A Basic Guide for VALUING a Company phần 10 docx

Estimating fair market value of businesses assumes that the only exter-nal influence is one of supply and demand economics, which is tradition-ally rooted in a concept of scarcity.. Thu

through search engines (e.g., Alta Vista, Excite, HotBot, InfoSeek, andLycos) Unfortunately, it’s not just as simple as connecting up with anydirectory or search engine The web host-selection problem is not reallydifferent from radio stations and the music played to listening audiences.Individual stations take great effort to appeal largely to a specific listeninggroup (country and western, blues, jazz, rock, etc.) Online directory andsearch engine hosts seek to minimize competition by appealing to definedsegments of the market; therefore, situating the new website cannot beleft to random positioning.

How consumers learn about a site or are directed to a site should bedetailed through formidable architecture that shows alternative planningfor the failure of original actions to target consumers effectively

Who Is the Customer?

There is only one purpose for starting a business: to create customers! Arecustomers male, female, or taken from both sexes? Do customers comefrom the Mature, Baby Boomer, Gen-X, or Gen-Y demographic? Whatprimary territory might draw the most customers? What features or bene-fits do customers expect in the product or service? Will they be repeatingcustomers, and if so, how often will they buy? What buying motivationswould cause them to buy from me (online)? Is there something I can do

to my product or service or website that would stimulate increased buying(e.g., color and psychographic components of design or packaging)? Willthis batch of customers be profitable? Dot-commers did far too muchguesswork constructing customer profiles They also expected too muchdraw from the techno curiosity factor, expecting customers to come shop

at a website just for the technology reason alone Inadequate thought wasgiven to how the customer definition changes in the no-see-um environ-ment of online marketing

As the old saying goes, ‘‘Garbage in, garbage out.’’ Reasonably dictable sales and expense forecasts have always hinged on some basicpremise of truth This should not have been news! This is elementarystatistics—high school stuff—yet, they (and we) missed it! Vis-a-vis, a lack

pre-of talent issue Building a business plan is first the test pre-of a hypothesis for its

containment of customer reality And second, if passing on its fundamental

principle, it is a projection outward from one source of truth Sadly, withtoo much hope and idle prayer for an idea, the first step is too often

skimmed over entirely Only when the profile of the most ideal (and most

likely) customer has been well framed can primary, secondary, and tertiarycustomer profiles be adequately developed Sales forecast may then be ex-

270 ‘‘Dot-Com’’—Information Technology

trapolated—one customer at a time—from each of these ranks But thesedata remain characteristically unreliable until passing safely beyond bom-bardments from the realities found in market demographics, real-worldcompetitions, factors of (or inhibiting) supply and demand, conditions ofprevailing and future economies of scale, issues of production and/ordistribution, and, undeniably, the reasonable availability of proper talent

to execute plans for accomplishment

Who Is the Competition?

There is only one proper and safe assumption to hold sacred about thecompetition: Great ideas attract vultures! Someone else will develop thebetter mousetrap the day after any new product goes into production Acompetitor’s ease of market entry is the cancer to launching and holding

on to ideas The only surefire defense lies in knowing more about themthan they know about you Once all is launched, the brass ring for success

eventually goes to the one maintaining the most unfair advantage over

all the other competition There is no end to anxieties drafted from thecompetition unless one knows their strengths and weaknesses It is careless

to attack the greater strength Niche market holders sift through petitor weaknesses to match against strengths in themselves for seizingupon the unfair market advantage

com-What Makes the Customer Buy from One Business over Any Other?

Customer loyalty is a figment of the imagination for anyone who thinkssuch an animal exists Customers are only loyal to the vision they seethrough their own eyes Roadblocks to the mounting of sales come down

to three generic essentials: price, quality, and service being offered Rarely,

if ever, will any business possess all three to advantage The price advantage(mass merchandising, for example) usually gives up quality or service orboth, the service advantage might give up price and possibly quality, andthe quality advantage most likely gives up price and might give up service.These distinctions identify how consumers view dealing with any businessthrough their eyes Planned architecture that fails to realize how the con-sumer personally views the total shopping experience at a new enterprisealso reveals the initiate’s lack of thought about going into business

Time, space, and matter do still apply at the point of purchase Early in

the dot-com buildup, founders learned that deeper discounts than

antic-ipated were needed to jump-start consumer buying They also graduallylearned that discounted selling would remain the high need in the con-sumer model Giving then reneging doesn’t work Thus, they should alsohave known that the most initial competition would come from the mass-merchandiser, the deep-pocket specialist in discounted merchandise It’sdoubtful that a gnat on the back is worrisome to any elephant Wal-Mart,for example, is the leader in wholesale leveraged buying They can afford

to discount and still maintain profitable margins The dot-commer canneither buy nor sell on such competitive margins and stay whole Attack-ing service or quality or both might have led to better choices

Summary

Time is the precious commodity that creates wealth Time to make, to

package, to deliver, to retool, and to repeat the processes over and overagain pits every business owner against everyone else in the game Themore efficient they become with their time, the more they hold an ad-vantage over everyone else Milt Friedman said that inflation is too muchmoney chasing too few goods During past eras, inflation of this sort wasmore in evidence because of the time limitations on production Today,information technology equals saving time, cutting costs, increasing prof-its, and decreasing error and waste

Every corner of the globe is now the shopping haven for even the traveled among us Click a mouse today and you are anywhere in the worldyou want to be Computers are becoming as commonplace in the house-hold as knives and forks In a decade, nearly everyone will be using themmore than the phone In two decades, few people will remember when

least-we didn’t have them Space, once the constraint of doing nearly

every-thing, will only advocate definition for traveling outside our universe

Teleporting matter becomes real Products and services extended by a

thread, through data bytes, will weave the new shopping interface into

common habit When we do go out to shop, it will be for the antique

experience Behemoth real-estate structures will not be needed to housethe increasing thousands working from their homes I know this last par-

agraph may sound a bit ridiculous, but the framework is already in place,

and for even more unthinkable events to happen to life and the shoppingexperience

If any great change occurs in the equation for how we value companies,

it will lie in how we view present and future usages of time, space, and

Thus, on a Minor Note

Stock market activity has been a barometer on how well we have come toaccept change Values have risen from P/E ratios of 15 to as high as 40

in terms of safety margins investors will accept What investors acceptconditions what valuation tacticians do

Louis Rukeyser’s March 2001 ‘‘hype and buy-me newsletter’’ carriedthe headlining question, ‘‘Are Technology Stocks Dead?’’ I loved his re-sponse: ‘‘My Answer is ‘BULL!’ ’’ He went on, ‘‘Anyone who hasn’tnoticed that Wall Street has a perennial penchant for panic clearly hasn’tbeen paying attention Tighten the screws for a few hours, and fear beatsgreed by a landslide.’’ A new crop of better developed, better funded, andbetter managed online technology businesses will come out of the embers.However, I disagree with Mr Rukeyser’s thoughts about fear beating outgreed (for too long), because the market-watchers and players were stillplunking down cash in the NASDAQ as recently as just a few days ago

On March 12, 2001, fear hit again; it can’t help but return But greedonly sleeps for a while It, too, returns

Case of Shot Myself in the Foot

In 1963 I came up with what ended in a bird-brained debacle—a ant Under Glass’’ restaurant/franchise concept Chicken franchises werehot; pheasant, considered the meal of kings—this idea would certainlytake a new business up and out of sight I had even enlisted a top radioannouncer to be partner and to lend the use of his name We becameexcited: collected and analyzed tons of chicken data, had special under-glass-like containers designed, commissioned architectural renderings forbuildings, designed a flexible distribution system, set standards for book-keeping—the whole nine yards! But the most important yard missing wasthe first yard Production! How does one commercially grow a supply of

‘‘Pheas-pheasant sufficient to feed an army that might not stop growing? The U.S.Department of Agriculture pointed us to the nation’s largest grower Formany years, he’d been in the business of supplying the U.S Fish and Gamepeople with ready-for-release birds to seed in places where populations ofpheasant were dying out Try as he may, and for over 10 years, he couldnever get his adult-bird production beyond 250,000 per year We learnedthat pheasant is an incredibly complex and high-risk bird to raise We alsolearned that 250,000 birds would be unlikely to supply more than 2.3facilities in less than one year from opening Breakeven on initial devel-opment costs could not occur until the sixth facility was up and running.

$175,000 and much wasted time now foolishly out the window, I hadspent less than $500 on phone calls and travel to learn from a professionalgrower that my original hypothesis was broken I started out looking foranswers in all the wrong places

Appendix A Valuation of a Marina

Author’s Responses

Until a business actually sells, there are no right or wrong answers as to its

value; there are only estimates as to what buyers and sellers might plish through arm’s-length negotiations For all practical purposes, arm’s

accom-length simply means that a buyer and a seller are ‘‘free’’ to accept or rejectany and all proposals made by each other For example, in cases of divorce,death of owners, or impending bankruptcies, sellers may not have much

choice and thus may not be as freewheeling in their negotiations as they

might otherwise be without the influence of these external pressures

Estimating fair market value of businesses assumes that the only

exter-nal influence is one of supply and demand economics, which is

tradition-ally rooted in a concept of scarcity Asset values, cash flows, financingconditions, and freedom of choice for both parties set that stage However,Alchemic* economics (belief that today’s markets are no longer driven by

scarcity but rather by a concept of creating abundance) offers that dicting most-likely selling prices may or may not entirely fit conditions

pre-based on scarcity The issue of estimating fair market value has traditionally

been scientific in nature, and the process has frequently been completed

by an individual whose primary strengths lie in finance or accounting Inthat respect, and at least on the small-company valuation scene, knowl-

edge about the motivations (emotional makeup) of a sole decision maker

in the closely held enterprise can be missing Unless the value processoralso possesses intimate marketplace awareness, these estimates for fair mar-ket value can quickly become ruled by the numbers game As a rather too

*Alchemy—A medieval chemical science and speculative philosophy aiming to achieve the transmutation of the base metals into gold, the discovery of a universal cure for disease, and the discovery of a means of indefinitely prolonging life In effect, a power

or process of transforming something common into something special C.G Jung, in

his 1944 book Psychology and Alchemy, offered that the aim for gold was the human

wholeness of individualism (a process rather than a goal).

common practice, the prediction of most-likely prices under which nesses might elicit transfers of ownership is derived from the spectrum and

busi-wide use of ‘‘comparable’’ sales techniques It is indeed hard to compare

the educations, experiences, skills, and driving forces of individuals whopresume to operate these so-called comparable businesses Thus, smallbusinesses can possess both fair market values forecast through the num-bers game and most-likely values, which are largely an emotional gameplayed out by buyers and sellers themselves (and measured best by themarketing representatives who sell these small businesses) If Alchemiceconomics plays any role in small-business purchase, and I strongly suspectthat it does, then buyers might frequently enter negotiations with addi-

tional unmeasurable criteria that is not based in any past occurrence of

comparability Mix this well, as in our case example, with the ambiance of

a body of navigable water, then even the skills of a rocket scientist may beunable to predict where the projectile of ‘‘price’’ will land

Our Case

The owner of this marina has scraped out a living during the past 11 years

of ownership He has improved the business considerably during his ure, but cash has always been in short supply From a business standpoint,

ten-he is under no duress to sell; however, ten-he has an opportunity to manage

an oceanfront complex at a very good salary I purposely left this vital detail

out so that readers would view the practice exercise through an length window (which, incidentally, is the more traditional viewpoint as-sumed by a majority of players) The dilemma (emotional) faced by ourseller could be assessed as follows:

arm’s-1. Eleven years of ownership without much to show for it in the way

my sale as possible so that I can go on to the job with a sense of pride.’’

276 Appendix A

The beginning balance sheet 11 years ago reveals approximately what he

paid for the business originally With the exception of inventory($148,790 at the time of his purchase), 1999 discloses the rest

Approximate Price Originally Paid $600,000

Why is this important to know? Psychologically (by reason of

self-esteem), few sellers will part with their businesses below this number,

unless ‘‘forced’’ to do so by external influences beyond their control.

Compelling though it may seem, accepting or rejecting the ‘‘job’’ is,

nevertheless, within the seller’s control This sets the stage for estimating

a most-likely selling price Will the fair market estimate accommodate at

least $600,000, and, if not, what ‘‘sale features’’ can be included to arrestpotential feelings of low self-esteem and still encourage sale?

Our first task is to review what is being held out for sale with thebusiness:

Appraised Value of Assets Held Out For Sale

*$72,261 of the products are in ‘‘floor-plan’’ inventory at 2% per month carrying cost For a

properly qualified buyer, these may be assumed and thus do not require additional financing.

However, bear in mind that a lender would add these costs to other debt-service payments as they consider the extent of other capital they might loan.

Based on the footnote above, total assets held out for sale could, sequently, be reduced to $539,302 Floor-plan interest is already included

sub-in operatsub-ing expenses

At this stage, we must determine whether cash flows will support the

purchase of assets ($539,302) plus the difference to $600,000 ($60,698)

of goodwill or even more in value The balance sheets and incomestatements are repeated here for your convenience

Practice Session—Marina Balance Sheets

278 Appendix A

Practice Session—Marina Reconstructed Income Statements for Valuation

This ratio measures the percentage of sales dollars left after goods aresold Although gross margins have improved, they remain below the in-dustry median A number of potentially adverse conditions could be pull-

ing these margins down in our target company It may be in product

‘‘mix,’’ due to poor buying decisions, low ‘‘quantity’’ buying, low yield services offered, and so on A prospective buyer might be advised tolook into what effect unavailable cash has had on gross margins

profit-The current ratio provides a rough indication of a company’s ability toservice its obligations due within one year Progressively higher ratios signifyincreasing ability to service short-term obligations Bear in mind that liquidity

in a specific business is a critical element of asset composition Thus the acidtest ratio that follows is perhaps a better indicator of liquidity overall

Total Current Assets

Total Current Liabilities

Industry Median

Cash and Equivalents Ⳮ Receivables

Total Current Liabilities

Industry Median

A ratio of less than 1.0 can suggest a struggle to stay current withobligations The median suggests that the industry as a whole may wrestlewith liquidity problems by the nature of doing business and, even the top25% of reported companies reflect only a ratio of 5 This comprises ourthird index signaling a ‘‘downside’’ nature

(Income Statement) Sales

Sales/Receivable Ratio ⳱ or

Receivables (Balance Sheet)

Industry Median

280 Appendix A

This is an important ratio and measures the number of times that ceivables turn over during the year While erratic in nature and aboutaverage in sense of the industry median, we cannot put much weight onthis ratio, since receivables tend to be so small

This highlights the average time in terms of days that receivables areoutstanding Generally, the longer that receivables are outstanding, thegreater the chance that they may not be collectible Slow-turnover ac-counts merit individual examination for conditions of cause Turnover inour target seems acceptable by industry standards

Generally, the higher their turnover rate, the shorter the time betweenpurchase and payment Lower turnover suggests that companies may fre-quently pay bills from daily in-house cash receipts due to slower receivablecollections This practice may be somewhat misguided in light of invest-ment principles whereby one normally attempts to match collections rela-tively close to payments so that more business income can be directed intothe pockets of owners Some businesses may, however, have little choice.Our target company is exceptionally attentive in paying bills This raises aquestion of floor-plan management For example, is there a good balance

of cash being used to pay floor-plan interest, versus a better use towardpurchased inventory? How might this play out in terms of increasing grossmargins?

Sales

Sales/Working Capital Ratio ⳱ or

Working Capital*

1999 2000 2001

Industry Median

*Working capital equals current assets less current liabilities.

A low ratio may indicate an inefficient use of working capital, whereas

a very high ratio often signals a vulnerable position for creditors This

minus industry median indicates that working capital is quite regularly

scarce or that inefficient uses of working capital prevail throughout thisindustry The results of this ratio indicate positive signs Though workingcapital increased in each of these years ($77,628 to $82,956 to $108,789),the ratio dropped off in 2001 because of the lowest sales performanceduring the three-year period Ratios, by themselves, may not always tellthe whole story

To analyze how well inventory is being managed, the cost of sales toinventory ratio can identify important potential shortsightedness

A higher inventory turnover can signify a more liquid position and/orbetter skills at marketing, whereas a lower turnover of inventory may in-dicate shortages of merchandise for sale, overstocking, or obsolescence.These lower turnovers of inventory leave me skeptical about conditions

in this asset My first inclination would be to look, item by item, to termine what, if any, products could be changed from stock to ‘‘custom’’order, or dropped entirely $140,124 ($212,385ⳮ $72,261 in floor plan)

de-is a great deal of money to be turning over at less than twice per year

The Valuation Exercise

Book Value Method

Total Assets at Year-End 2001 $ 616,485

Book Value at Year-End 2001 $ 260,322