Wednesday, September 3, 2008

Low Valuation Now Haunts Owner

A couple of years ago a printer with sales of $1.2 million sold 10% of his business to a loyal, long-time, hard-working employee. The cost of that 10% to the employee was based upon a valuation conducted by one of the two major printing associations.

In round numbers, the original appraisal came in at approximately $600,000 and thus the buy-in price for 10% of the action was $60,000. The owner thought at the time that the valuation was lower than he had expected but he let it slide. Now, it is time for him to sell another 10% but this time he decided to seek another opinion as to his company's value.

When we looked at the numbers, even wearing our "conservative" hat, we came up with a value of approximately $900,000 or 50% higher than the previous valuation. If anything, our valuations generally tend to be lower when compared with other appraisal methods, but this company was exceptional and is one of the most profitable, best-managed companies we have seen in a long time, and consequently we are extremely confident in our valuation.

Obviously, the owner now has a quandary on his hands. It is now time to sell another 10% of the company to his employee and his employee is expecting it, but how is it going to look when he tells the employee that his next 10% is going to cost him 50% more today than it did less than 24 months ago. By the way, the company is no more or no less profitable today than it was when it was first valued. On the one hand it is sort of like changing the rules in the middle of the game. On the other hand, being generous is one thing, but selling your company for 33% less than it is worth is a whole different situation.

The lesson to be learned here is that you should establish a clear formula or method for valuing the company both now and in the future, and both parties should fully understand and agree to this method.


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