Using Business Appraisers

Value a Business
Using Business Appraisers

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Valuation Technique 5: Using Business Appraisers

I have seen numerous buyers spend a large portion of their personal net worth to buy a company without receiving expert opinion from professionals in the M & A field. Needless to say, some of these businesses failed largely because the buyer overpaid when going into the deal. One does not have to hire an appraiser to put together a $5,000 to $10,000 “bulletproof” document that is defen sible in court. You can hire an appraiser for $150 to $200 per hour to give you a verbal opinion. You might also want to consult on an hourly basis with specialist appraisers who concentrate in providing values of machinery and equipment, inventories, or real estate and buildings.

One of the saddest stories of a business buyer involved one of my closest and oldest friends. He had come from a broken home and had been unable to afford to continue at Andover Academy. He finished his last two years in high school in Texas but was able to earn a scholarship to Yale. After Yale, my friend had a thirty-year successful career at IBM. Upon reaching age fifty-five, he sought to fulfill his lifelong dream of owning a business. In 1988, he bought a small distributorship in Pennsylvania that sold lockers, stadium seats, and warehouse storage racks. Like many marketing- and sales-oriented people, he drew a “hockey stick” type of sales projection and had grand designs for growth. But he made the fatal mistake of paying too much for the business. With dreams of success, he mortgaged his home, pooled his life savings, and left his secure job. The rest is history. The economy collapsed, the building business tumbled, and in two years he went under. Chapter 11, Chapter 7, the end of a chapter. The experience was almost life-shattering.

Many years later my friend stopped by my office seeking my advice on his new business. I could not help but ask what lessons he had learned from his failed venture. Obviously he had thought about this question before because he did not hesitate to rattle off the following response:

1. Do not stray from the business field in which you have experience. (In his case, he had gone from a high-tech background to a low-tech business of distributing lockers, stadium seats, and storage racks. He had gone from a white-collar to a blue-collar culture, a difficult transition to make.)

2. Do not acquire a company if you will be undercapitalized at the beginning of your ownership. (In his case, he had felt that the increased revenue he could generate from doubling his sales would cover the high debt load.)

3. Be sure you have highly competent people in the business.

4. Hire a business appraiser to assist you in determining how much you should pay for the business.

There are lessons to be learned by all of us, no matter how old or experienced we are—including, of course, myself. One of my important business colleagues, Jim Tonra of McLaughlin & Tonra in Wellesley, Massachusetts, has some very sage advice for business buyers. “Don’t be afraid to consult your friends who have a sound business background in order to obtain their unbiased professional opinion on a deal you might be considering.” I am sure that the tragedy described above could have been avoided if my friend had followed Jim Tonra’s advice.

* Source Adams - Buying Your Own Business
Identifying opportunities, Analyzing true value, Negotiating the best terms... by Russell Robb

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