BusinessTN

In the struggle to make a small business succeed, it's easy to lose sight of the big picture. And while most small business owners agree the business is an important asset, it's likely they may not know exactly what it's worth. Whether selling one's business is a consideration now or in the future, it's crucial one take the time to understand the ins and outs of valuing it.

David Wood, who heads up the valuation, litigation and acquisition division at Lattimore, Black, Morgan and Cain in Nashville, says getting an outside party to value a business can be an advantage for sellers and buyers alike. Buyers rest easier knowing that a disinterested party is tallying up the price tag, and business owners benefit from having professionals, who typically find assets the owners might have missed, calculate the earning potential of their companies. When selecting the right person for the job, make sure he or she is a professional.

"I want someone that does this full-time, not when tax season starts," Wood says.

Look for someone with credentials from one of four organizations: American Business Appraisers, American Institute of Certified Public Accountants, Institute of Business Appraisers and the National Association of Certified Valuation Analysts. Once you've determined that a potential appraiser has the appropriate credentials and references, Wood suggests meeting the person before the valuation process begins, as mutual trust is vital.

"The two most important things we need from clients is information and valuing what we do," Wood says.

The standard valuation costs about $10,000 and takes roughly 45 days to complete, and it can all be for naught if business owners don't share the necessary information. But what does it take to value a business?

Larry Rossini, director of the Tennessee Small Business Development Office in Knoxville, looks at three categories—and the first two are often easier to pin down than the third. First, Rossini says, determine the value of the property and equipment. Second, figure out the value of the inventory.

Finally, consider what Rossini calls "good will"—the potential earning power of the business, based on its reputation. While it may be difficult to gauge customer opinions about a particular company, Rossini's office looks at a business' tax returns to determine good will. If the records show a profit, then a potential buyer can project profit numbers for the next few months, raising the value of the business. Unfortunately, as Rossini says, "Most business owners looking to sell are showing a loss on their tax returns," which makes their good will factor worthless.

When taking these steps and others to value a business, it's also important to be objective.

"We all think our businesses are worth more than they are," says Robert Staub, founder and executive director of the Memphis Small Business Chamber.

As Staub points out, business owners often see the years of hard work they've put into their business as contributing to its value. While that may be true—especially if the business has built a name for itself, one still needs numbers to back it up. Staub compares a business to a home.

"It's a huge investment, and if you take care of it, it will increase in value," he says.

If a business looks like a fixer-upper, it won't sell easily, but if it's run well, it's likely to be successful, and, in turn, valuable. One of the best and most efficient ways to run a business is to institute carefully planned systems.

"Too many owners have their business all in their heads, with no system that an outsider can see," Staub explains.

One way to avoid this is through documenting policies and procedures, as well as transactions related to such things as HR, financing and debt. Careful record keeping not only helps a business run more smoothly—it displays that smooth operation to potential buyers, as well.

It also helps to determine how vital the owner is to the company. If most of a business' value is tied up in the reputation of an owner and spokesperson, then the company may only be as valuable as that owner, says Karl Greenway, who owns Ductz Indoor Air Professionals in Memphis.

For example, Greenway, who has bought and sold multiple small businesses, points out that while one owns a business, it may be beneficial to have his or her name synonymous with the company because that personal touch often means a lot to customers. But if customers believe that company revolves around its owner and that owner dies or leaves suddenly, the business may run into trouble. Greenway suggests that the first step to overcoming this phenomenon is a different marketing strategy.

"Many owners like to put their names alongside the company's in a commercial," he says. "But sometimes it's better to just talk about why the company is good at what it does, rather than what the owner does with the company."

That's not to say the relationships an owner develops with customers cannot be an asset in selling a business, especially if the owner stays on for an adjustment period. It means a lot to buyers and employees to have the old boss around making sure everything runs smoothly, and for customers, this represents a sort of stamp of approval for the new management.

"It ensures that the employees are working as hard for this person as they worked for you," Staub says.

Unless you're in a hurry to get out of the business, staying on as a consultant or manager for a few months is a great way to swing the value of your business in your favor, albeit in an incalculable way.

Ultimately, it's best to think from the perspective of the buyer.

"Ignore the attachment and years of work, and think about it from the buyer's side," Rossini says. "What's really for sale?"

If you consider the company from the outside looking in, you may find problems you did not anticipate—but you may also discover heretofore unrecognized value.