Tuesday, June 26, 2012

Judge Praises Stewart Valuation

Just received the following from one of my former clients, and I thought you would be interested in his comments:

"I had used John Stewart's consulting services several times throughout the last 15 years, and he has been extremely helpful in helphing me manage and grow my printing company.

I went through a horrible divorce last year and hired John to do my valuation and to testify at my divorce trial. John's valuation was used by the court, despite the fact that there were two other valuations that were presented by a realtor and a business broker.

In fact, the judge said that John's testimony about the nature and value of my printing company was very compelling and that he (Stewart) was the best witness I presented for the entire trial.

This saved me almost a half million dollars in my divorce settlement as the other lawyers presented values that were twice what the business was actually worth.

The process John used for the valuation was straight forward mathematically and made common sense.

We can talk about rules of thumb and the economy but the basics of finding what your business is worth lies in the actual numbers, and John's knowledge of the printing business allows him to ask the questions necessary to get down to the real earning potential and value of a printing company.

I recommend his book on selling a printing company (www.printshopsforsale.net) as a good read to prepare you for doing a good job with him in finding the fair market value of what your company is really worth."

Tony Meyer, Owner,
Xpress Printing

Sisters, OR

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Monday, June 11, 2012

Deferred Salary to Owners

Regarding my blog on various assets and liabilities, one reader responded that, "I recently saw a small business P&L with a liability called 'deferred salary to owner.' He informed me this was an allowable accounting maneuver. By the way, his net profit was showing as 18%."

Yes, that is indeed a legitimate maneuver, for temporarily avoiding payroll taxes. So long as the company can well afford to satisfy this liability at any time in the future this is perfectly Ok.

Unfortunately, what that entry often means more often is that while the owners were entitled to this payroll, the company simply did not have enough funds in the bank to cover that withdrawal while covering the payroll to the rest of the employees. So, they simply defer that payment and thus the entry under "liabilities."

This is one of those liabilities that a buyer doesn't care about, since whether it is satisfied or not does not impact him in regards to purchasing the "hard assets" unencumbered assets of the business.

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Thursday, June 7, 2012

Interesting Balance Sheet Entries!!!

In reviewing dozens of balance sheets in preparation for an upcoming column, I couldn't help but note some really questionable entries that caught my attention. Here are just a few:
Here are some interesting entries found under ASSETS:
(1) Other Assets - Goodwill/value of existing accounts - $48,000 (Goodwill is the difference between asset value and the selling price of the business and is determined by the value placed on the business above and beyond the asset value; this entry has little significance or meaning when it comes to valuing a business.
(2) Note Receivable - New Project - $96,000 (the company loaned owner this amount and owner owes it back - Sure!)
(3) Shareholder Receivables - $118,000 - This type of entry represents an amount of money loaned to the company by the owners and hopefully supported by a formal note of some type. No buyer in his sane mind is going to incorporate this amount into his valuation of your business. If you expect to get paid back, you better do it before you attempt to sell.)
(4) Goodwill (once again)... $1.1 million less amortization of $100,000. (Boy, at first glance this makes the net worth of the company look pretty good at first glance. Remember, most sales are structured as "asset sales" and "goodwill" as shown on the balance sheet has little relevance in the valuation process.)
(5) Non-Compete Agreement - $46,000 (This is not considered a tangible asset and once again will not be considered in the valuation process - sorry!)
(6) Pre-Opening Expense - $10,500 (This is a typical entry found on many franchise balance sheets - The only way you recover anything like this is from the excess earnings and multipliers used to calculate the value of your business. Nobody really cares what you spent eight years ago to open the business, they only look at what they consider to be its value TODAY!)



Ok, here's some sample entries under LIABILITIES:
(1) Notes Payable to Tom & Cathy Smith - $93,500
(2) Notes Payable to Mr. Bill Stevens - $4,500
(3) Notes Payable to J.C. Aramson - $74,000
(4) Shareholder Loan - $291,989

All of the above entries share two things in common... (1) they represent loans made by the owners or shareholders to their company... i.e. owners were forced to loan their companies money in order to pay bills, make payrolls, etc. They are shown as liabilities because technically the company is obligated to pay these loans off, with or without interest. (2) these liabilities are rarely satisfied and remain on the books indefinitely. Once again, buyers could care less about these types of liabilities unless they are tied to assets they are buying and in that case buyers expect those types of liabilities to be taken care of prior to settlement.


(1) Line of Credit
- $123,000
(2) Line of Credit - $325,000
(3) Line of Credit - $89,000

Now these types of entries are different, because they must be paid off by the seller prior to selling the business, and yet they are not directly incorporated into valuing the business.

Well, the above has already gotten lengthier than I had planned. I will be dealing with it in more detail in my next column. At least the above will provide you with some food for thought.

Read my recent column on ratio that will shock many owners! Visit my website at: http://www.quickconsultant.com/

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"Quick Consultant" Escapes!

As usual just prior to a vacation, I find myself in the midst of trying to finish up a myriad of tasks in preparation for my "escape" (literally and figuratively) on a 14-day transatlantic cruise on the Oceania. This is called a re-positioning cruise and they occur twice a year.

It is the method that most cruise lines use to transfer or relocate their ships between the Mediterranean and the Caribbean. Many of the ships normally down in the Caribbean during our Winter are repositioned to the Mediterranean for their summer cruising season. The reverse scenario occurs once again in the fall.

Since the cruise lines have to get the ships across the Atlantic with pretty much a full crew, they figure why not invite passengers to join them as well. They offer fantastic rates, especially to travelers who are not necessarily interested in getting off the ship everyday at a new port.

Mind you, there aren't many places to stop between Miami (where we leave from) and Barcelona where disembark. Which means lots of time for reading, relaxing and yes, even hitting the gym.

After we arrive in Barcelona, we are scheduled to fly back First Class via Frankfurt, Germany using milage we have accumulated. I've flow Business Class many times, but this will be the first time ever that Mary and I have flown across the Atlantic in First Class. I assume that the privilege will provide us better food and certainly get us there a couple of hours earlier than the rest of those in back!

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