Archive for March, 2010

BV Blogroll

March 23rd, 2010 by Brian Alwine | Tags: , | Posted in Blogging, Recommended Reading |

Thanks to BVWire News for the link on their sidebar! Reminded me of something I’ve been meaning to do for a while – highlight some of the other business valuation bloggers out there. Here are a few of the business valuation blogs I read regularly:

I’m sure there are plenty I’ve missed. What BV blogs do you follow?

Succession Planning: A Small Business Crisis?

March 17th, 2010 by Brian Alwine | Tags: | Posted in Estate Planning |

j0443079A friend just passed on a good article about succession planning in the current issue of MyBusiness magazine.

A sidebar in the print edition notes five key questions to consider long before you’re ready to retire.

  1. Are you trying to raise as much money as you can for your own retirement?
  2. Can you imagine life without thinking about the business?
  3. Are your heirs interested?
  4. Do you want to maximize the wealth you leave for your family?
  5. Is the value of your business increasing or decreasing?

A business owner’s answers to these questions are critical to finding the right succession or exit strategy for them.

Most owners underestimate the time required to carry out a viable exit plan. Sure, some “win the lottery” through a quick strategic sale for top dollar, but those cases are rare. The article notes that crafting a viable exit plan can take as long as seven or eight years.

I’m reminded of the poll conducted last year by George S. May International. The poll found that 58% of business owners have not recently valued their business and do not plan to do so in the future, while 42% of the respondents plan to sell their business within 10 years.

Peter Drucker said, “What gets measured gets managed.” If that’s true, 58% of business owners aren’t managing what is presumably their largest asset. That has significant implications not just for their net worth, but also for their heirs and their communities.

Doctoral Candidate

March 12th, 2010 by Brian Alwine | Tags: | Posted in Current Events |

Congrats to our very own Josh Sauerwein on his acceptance to the doctor of business administration (DBA) program at Anderson University!

Debt, a Powerful Force

March 8th, 2010 by Brian Alwine | Tags: , | Posted in How to Boost the Value of Your Business |

This post is part of a series, “How to Boost the Value of Your Business.”

With apologies to Homer SimpsonTo debt: the cause of — and solution to — all of your business problems.

This post has several parts:

  1. Pros and cons of using debt financing in your business
  2. How to evaluate if your business has high financial risk
  3. Action steps to boost your business value by reducing your cost of debt

Business Debt Pros

The upsides of using financial leverage in business are clear.

  • It’s not your money
  • Fund expansion or acquisitions
  • Even out cash flow for seasonal businesses
  • Lower cost of capital than equity
  • Amplifies success

Business Debt Cons

The downsides of financial leverage are also clear, or should be after everything we’ve seen the past couple of years.

  • You no longer control 100% of your business
  • Interest rates can be raised, lines of credit dropped, covenants changed, etc.
  • Often used to mask operational problems
  • Reduces net cash flow and/or eventual sales proceeds to the owner
  • Amplifies failure

How Leveraged Are You?

One of the most common ways to measure leverage is the debt to equity ratio. However, in recent years many tools that are more sophisticated have been developed. One of the most popular of the recent tools is the Altman Z-Score, a formula for predicting bankruptcy.

You might be surprised at what it takes to qualify as high-risk. According to the latest Duff & Phelps Risk Premium Report, nearly 25% of public companies fall into their “high financial risk” category. This includes:

  • Companies in bankruptcy or liquidation
  • Companies with negative 5-year average earnings
  • Companies with negative book value
  • Companies with debt-to-total capital of more than 80%

The average debt to market value of invested capital (MVIC is debt financing plus equity value) ratio for this high-risk group ranged from 25% to 60%. For companies in the “gray” or “distressed” zone (measured by Z-Score), average debt to MVIC was roughly 50% or more.

Does high financial leverage really make a difference? High financial risk companies pay a higher rate on debt financing. Importantly, high financial risk companies have a higher cost of equity capital (e.g. opportunity cost to the owners) in addition to higher direct financing costs.

Action Steps

Don’t be afraid to talk with your banker. Most bankers I know wish they were able to have candid conversations with their customers and work with them to improve their business. If you’re afraid of your banker, you might need a new financing partner or you have something to hide.

Ask your lender what it will take to eliminate personal guarantees, simplify or eliminate restrictive covenants, reduce your interest rate by 1/4 point, 1/2 point, etc. Develop a plan to meet the targets and demonstrate your ability to manage your business.

Too many business owners run from fire to fire rather than stopping to take an objective look at their operations. Doing so will improve your borrowing relationship, lower your borrowing costs, and ultimately increase the transferable value of your business.

Value Pricing Adjustments

March 2nd, 2010 by Brian Alwine | Tags: , , , | Posted in Value Pricing |

Inspired by the folks at Valorem Law, we recently sent out a bill with a value adjustment line. Since the project was a consulting engagement, not an independent appraisal, we let our client have the final say in whether or not we added value.

I’ve been wondering if something like this could be structured appropriately on an appraisal assignment, since contingent fees are prohibited under professional standards.

What do you think… Does a value adjustment line represent a contingent fee or look too much like one? What if it were limited to non-appraisal result factors such as time to complete, communication metrics, etc.?