April 9, 1995 in Business

Professionals Best Equipped To Judge Value Of Businesses

Paul Willax Staff writer
 

The classic answer to the question “what’s it worth?” is “whatever the buyer and seller agree upon.”

Negotiation is the tried and true way of coming to a price that will make a transaction happen. But value determined in this manner applies only to one specific transaction, at one point in time, as it is agreed upon by that buyer and that seller. Other circumstances in which value must be determined usually require more scientific appraisal methods.

Q: I am 51 years old, a widower, and own a successful business. I’ve just begun to think about my estate and the taxes my kids will have to pay on the business they inherit. Insurance will help, but I don’t know how much to buy because I don’t know how much my business is worth. Is there a simple formula I can use?

A: There’s no shortage of quick-and-easy valuation “recipes” and “rules of thumb” to determine the value of an enterprise. My advice: if yours is a privately held firm with no market-established share price, forget the shortcuts and have a professional valuation performed by experts.

When calculating your estate tax liability, the IRS will use sophisticated specialists to produce the maximum value that can be ascribed to your firm. The greater the value, the greater the tax. And the estate tax rate can quickly climb to 50 percent of established value. A professionally conducted valuation will give your estate important bargaining power with the IRS.

You are on target with respect to insurance, but in order to decide how much coverage is enough, you’ll need to know the true value of your business.

When your goal is to develop a strategy to deal with your tax obligations, an experienced, independent valuation firm should be brought in to work with you and your accountant to generate an unbiased, detailed, defensible appraisal.

IRS Revenue Ruling 59-60 and Chapter 14 of the Internal Revenue Code provide some detailed guidance. The nature of your business and the purpose of the valuation will determine the best method of valuation to use.

Most methods focus on a combination of asset value and present and projected earnings. Often several techniques are used to establish a range of value.

When attempting to estimate insurance needs for estate tax purposes, look to the high side of the range unless you or your firm have considerable liquidity to cover the inevitable tax bill.

Personally, I favor a weighted, risk-adjusted approach that takes into consideration present tangible asset values plus an intangible value based on anticipated future earnings. Once again, this is a very important issue that does not lend itself to a “do it yourself” approach by an business owner.

Q: There doesn’t seem to be a place in today’s world of low-price megastores for my small retail business. What’s my best strategy, price or service?

A: Both. For obvious reasons, price has always been a paramount issue among consumers. But keep in mind, the price you charge can be justified by giving your customers more than just the item they came in to buy.

The service you offer also has value, especially the “feeling” of satisfaction a customer gets by shopping at your store. Remember, Nieman Marcus didn’t grow by offering the lowest prices in town.

Today it’s tough for a small retailer to stand up to the giants solely on the basis of price. However, small operations can compete effectively by offering superior product information and post-purchase support.

Your personal experience with the goods you sell, your ability to identify and address individual customer needs, and the atmosphere your shop provides all have value that, if showcased properly, will be paid for by a customer.

Knowing and using your customers names is a big plus. So is a phone call to the customer after a purchase to make sure that everything is satisfactory.

Your ability to quickly resolve customers’ post-purchase problems is important, too. An ongoing telemarketing program that keeps you in constant, personal touch with your best customers will make sure they don’t forget the unique bundle of values you offer.

The key is to forcefully illustrate your store’s uniqueness in a way that makes the entire transaction worth the price you have to charge. Of course, you still must buy your merchandise right and keep a handle on operating costs in order to keep your prices “reasonable.” But “reasonable” doesn’t always mean “lowest.”

As my ol’ uncle Ollie used to say: “You get what you pay for, so make sure your customer knows what that is.”

xxxx Paul Willax is the Sandifur Distinguished Professor of Entrepreneurship at Eastern Washington University. Copyright 1995 Paul A. Willax 16meb035a

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