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BUYING A SMALL BUSINESS

The Number Cruncher Versus the Vision Guy

We asked two appraisers to put a price tag on three different companies. You'll be surprised at just how different their numbers turned out, and how subjective a business valuation can be.
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How much is your business worth? It seems like a simple enough question to answer. Not off the top of your head, of course. But it ought not rank up there with life's great imponderables. After all, there are armies of experts--CPAs, ASAs (accredited senior appraisers), AVAs (accredited valuation analysts)--whose job it is to boil your capital assets, your contracts, your intellectual property, and everything else down to a simple bottom line. These valuation experts go through years of financial records. They interview you, and sometimes your staff, investors, and customers. Finally, they give you a report--which, inevitably, you will quickly flip through to find The Number.

Ahh, the number. To an entrepreneur, there are few things more important. While your business may be worth more to you than mere money, a sentiment-free assessment of its value is a requirement for any major business decision. Indeed, the number you get from a professional appraiser can be a key asset. If you're meeting with angel investors, walking in with a high valuation, and the analysis to back it up, can impress. If you're being sued, that same high figure will likely bring glee to the opposing attorney. If you're cashing out, you have one chance to set your price. Understanding how professional valuators work can help you find a valuator who best understands your company.

Of course, the other nice thing about the number is that it has hard edges, the solid, satisfying feel of science, something to hold on to in an uncertain world.

But is it really science? The problem in valuing a business is that an entrepreneurial company's key assets often are, to use a nontechnical term, squishy. That's especially the case today, in an economy that thrives on creativity and intellectual capital. How do you put a price tag on patents, trademarks, brands? What about the quality of your staff, the loyalty of your customers, the ideas in your business plan--your very skills as an entrepreneur? It is, as some appraisers would have it, the art part of the art and science of valuing a business.

Where does the science end and the art begin? If you hire a competent professional, how different will his number be from one produced by a similarly competent competitor across town? Or, for that matter, how will it compare to your own gut sense of your company's value? These are questions that pretty much everyone who has undergone a business appraisal--especially everyone who's been dissatisfied with the result--has asked.

Answering these questions is not easy. To do so, you'd need to hire a couple of appraisers, and see how their conclusions compared. If the numbers diverged, you'd try to understand why. Do they see things about your company that you don't? Unanticipated risks? Undiscovered assets?

Inc. decided to undertake this very process. We selected two respected valuators, with two very different approaches to appraising a business, and set them loose on three different firms. They have vastly different sensibilities, but they took roughly the same steps: They interviewed the entrepreneurs and researched each company's industry--tapping databases, surveys, Web searches, and so on. And they pored over each company's financial statements.

Here's what happened:

Valuation: Infinite Conferencing

Valuation: Mistral Software

Valuation: Vivid Sky


Our Expert Valuators:

Mary O'Connor, ASA, M.B.A.

She's the director of valuation services at RGL, a forensic accounting firm and consultancy in Chicago. She's been valuing companies since 1979--her rates start at $325 an hour--and she often serves as an expert witness in court. When she appraises a business, O'Connor is most interested in numbers. Lots of them. "I need five years of financial statements, tax returns, payroll register, general ledger details, a budget for next year, an organizational chart," she says, without stopping to take a breath.

Leonard C. Green, CPA, M.B.A.

He's the CEO of the Green Group, a consultancy based in Woodbridge, N.J., and a professor at Babson College. Green is also a venture capitalist and currently has an ownership stake in 14 companies. He's been valuing companies for more than 25 years. "Most people say, 'Show me the financial statements and the tax returns," says Green, who charges about $400 an hour. "I want to see those too. But more importantly, I need to know something about the management team, what their background and experience is. So many people who value companies don't ask the right questions."

Last updated: Jan 1, 2006




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