Why Operate Without a Report Card: Get an Estimate of Value of Your Company
by Larry Grimes, Chairman & Adviser, Grimes, McGovern & Associates
Imagine your children going to school through high school, without ever receiving a report card. As a parent, how would you know when they needed additional help, if they were ready for new challenges, or what they needed to prep for college or alternative training?
Without a report card, it would be hard to make proper decisions. Your kids would go to school and put in all that time every day, and you’d have no idea if they were doing D or A-level work.
Unfortunately, this is exactly how many business owners run their companies. So many newspaper owners go into business with the end goal to build the company, earn a good income, and then sell it to fund their retirement and then some. They basically wait to get a grade until that final sale. That is one slippery slope to try to climb.
It makes no sense to rely purely on gut feelings about your company’s value. Where, getting regular estimates of the value of your Company, through an informal valuation from an M&A advisor, makes so much sense.
Let’s compare this to selling a home. You go out, you get an opinion from a trusted real estate agent who knows your market, has researched comparable transactions in similar markets, and understands the nuances that will make a difference in your home’s price and salability. Creating an estimated value of opinion for your business is a little more complex, because of the varying variables that go into that valuation, but it’s a similar idea.
We recommend business owners get a valuation every two to three years, for as long as they’re in business. It’s a perfect way to understand if you’re on track to meet your goals.
Now there are several other reasons to get a valuation beyond benchmarking:
A great way to maximize value: Is your business is ready to meet your financial goals. If you know where you stand and work with a specialist every couple of years, you’ll be better able to focus on the value indicators that matter most to potential buyers.
Protect your family’s interests: A formal valuation provides the necessary information to keep your life insurance, succession plan or buy-sell agreements updated with a current business value.
Buying a business: If you’re looking at acquiring another paper, a valuation of that business by an independent, third-party can make a huge difference. Every engagement that W.B. Grimes takes on is thoroughly analyzed and processes reviewed by the Associate and Grimes management. Yet, so many buyers either rely on their own experience or seek assistance from accountants or attorneys with no newspaper experience.
Monitoring the market: Even if your sales and profit numbers remain static, it’s safe to say your value won’t be the same three years from now as it is today. The market gyrates, and you can’t plan properly without knowing where you stand.
Preparing for the worst: Death of a partner or fellow owner, a contentious divorce — these are possibilities most business owners would rather not think about. Yet, it’s so important to have valuation knowledge up front, rather than needing to scramble all of a sudden to get an idea of value”. A valuation can also ensure your family is protected should you pass away. For example, if the value of your business increases significantly, you may need to increase the payout on key person life insurance policies. We receive several calls every year from family members, who have unexpectedly been asked to run the newspaper business, without warning or advanced preparation. Now they want us to sell it. A big mess that would have been prevented with a little advanced planning.
Laying the groundwork for retirement. Engaging a valuation expert at least a few years before you plan to exit the business you own makes great sense. A full valuation is crucial to help you better understand your options. “This scenario is becoming more common as more folks hit retirement age. For example, the publisher planning to sell or transfer his shares to other family or equity owners of his business. They need to start thinking about how they’re going to pay him out and start to negotiate what that purchase will look like.
Planning for hard times. It’s so important for business owners to understand how shifts in the market might impact their company. Just look at the effect digital technologies have had on newspaper publishing. An owner may be hesitant to want to know their value right now — but it’s important for them to know. So they can map out a strategy to handle the leaner times while allocating the proper resources to secure growth in new areas. Alternatively, a down market may be a good time to gift equity so as to minimize gift taxes.
Revealing weaknesses. Identifying weaknesses in your Company is important whether or not a sale is on the horizon. A thorough valuation should be looking at a company’s performance and assessing risk. It should help a management team look at all the factors that are driving value and develop a plan to address any weak links. Issues like personnel evaluation, outdated equipment and systems, advertiser concentration, A/P and A/R management, working capital position will be red flags for buyers. Truth is, they will also impede growth in general. A valuation can reveal things that may become a problem ahead of time.
Moving beyond the Noise. We hear all the time, “this Company got this X multiple, so why can’t we?’” Or, “these deals were at X valuation, so that must be where the market is today”. Every company is different. Markets also vary widely. A valuation expert can look at the intricacies of a company’s financial health and history to figure out a realistic multiple to shoot for. The appraiser will be backed by comparable transaction data beyond purely the P&L statements and will be able to provide a true “apples to apples” comparison. For business owners casually contemplating an exit, getting a valuation well ahead of time will help you plan and build out your case.
Grimes, McGovern & Associates, formerly W.B. Grimes & Company is one of the nation’s oldest and most respected media brokerage firms. We’ve sold more than 1,500 media properties since 1959 and appraised thousands of others. The Company maintains regional offices nationwide. Larry Grimes, Chairman & Adviser, can be reached at (301) 253-5016; email@example.com.
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