Valuations 2003: What's Your Company Worth Now?

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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.

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.

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