an approximate value for the company of $140 million to $150 million, based on a median valuation multiple in the 5.5 to 6 range. Pessimistic that valuations would rebound soon, Graebner accepted a buyout offer last year from Altrista (since renamed Jarden), a New York-based kitchenware maker, for $160 million. "The valuation told us that was a fair price," says Graebner. "In 1999, that would have been low, but in 2002, that was a fair price."
To really use valuation as a tool to improve your business, figuring out an estimated worth is just a first step. The real key is acting on the knowledge. Danny Karpin runs the kind of family business you almost never sell. A quarter century ago, his father started Metalco Steel & Supply, a Torrance, Calif., distributor that breaks up hot-rolled carbon steel from mills and then resells it in smaller batches. After his dad died 19 years ago, his mother, Shoshana, took over the company and continued to nurture it. When Karpin, now 34, graduated from college 12 years ago, he immediately joined the six-employee firm, which has more than $5 million in revenue.
Despite having no specific plans to change the business, Karpin ponied up almost $10,000 in 2001 to hire USBX to perform a soup-to-nuts valuation. "This business has been around 25 years, and grown for the last 10 straight and we felt that we may have exhausted everything we knew how to do to grow," he says.
Karpin says he wasn't disappointed when USBX assessed his company with a figure in the lower range of what he'd hoped. Instead, he viewed it as a reality check. His valuation came in low because his business was strictly a wholesaler, selling standard-length steel section. Companies that provided value-added ser-vices in his sector, such as cutting to size or shearing, were priced less like a commodity provider and more like a retailer with a premium. "We've added some services, and I feel that helped us in a slow economy," he says.
While there are plenty of appraisal-for-hire types who, for legal purposes, will justify whatever number you ask them to come up with, the talented business valuator acts like a business consultant, stripping down your business to figure out its value, and leaving a blueprint for making it higher next time.
There are two senior certifications for which you should look when hiring an appraiser, although not every qualified firm will have them. The ASA (American Society of Appraisers) gives out an ASA (Accredited Senior Appraiser), which requires courses, exams, five years of experience, and peer review of reports. The IBA (Institute of Business Appraisers) certifies its CBA (Certified Business Appraiser) in much the same way. Those looking to really confuse themselves can ask about an ABV (Accredited in Business Valuation) designation from the AICPA (American Institute of Certified Public Accountants), or the lightly regarded CVA (Certified Valuation Analyst) issued by the NACVA (National Association of Certified Valuation Analysts). Strong recommendations from an expert's savvy, satisfied customers is better than any certificate, though.
Appraisal costs vary, of course, but here are some ballpark figures. A bare-bones, quick-and-dirty might run $4,000. For a full-blown report, running at least 30 pages and involving several days kicking your tires, the bill could come in at $10,000. Never pay based on a percentage of your company's value. "The bottom line," says David Newton, a top California appraiser, "is that there's no additional work between a well-organized $10 million company and a $3 million company." There is less work, however, with reappraisals. Demand a discount if the valuation is more update than original investigation.
Each business has its own blueprint for success, but one key to a high valuation is minimizing risk. To an outside buyer, more risk carries expectations of a higher return -- and thus a lower price. With this criteria in mind, a survey of business appraisers shows that many rules of thumb prove fairly universal in enhancing value. And that starts at the top, with the area over which you have the most control: management. If you're looking for long-term value, owner compensation must be in line with industry peers. If it's out of whack, it both suppresses earnings and raises red flags. A deep management team is also vital, since a business that relies too heavily on one person won't be as valuable.
When evaluating an earnings stream, diversity is critical. Just as having only one key executive creates risk that could suppress value, the same is true of having only one or two key customers. This diversity carries over to product lines and services -- as Metalco's Karpin learned, a broad offering generally makes a business less vulnerable to business cycles.
But don't add customers just for the sake of padding the client list and the sales figures -- as numerous models demonstrate, cash flow is king. Businesses that command a premium maximize profits over sales. "I've seen losing divisions weigh down the value to the buyer," says Mary Ellen Ludeking, an appraiser in Florida. As new customers materialize, formal -- and transferable -- contracts create direct value for potential buyers. Just as with customer diversity, vendor diversity proves important: Overreliance on a single vendor ups the risk quotient and thus impairs value.
Finally, concentrate on the underlying aspects of value, rather than the valuation number itself. Which brings us back to our friend Jerry J. Moore. This was a man obsessed with his net worth, or at least what I considered it to be. He and his accoun-tant spent two hours with me the day after our Luke's Hamburgers meeting, poring over his holdings. He then began calling me every week or two, full of spin. To Moore, the number was an end in itself -- something that would establish his business worth for the world (my figure came in around $500 million). But Moore missed the fundamental lesson of using net worth as a tool: the actual number is less important than employing it to improve the business. At the very time Moore was courting me, it turns out, he was also searching for an exit strategy. He engaged an investment bank to try to take him public as a REIT, but the market dried up. The next year, he tried the REIT route again, but once again there were no takers. Morgan Stanley, however, had a real estate arm, and wound up buying a controlling interest in Moore's properties for a figure that was made public at $400 million, but that one source told The Wall Street Journal was closer to $100 million once assumed debt was factored in. Last year, he put his chateau up for sale, complete with the 26-car underground air-conditioned garage. Price tag: $18 million. No tears for Moore, of course, but I've often thought about how much time he spent wooing me, and how if he'd spent that time tending to his business, he might have a few extra Duesenbergs in his collection.
