Before the Divorce

No one that I know plans in advance getting a divorce, and yet we all know that approximately 50% of all marriages end up in a divorce. The statistics are even worse for second marriages!

From my considerable experience in both consulting and conducting business valuations, about the worst time in your life will be when you and your spouse start talking about separating and getting a divorce.

The only worse thing will be when you realize that a judge may force you to sell your business or at the very least buy-out the interests of your spouse to avoid that sale.

Suddenly, you find yourself wishing that you and your spouse had settled on some type of approach or formula very early on in your marriage.... NOT of course, one spouse or partner thinks the business is worth $1.5 million while the other person (the likely buyer) thinks or hopes it is worth 1/3rd that amount!

Every couple, every partnership needs to agree far in advance as to what methods they will use to value their business, and they need to establish at least a base-line value as a starting point.

Based upon some recent experiences as an expert witness, I can't begin to tell you the tens of thousands of $$$ that you will save yourself as a result of following this advice.

Allowances for Capital Expenditures

There is little doubt that our industry is capital intensive, requiring constant replacement and upgrades of equipment and software.

When valuing a business it is important that the business you anticipate buying (or the one you are selling), is able to afford three things:

(1) Pay you a "living salary" according to a formula outlined by Larry Hunt and myself.

(2) Be able to fund and support various capital expenditures during the 2-4 years the business is being purchased or sold. This is the specific reason why we do not include "Depreciation" or "Interest" payments as part of owner's cash flow or owner's compensation. For most small businesses, these are ordinary and very real expenses of a small business. They are not merely paper transactions that can be dismissed with accounting tricks and terms.

(3) All the while, the business must also be able to consistently generate enough excess earnings to pay the seller his asking price. Yes, that's quite a task, and that's why most businesses are worth very little and while many more simply close their doors.

To quote one source, "You must deduct appropriate amounts from the "owner's benefits" number in order to determine both the true value of the business as well as its ability to fund future expenditures."

Owner Mistakenly Forgets Wife's Salary (Part 1)

Just finished another valuation for a company. The company is doing about $550,000 and after my initial review of financials, equipment lists, and answers to various questions my initial value was approximately $355,000.

All things considered, that turned out to be a pretty decent or healthy valuation! Apparently the buyer was prepared to pay that amount and the seller's own numbers came pretty close.

Well, everything was ready to literally save and send when I received a casual note from the owner. Almost hidden among his commentary was a brief mention of Paula, his wife, and how valuable she was to the business, etc., etc.

Guess what? This was the first time her name or her involvement in the business had been mentioned! Now this is what it did to the original valuation...

See Next Blog for Part 2 of this Story

This Business Has Great Potential

Here's some food for thought...

How many times have you said to yourself or heard someone else remark, "This business has so much potential. If the right person came along they could probably double sales in the next two years."

Sometimes the above comments are amended by, "With the infusion of a relatively small amount of additional capital along with some proactive outside sales efforts (etc., etc.) this business could really take off, boosting both profits and sales."

By themselves, these statements sounds fairly innocuous but the problem is most of the individuals making those comments are owners wishing to sell, or a broker with a business for sale! Many businesses, given a change in circumstances and some additional financing, can in fact experience a jump in sales, but those jumps in sales, along with the credit for those sales, belongs to the buyer and not the seller.

Seller's or brokers who bump up the price of the business based on the premise that "the business has so much potential" are simply taking credit where none is due!

Your business is worth only what it is producing today in terms of excess earnings, plus a modest value placed on the equipment package. The fact that it isn't producing sales or profits at a higher rate is simply the reality of the current situation, and it is the current situation that must be used in the valuation process.

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