It is possible that if you spend a huge amount of time on valuing a business, especially if you are willing to spend a lot of time studying the latest deals in your industry, you could do a better job valuing a target company than a professional business appraiser could.
But, chances are, a business appraiser is going to do a much better job than you. Furthermore, business appraisers are a detached, rational, third party—they aren’t getting emotional around how buying this business may be a life-changing event for you. This alone is a powerful argument for hiring a business appraiser and paying a lot of attention to his or her valuations.
Russell Robb, in his book that I published, Buying Your Own Business, strongly advises people to use a business appraiser. Robb says that he has seen numerous buyers spend a large portion of their personal net worth to buy a company without receiving expert opinion from professionals in the mergers and acquisitions 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 defensible 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 Robb’s closest and oldest friends. He had come from a broken home and was unable to afford to continue at Andover Academy. He finished his last two years of high school in Texas, and was able to earn a scholarship to Yale. After graduating from Yale, he had a 30-year successful career at IBM. Upon reaching age 55, he sought to fulfill a lifelong dream of owning his own 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 two years later, he went under. The experience was almost life shattering.
Many years later, the friend stopped by Robb’s office seeking advice on a new business. Robb 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:
- 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.)
- 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.)
- Make sure you have highly competent people in the business.
- 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 himself, Robb says.
Me, Bob Adams? I don’t follow that advice—I charge into businesses that I have no experience in all the time, but I am also acutely aware of the high risks I am taking.
