2008 Issue 1
Realizing The True Value Of
Your Business
Forming A Strategic Alliance
Perfecting Your Sales
Presentation
The Power Of Numbers:
Solvency Ratios
 
What's New...
Realizing The True Value Of Your Business
If you are planning to sell your business it’s clearly
an advantage to have an objective idea of what
it is worth. Even though ultimately a business
is worth what a buyer is willing to pay, it’s
easy for a seller to undervalue and lose out in
the deal or to unrealistically overvalue and
miss out on attracting buyers.
Many companies are oddly reluctant to invest in
getting an accurate valuation. Even among owners
who had tried to sell their business at one
stage, a survey reported by CFO.com found that
only 12% of them had ever had a formal valuation
done. This is surprising. Guessing the value to
put on your biggest asset is really risking your
future.
There are a number of different valuation methods and
different methods may be appropriate for
different types of business. For example, if you
run a services business there’s little point in
evaluating it based on the value of its physical
assets. Other methods consider intangibles such
as 'goodwill', which are difficult to put a
figure on but can represent a significant
element of the value of some businesses. And
value may also be in the eye of the beholder –
it will actually be worth different amounts to
different people depending on their reason for
wanting a business.
A variety of factors are taken into account in
ensuring that a valuation is accurate and
useful. Primarily, the valuation needs to be in
line with hard data, particularly your current
and past financial position. Some valuation
methods focus on financial data such as profit
levels, asset value, cash flow and debt carried
by the business. Other factors are not so clear.
The valuation might incorporate financial
projections for the next three to five years. It
might consider intangible assets, such as
intellectual property like patents and
trademarks, brand names and goodwill. You also
need to consider the context. Your own company
may be doing very well but its value will be
diminished if it is part of an industry that is
in serious difficulty or in decline overall.
There are over a dozen different valuation methods.
The crudest methods operate by rule-of-thumb or
‘multiples’. For example, landscape businesses
are estimated to be worth 1 to 1.5 times their
discretionary earnings plus the value of their
capital assets. However, multiples only give a
rough, industry wide ballpark figure for
business value. They do not necessarily give the
real value of a particular business. More
accurate methods include the ‘balance sheet’
approach, which basically subtracts business
liabilities from assets. The ‘adjusted book
value’ method is similar but uses current market
value rather than purchase price or depreciated
value.
Retail and manufacturing businesses are generally
assessed according to the value of their assets,
given that they tend to store large amounts of
value in their inventory or capital assets while
service company valuation is based on the
‘capitalization of income valuation’ method,
which places a heavy emphasis on intangible
assets. It’s also possible to calculate the
value of a private company by comparing it with
an equivalent public company and making
appropriate adjustments. Business value can also
be estimated by anticipating cash flow over a
three to five year period and adjusting that
into current dollar terms.
A current valuation can be important at times other
than sale. There are numerous business and legal
situations that require a detailed valuation,
among them: when considering a merger or
acquisition; when seeking investment capital;
when buying out a partner or implementing an
employee stock ownership plan. A properly
determined valuation inevitably enters into less
pleasant activities such as shareholder disputes
and divorce settlements. Tax minimization
planning can involve business value, for example
in developing estate and gift transfers.
A valuation can also indicate how your business
compares to its direct competitors. It can
identify the strengths and weaknesses of your
business. When a valuation identifies
weaknesses, it can help you focus on building
long term value into your business. This will
improve your outlook in terms of succession and
estate planning.
With this many potential situations requiring a
business valuation it's important to have an
up-to-date professional estimate of the real
value of your business. To get a valid and
commercially useful valuation you will need to
work closely with a professional who has
experience in the area. Your accountant already
has a good understanding of your business and
will be able to advise you on which valuation
method will be best suited to your business
circumstances.
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Forming A Strategic Alliance
Looking for a smart way to grow your small business? A
strategic alliance may be the answer. A
strategic alliance is essentially an agreement,
formal or informal, to combine efforts with
another business. The project may range from
leveraging better prices from suppliers by bulk
buying to building a product together with each
partner carrying out the part of the production
process they are best set up for.
Just who might be a good candidate for a strategic
alliance depends on what you want to achieve.
Partnering with a key customer can cement the
relationship and protect your business with
them. Partnering with a firm that already has a
well established brand offers the opportunity to
become better known by association. Even
partnering with a competitor to achieve specific
strategic goals can be beneficial. Apart from
the bulk buying type deal, it could involve
working with them to win contracts that may be
too large for you to handle by yourself.
The nature of many small businesses is they are
specialized in one area or another. That means
your skills and knowledge will be most
attractive as a strategic alliance partner to a
business whose product or service you complement
in some way. Relationships can be formed
vertically (between supplier and manufacturer or
between manufacturer and distributor) or
horizontally (between similar firms in the same
industry). They can operate at both the local
and global level – forming an alliance is one
way that SMEs can get started in overseas trade.
Whatever the nature of the alliance there are some
rules for ensuring it delivers the advantages
you want from it.
Communication should be your foremost consideration.
While it isn’t necessary that each member of a
strategic alliance have exactly the same
objectives, each should still be committed to a
common outcome. To make sure that you and your
alliance partner share similar goals it is
important to be honest from the outset. That is,
be frank about what you hope to achieve from the
alliance, and what you can provide to make sure
your partner’s needs are met.
One of the most common mistakes is a failure to
clearly lay out the details of the alliance from
the beginning. The result of this failure can be
significant - mismatched goals, insufficient
commitment, and an inability to alter the
alliance easily at a later stage. Especially
important is defining where the alliance ends
and competition begins.
When considering an alliance look for situations that
will deliver strong benefits to both members.
Only take part in an alliance when you think it
will improve your business relationship with the
other party overall, not just during the term of
the arrangement. Alliances are only worthwhile
if they represent a win/win situation for all
parties involved.
For the small business entering into an alliance with
a bigger firm there are other challenges. Try
to establish connections with several of the
company’s members. This is important because, in
a large firm, it is more likely that if one
department is dealing with you, others will be
unaware of, or at least unfamiliar with, the
alliance. It could destroy the value of the
alliance to you if your key contact suddenly
leaves or is moved to a different office.
Don’t get too locked into an alliance. The benefits
deriving from an alliance can decline over the
longer period as each organization develops
along its own strategic pathway or outside
factors alter the situation. One type of
alliance may have suited your goals at an
earlier stage of the business’ development but
have since lost relevance. Others may have
proved to be too narrow and need to be widened
to meet your continuing business needs.
Forming a strategic alliance is becoming a more and
more common tactic for expanding the reach of a
business without committing to expensive
internal expansions beyond the core business.
For small businesses a strategic alliance may
consist of no more than ‘bartering’ with
customers, suppliers, and even competitors. But
the terms can go way beyond that and open up the
possibility of allowing your business to share
expertise, assets, expenses, and risk with
another business without necessarily incurring
cash debt or trading away too much of your
equity.
To Top
Perfecting Your Sales Presentation
Invariably in preparing for a sales presentation the
question comes up - “Just how am I going to
convey to these clients that what I have to
offer will suit their needs best?” These
tips will help you create a winning pitch.
Know your prospect
It is vital that you have a solid understanding of
your (potential) client’s business. You can use
the Internet to do some background research on
their company. Start with having a look at the
company’s own website, which should give you a
good overview of the business, then follow up
any sites that look like they might provide
further insight – maybe they mention other firms
they do business with and that you will be
competing against. Then talk to the company,
preferably to the person who will be primarily
instrumental in deciding whether or not to go
with your product. Tell them that you are
calling for some information in preparation for
the meeting - you want to make the meeting as
meaningful as possible so as not to waste their
time at all. You can ask them what they expect
from the meeting and who will be attending.
Never assume that all prospects are the same and will
be sold on your product in the exact same way.
Some will be more interested in the technical
aspects, others in the selling points or cost
involved. Get to know as much about the
prospect’s likely area of interest and develop
some hot messages that tailor the presentation
to those interests.
Avoid surprises
Find out how much time you will have for your
presentation and in what sort of venue (e.g.
office or a meeting room) it will take place.
That’s so you can get an idea of what equipment
is likely to be available to run the
presentation and what you will need to supply.
If you’re preparing a PowerPoint presentation
for example, you will need a data projector.
Does the room have one or do you need to bring
one yourself?
Get the audience involved
Getting your audience involved will make your
presentation a lot more interesting to
participants. You can ask each participant for
suggestions on what they would like you to cover
and refer back to these individuals when
addressing the issues covered by their question.
If it’s feasible, hand around samples of the
product or present a hands-on demonstration to
make it real.
Focus your presentation on the prospect’s needs
Don’t waste their time or stretch their patience by
taking up time talking about you. The
presentation isn’t about you - it’s about the
prospect and their needs so the focus has to be
on the benefits your product or service has for
them. Talking too much about yourself could talk
you out of a sale.
Close by creating an opening
Your presentation must end with a call to action of
some sort. If appropriate, ask for the sale
then and there. Where the prospect is going to
need a little time before they can come to a
decision ask for an indication of how long that
might be. In this circumstance a good closing
might be to ask them for a follow-up meeting in
a week to talk about the next step or to answer
any questions that may have come up meanwhile.
Researching your prospect, getting organized and
developing a close – all essential parts of
delivering a winning presentation. But in the
time between these and the actual presentation
don’t forget to practice. A couple of dry runs
in front of someone on your team will identify
any weaknesses in the storyline, provide you
with ideas about how to get your points across
and give you time to memorize the information so
that the presentation goes off smoothly and
professionally.
To Top
The Power Of Numbers: Solvency Ratios
This second article in our series on The Power Of
Numbers deals with Solvency ratios. There are a
number of solvency ratios but they all have a
common purpose – to measure business risk,
specifically the risk attached to your ability
to pay your debts in the absence of any cash
flow. Investors are very interested in these
ratios because they indicate the amount of debt
your company can handle. By indicating the
amount of investment equity you have in your
company they tell whether it owns more than it
owes.
Debt To Equity Ratio:
the debt to equity ratio measures your net
worth. If your debt to equity ratio is growing
quickly it’s an indication that you need to
decrease your liabilities before taking on more
debt.
Formula: total debt / owner’s or stockholder’s
equity
Paying off debt or increasing the amount of earnings
retained in the business (at least until after
the balance sheet date) will improve the ratio.
You might opt to defer paying some of your
debts, cut back on inventory purchases or delay
a major fixed asset purchase.
Debt To Assets Ratio:
shows you the percentage of your assets that are
being financed by your creditors, that is,
financed through debt, as opposed to by the
business.
Formula: total debt / total assets
Generally it’s considered sensible to finance less
than 50% of your assets by debt. A higher ratio
could mean a problem meeting repayments if cash
flow slows. You can reduce this ratio by paying
off debt or by increasing the value of your
assets – could you have more value tied up in
inventory than you estimated for instance?
Coverage Of Fixed Costs Ratio:
shows how easily you can pay your fixed costs.
Coverage of fixed charges is also sometimes
called ‘times fixed charges earned’.
Formula: (net income before taxes + fixed costs)
/ fixed costs
Fixed costs are costs that remain pretty much the same
even when sales increase or decrease (such as
rent on premises). If you cannot cover your
fixed costs as they come due your business is in
serious jeopardy so the higher the number the
better. Many working capital loan agreements
specify that you must maintain this ratio at a
certain level as an assurance that you continue
to have the wherewithal to make repayments.
Interest Coverage Ratio:
represents how many times the net income
generated by your business, without considering
interest and taxes, covers the total interest
charge on it. It is also referred to as ‘number
of times interest earned’.
Formula: net income before interest and taxes /
interest expense
It is similar to the Coverage Of Fixed Costs ratio but
narrower in focus – it relates to just the
interest portion of your debt liability. It
measures by how many times your interest
obligations are covered by your earnings from
operations. The higher the ratio, the better
your ability to meet interest payments.
Debt and equity are two key elements of your financial
statement and lenders or investors often use the
relationship between them to evaluate their risk
in providing funds. In general, the lower a
company’s reliance on debt to finance its
assets, the less risky the company. By checking
these ratios you can assess your level of debt
overall and in relation to a number of specific
obligations and decide whether it is at an
appropriate level or if you are at risk and need
to address the situation.
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What's New...
Bartolomei Pucciarelli is proud to announce that
Peter Miceli has been named a Partner of our
firm.
As many of you are aware, Peter has been a
Senior Manager with Bartolomei Pucciarelli for
the past 8 years and is a veteran in public
accounting. With much of his focus on small to
medium-sized businesses, Peter enjoys consulting
with clients on tax and accounting issues, as
well as guiding them on a host of business
advisory and individual strategies.
Forming long-term relationships has been easy
for Peter because he takes a personal interest
in his clients. Everyone working directly with
him can attest to his professionalism, integrity
and service ethic.
Peter is a graduate of St. John's University in
New York and received a Bachelor of Science
degree in Accounting and an Associates Degree in
Sports Management.
All of us at Bartolomei Pucciarelli wish Peter
great success in his role as Partner.
As our firm grows, new partners like Peter, enable
us to broaden our service capacity while
maintaining a high standard of service for our
customers. We are very confident that he will
continue his impressive work which represents a
key factor in the firm's long-term success.
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