Tag Archives: business finances

Business Valuations: Three Situations When You Might Not Need One

By Patrick Ungashick

Ungaschick-formal valuation

Business valuations are an important tool for owners and leaders of privately-held companies. For example, if you are doing sophisticated tax planning, buying-out a business partner, or if an owner is going through a marital divorce, then a valuation may be highly prudent—if not legally required. However, business owners and leaders should avoid rushing to get a valuation in circumstances where the need is not clear. Listed below are three common situations where getting a valuation may seem to make sense, but actually might be unnecessary or counterproductive.

Situation One: You are Getting Ready to Sell the Company

A commonly held view among business owners is to get a formal valuation prior to selling the company. Some valuation firms, investment bankers, and business brokers promote business valuations as a first step in preparing to sell. Presumably, this identifies the potential sale price and helps the selling owner set realistic expectations. A closer examination suggests a valuation in this situation is often unnecessary or even misleading.

Investment bankers or business brokers familiar with your company’s industry should be able to provide an estimated range they expect the company could sell for, without a formal valuation. Also, a formal appraisal before selling the company can be misleading. To explain why, imagine you intend to sell your home, and to determine your listing price you have the home appraised. The appraisal comes in at 1 million dollars, and so you list the home for sale at that price. After many months, you receive multiple offers but only for around 800,000 dollars. In that example, the home’s value is clearly closer to 800,000 dollars rather than 1 million dollars, regardless of what the appraisal said.

The same thing can happen in reverse. If you list your home for 1 million dollars but immediately you receive multiple offers for a much greater amount, then the appraisal was misleading—it was too low. Just like with a home, what your company is worth at sale is what a buyer will pay for it. Period. The existence of a third-party valuation claiming that your company is worth X dollars amount will not cause a potential buyer to increase its offer price by 1 dollars more than it is otherwise willing to pay.

If you are preparing to sell your company, rather than getting a valuation, ask several investment bankers or business brokers to estimate a likely sale price, and explain their reasoning. You still may end up selling your company for a higher or lower price, but you will not have wasted time and money on a valuation that potential buyers will typically ignore.

Situation Two: You’re Curious

Knowing what a privately-held company is worth is difficult or impossible most of the time. This can be frustrating, particularly when the company is the usually the owner’s most valuable (and cherished) asset. Imagine putting most of your money into an investment portfolio where you will rarely know what your investments are worth. Few people would be able to sleep at night in that situation.

Therefore, business owners can be tempted to get a formal valuation simply to know what their company is worth at that point in time. It can be helpful to periodically establish a realistic understanding of the company’s value, not mention help get a good night’s sleep. However, paying thousands of dollars to get somebody’s opinion about what the company is worth (even an expert opinion) is often not necessary, because alternative methods may be available for little to no effort or cost.

One alternative method to gauge your company’s value is to research what companies in your industry and of similar size are currently selling for, based on a multiple of earnings (usually calculated as Earnings Before Interest and Taxes, plus Depreciation and Amortization—EBITDA) or in some cases a multiple of revenue.

For example, if companies in your industry and similar size are currently selling for six to eight times EBITDA, and your company’s EBITDA is 2 million dollars, then your company value could fall between 12 million dollars and 16 million dollars. Clearly, this approach does not provide the depth of analysis nor precision that is provided by a formal valuation. But a market-based estimate will give you a general understanding of company value on a periodic basis—without the time and expense of a formal appraisal.

To learn the applicable multiples, ask an investment banker or business broker knowledgeable in your industry. That person may know the current market multiples off the top of their head, or likely can get the answer for little effort. Alternatively, research the subject online. You may find a recent article or report prepared by a trade organization, consulting firm, or business advisor that summarizes market-multiples in your space.

Any formal valuation must consider external forces such as industry trends, economic conditions, and capital markets. Click To Tweet

Situation Three: You Want to Track Company Performance

The third situation that seems to require a valuation is to track changes in your company’s performance and growth over time. Again, the value of a privately-held company can be a great unknown. Many business owners and leaders see benefit to engaging a valuation expert, and use the appraisal to monitor the company’s performance. However, getting a formal valuation in this situation may be unnecessary and counterproductive.

The valuation may be unnecessary simply because other metrics are usually readily available. Your company’s leadership team should be able to identify the five to ten most relevant operational, sales, and financial metrics that drive company results. Create a dashboard that frequently (not less than monthly and preferably weekly) displays these key metrics. This approach creates more timely and actionable feedback for the company leadership than a formal valuation.

Tracking company performance using a formal valuation may also be counterproductive, because a valuation is only partially based on the company’s internal results. Any formal valuation must consider external forces such as industry trends, economic conditions, and capital markets. These external forces can mask how the company is empirically performing. To illustrate the point, using a valuation to track company performance is like a pilot estimating his or her plane’s arrival time but overlooking the effects of wind. If the pilot needs the plane to fly 500 mph to arrive on time, and the current airspeed gauge shows 500 mph, then it might seem to the pilot that the plane will arrive on-time. However, if the plane is only flying 450 mph but is currently boosted by a 50-mph tailwind, only when the tailwind dies down will the plane’s underperformance become apparent.

A dashboard that displays key operational, sales, and financial metrics will provide the company’s leadership with more relevant and visible performance feedback, without being diluted by the external data that is important in a formal valuation but counterproductive in this specific situation.

Conclusion

Business valuations play a crucial role in many situations and offer owners and leaders an important tool to build successful companies, and one day achieve successful exits from those companies. Yet like any tool, valuations need to be used in the proper manner, and at the proper times. Owners and leaders should apply care to determine if a valuation is truly needed, or if alternative solutions exist.

Patrick Ungashick is the CEO of NAVIX Consultants, a celebrated speaker on executive and business owner exit planning, and the author of A Tale of Two Owners: Achieving Exit Success Between Business Co-Owners. With his wealth of knowledge on exit planning, Patrick has provided exit advice and solutions to business owners and leaders for nearly thirty years. For more information on Patrick Ungashick please visit: www.NAVIXConsultants.com.

Understand the Impact of Your Profit Per Sale

Make Sure You’re Dedicating Your Resources to the Right Clients

By Jill J. Johnson, MBA

Jill Johnson-profit per sale

Few enterprises truly understand the actual profits generated by the individual sales they make. Most metrics for sales effectiveness are monitored by reviewing top line revenue results. Yet the most critical determinant of on-going business viability is to understand what revenue actually drops to the bottom line after all costs have been taken into account. You must understand what profit is generated by sales to each of your clients. Then consider the benefits and vulnerabilities the cumulative impact these sales mean to your business. Knowing the breakdown of the profitability by the individual sales to your clients can have a significant impact on your ability to achieve your business goals.

The impact of the true profits generated by each individual sale takes on greater importance. Click To Tweet

1. Understand the Impact of the Profit Per Sale

There are many expenses that go into determining profitability for a company. The same is true for determining the profitability of a sale. Each sale has multiple components impacting its final profit. You should consider your total cost of goods sold, including investments in promotion and delivery expenses. Factoring in the costs associated with the staff time required to generate a sale is a must, too. Unfortunately, few companies consider all these expenses when developing their marketing and sales strategies. Whether you are working on growing your business or you are struggling financially, the impact of the true profits generated by each individual sale takes on greater importance.

2. Know Your Profit Per Client

Frankly, not all clients are worth the effort to generate the sale. Sometimes your growth goals for your business mean you also are growing beyond clients you have historically served. This transition period is a very vulnerable point for any enterprise. It is also very stressful because you might be wrong and wind up losing a client that could have provided even revenue value if you have not been afraid to maximize your relationship.

Carefully study the costs associated with serving each client.  Perhaps you have long-term clients you like personally, but if you have not taken the time to explore the costs of the sale, their value to your business may have changed dramatically over the years. Before abandoning these clients, try to identify options to trim your expenses without jeopardizing your quality. But it may be time to move on if they are not generating any real profit to your company.

3. Review Your Customer Segments Revenue

Using a target marketing approach to grouping your customers into similar client segments provides you with a more detailed understanding of what is working and what is not. The key to effective target marketing is to focus your sales activities and expenditures toward those type of customers who can best be served by your enterprise, who will stay with you over the long-term and who will generate solid profitability. 

4. Evaluate Individual Sales Profitability

There are two ways of looking at your sales profitability data. One is by the individual clients. The other is by combining clients using some specific target marketing components. Grouping clients by similar characteristics makes it easier to identify trends in the data that you can use to assess the profitability of each of these major segments.

There are many options for grouping your customers into segments. For a B2B client, you could group them by their industry sector, number of employees, location, etc. For a B2C customer, you could group them by where they live, personal attitudes, age, family size, income level, etc.

If Client Segment A generates solid profits for you, but all of your marketing efforts are being devoted to Client Segment B who are barely break-even, the choice is obvious. You must retool your marketing and sales activity to attract more prospects from Client Segment A.

5. Monitor Individual Client Profitability

A complete review of the mix of your customers and sources of sales will reveal your potential vulnerabilities if market conditions change. It is not enough in today’s complex and competitive marketplace to look only at your total overall sales. If you have one customer that generates more than one-third of your sales, you are in an extremely vulnerable position if you lose that client to a merger, change of staff or if it goes out of business. Controlling and monitoring your client profitability and cost of sales allows you to take corrective action before your business’s survival is at risk. This takes on even greater importance if you are overly dependent key clients for your profitability.

6. The Impact of Pricing on Profitability

A close companion to client profitability is to understand the impact of various pricing strategies on the perceived value of your goods and services, and how they intertwine in attracting the customers who will buy from you. Engaging in discounted pricing strategies often attract customers who are buying from you based on price, not your value. If you are in a service-oriented business, this can be a slippery slope. You may get clients who keep you busy, but who do not generate the profits you need to build a sustainable enterprise or build your net worth. It is a delicate balancing act, but one you must realistically consider given your business objectives.

7. The Impact of Strategy on Profits

You must also consider the financial consequences of your business direction and your vulnerability to setbacks. This assessment allows you to make better business decisions and to set a more realistic strategic vision for your organization. “Finding a lane” or picking your niche through target marketing must also incorporate a true understanding of the costs of reaching them, as well as their ability to add to your bottom line in a meaningful way.

Final Thoughts

Reviewing the trend information for each of your major client segments is a highly impactful approach to revaluating the effectiveness of your sales and marketing efforts. It removes your emotions and relationships with your clients to allow you to be more detached in considering their impact on meeting your business objectives. They are no longer become just people you like, but a bigger grouping of customer segments who impact your future costs and business growth. If you are not attracting the kinds of clients generating the profitability to move your enterprise forward, it is time to reconsider all of your sales and marketing efforts.

Jill J. Johnson is the President and Founder of Johnson Consulting Services, a highly accomplished speaker, an award-winning management consultant, and author of the bestselling book Compounding Your Confidence. Jill helps her clients make critical business decisions and develop market-based strategic plans for turnarounds or growth. Her consulting work has impacted more than 4 billion dollars’ worth of decisions. She has a proven track record of dealing with complex business issues and getting results. For more information on Jill J. Johnson, please visit www.jcs-usa.com.

Controlling Corporate Healthcare Costs

5 Simple Steps to Reduce Costs and Improve Care

By Dr. Josh Luke

Josh Luke-healthcareAfter working on his own as an independent healthcare insurance broker for several years, Ryan recently took a job with a bigger brokerage. When he broke the news to his wife that the company he joined did not offer a traditional PPO or HMO insurance plan, she wasn’t thrilled. After all, Americans have been conditioned to these models for years.

A few weeks later, Ryan’s wife woke up and found one of their three children not feeling well, and she immediately grew frustrated as she knew what that meant: she would have to cancel her plans for the day and arrange alternative plans to carpool her other two children to school so she could take her sick child to the doctor. She immediately went to the mobile app on her phone to schedule an appointment at her child’s doctor’s office, only to learn that a telehealth consult with a physician could be scheduled remotely within the hour. So she gave it a try.

Ten minutes later, from the couch in her living room, a physician conducted a telehealth appointment remotely via Ryan’s wife’s mobile phone. After asking a few questions of the mother and child, the doctor advised that he had written a prescription for the child and it would be available for pick up within 30 minutes at her regular pharmacy.

It turns out mom didn’t have to cancel her carpool schedule at all, nor re-arrange her schedule for the day. That was it.The more employees that engage in smart healthcare decisions, the more your company and the employee both stand to save. Click To Tweet

The irony of this story? The American healthcare delivery model is fragmented and broken, yet our innate desire to resist any sort of change keeps us clinging to ineffective plans such as a PPO’s or HMO’s. Stories like this exemplify how inane that resistance to change truly is.

New alternative approaches to providing employees and employee family member’s healthcare are sweeping the country. But you are not likely to ever hear about them unless you ask your broker. Why? Your broker is like a realtor, the more money you pay, the more they make.

So, it’s time to ask! When you do ask, you will learn that the more employees that engage in smart healthcare decisions, the more your company and the employee both stand to save. So creating a work environment that encourages smart, engaged healthcare decisions is the key. Many of these corporate offerings are turn-key and simply require your organization to contract with an organization and move forward! Here is a list of several offerings that could provide improved care and access to your employees, while drastically reducing your company’s overall healthcare costs.

1. Telehealth options: As discussed above, when used as an alternative to a primary care visit, both telehealth and 24-hour call lines can reduce wasteful spending and eliminate unnecessary delays in care.

2. Disease Specific Programs: The old saying that 10 percent of your employees account for more than 90 percent of your overall spending is never truer than in healthcare. Expenses on chronic diseases like diabetes can be reduced drastically if your company invests in and offers a prevention program for employees at risk for diabetes.

3. DNA Testing: Companies offering voluntary DNA testing or genome sequencing for employees are finding that the potential to save thousands on unnecessary medications and preventable chronic diseases has a swift return on investment. DNA test identify which medications are ineffective on an individual and also identify those who are pre-disposed to acquire several forms of cancer.

4. Integrative, Functional or Naturopathic medicine consults: The reemergence of natural methods to live healthier and prevent increased likelihood of chronic disease by better understanding each individual’s body composition has proven to be a quick return on investment as well.

5. Local Medical Tourism: Employees who choose a Center of Excellence, or in-network provider may save a few thousand dollars, but your company can save anywhere from 40,000 dollars to 80,000 dollars on major procedures. Making sure employees understand that the quality of care at both facilities is comparable often is enough to convince them to choose the in-network provider. And if not, why not offer to pay their personal co-pay if it saves the company 20,000 dollars or more?

Companies all over the country are proving that simple tactics like this can produce quick results. Not only will the employee and employer save significant dollars in year one, but you are also likely to see enhanced access to care, improved quality and an increase in overall employee morale as a result.

Keep in mind that you don’t even need to tackle all of these tactics in the first year. Many companies have had great success starting with two or three of these tactics and adding others later.

Of late, companies like Walmart, Disney, Apple, Amazon, JP Morgan and Berkshire Hathaway have all declared war on healthcare costs. Isn’t it time that your organization declare your tipping point on wasteful and excessive healthcare spending?

Dr. Josh Luke is a celebrated speaker, award-winning Futurist, a faculty member at the University of Southern California’s Sol Price School of Public Policy, and author of Health—Wealth: 9 Steps to Financial Recovery. Drawing on his experiences as a hospital CEO, Dr. Luke delivers engaging and entertaining keynotes that teach audiences simple concepts on how individuals and companies can save thousands on healthcare. For more information on Dr. Josh Luke, please visit: www.DrJoshLuke.com.

Good Profits versus Bad Profits

What’s the True Cost of Only Focusing on the Bottom Line?

By Dr. Kevin Coughlin

Is there really such a thing as bad profits? With business getting larger and more powerful, and investors feeling and expecting ever-greater ROI, wouldn’t that imply that all profits are good?

It is an important question to ask.

Bad profits are those profits that are earned at the expense of customer relationships. Whenever customers feel misled, mistreated, ignored, or coerced, then the result is a bad profit. Bad profits arise when a company saves money by delivering a lousy customer experience. Essentially it means that leadership or the company extracts value from their customers instead of adding overall value.

Your goal is to focus on good profits from good products or services. Click To TweetThose of you in leadership positions, those of you that run companies and manage people, understand that the culture you present to your team may lay the foundation for success not just in the short term but hopefully in the long term. The leaders who have exceptional core values and focus on good profits—and eliminate bad profits—will not only create companies with long term success, but will provide products and services that your customers will crave, want and need.

When companies don’t understand the difference between good and bad profits, the result is that growth suffers in the long term, reputations are hurt, customers become alienated, and employees become demoralized. You and your business become vulnerable to competition. Your business may achieve short-term success—but will always fail in the long term.

Steps to Eliminate Bad Profits: Bad profits create detractors. These are people that hurt your company and team members. They hurt your company’s reputation; they strangle growth and demoralize an organization. These detractors can be leaders, managers, employees, and customers.

The first step in avoiding bad profits is to recognize they exist, and the second step is to recognize the detractors. The third step involves deciding if you can convert your company’s detractors into enthusiastic advocates for your company. This is accomplished with top-shelf internal communication, and sterling customer service.

Create Customers that Promote: Your goal is to focus on good profits from good products and/or services. Good profits are earned with customer’s enthusiastic cooperation. They occur when their customers come back time and time again for your products and services. They want to tell their friends family and acquaintances about their exceptional experience. When this occurs they become the best promotional arm for your business.

As promotors, these individuals provide positive marketing for your company; they are loyal and provide the most cost-effective growth for you and your company.

It has been estimated that most companies have about 42-82% of promotors receiving products and/or services. Your focus should be to improve that percentage as much as possible to boost your good profits, and this is done by training—and more training—that is backed up by outstanding leadership and communication. This is not only smart business, but good business.

Perform a Companywide Internal Evaluation: One of the main keys to eliminating bad profits is recognizing the business behaviors that create them in the first place. To effectively identify the areas of your company that bring harmful returns, you must perform an evaluation of your entire operation.

Before you start re-evaluating your company, consider evaluating yourself or the leadership of your business. That may be the board, partnership or an individual. Look at those who are influencers and find out about their core values. This may be easier than you think.

Spending time with people can tell you quite a bit about that person. If it is a dinner meeting, observe how they treat the wait staff; if it’s a golf match, see how they handle a bad shot; if it’s at a dinner party, see if they include other people in their conversation, or does the conversation just revolve around them? Do they provide solutions and the action steps to create them, or are they afraid to speak up and state what they feel and why? Are they good listeners?

In the end, would you believe, like, and trust this individual, and if the answer is “yes,” you have defined a good set of core values. You should be honest and straightforward. You shouldn’t put profits before people. You should do what’s right and not just easy. You should put your customer and employees first, and make sure your team members know you’re always trying to do what is right.

Once you have the correct core values, the next step is simply putting the correct processes and procedures in place to make your business succeed.

Making good profits simply means you constantly re-evaluate yourself, your team, your customer service processes, and your products and services and constantly try to make improvement. These improvements do not necessarily have to be major changes; they can be minor tweaks that provide major improvement

In order for business to succeed longer, a company’s leadership must have a laser focus on good profits, and create the correct processes and procedures that eliminate bad profits.

Kevin Coughlin, DMD, MBA, MAGD is an accomplished dentist, author and speaker. With his unique and powerful message, Kevin provides small businesses with actionable solutions when considering strategic change, as well as keys to compete in an expansive market.

Fraud: Every Business is at Risk

By Chuck GallagherChuck Gallagher

At first, when his wife said that Sargent Willis was on the phone and had some questions, Reverend Bobby thought he might have run a red light and was caught by a traffic cam. Sadly, the actual problem was much graver. The police officer began to question him about Sue Hardy, the church’s treasurer, and the role she played in the church’s business affairs. It seemed that there were some suspicions of financial impropriety, and that Sue was the likely perpetrator.

The Shock of a Collapsing Illusion: We hear a lot these days about identity theft, Internet fraud, email scams or Wall-Street defalcations, but the truth is most organizations are more vulnerable to fraud than they might think. Whether it is a church, a non-profit or a small business that you’ve put blood, sweat and tears into, the chance that you’re at risk for fraud is substantial.

The conversation between Reverend Bobby and Sargent Willis led to arrest and conviction of what Reverend Bobby once described as a pillar of sainthood in their small but growing church. Sue was a Christian’s Christian. The backbone of the church, Sue gave of her time, taught Sunday school and was the treasurer for years.

Sadly, regardless of the type of organization, most frauds take place from within the company’s own ranks, and more times than not, by trusted individuals that we would never suspect.

By their nature, small businesses, non-profits or associations are typically run on a shoestring budget, which makes staffing tight and internal controls limited. And while most people are trustworthy, external factors can create a need that, combined with opportunity and a dose of rationalization, create the potential for unethical and fraudulent activity.

When the perfect storm of fraud hits and the illusion fades into reality it becomes clear the devastation that fraudulent activity creates. Every choice has a consequence and the consequences of fraud are significant and far-reaching.

What to Look For: Let’s use the example of Sue above to frame the discussion about how good people make very bad choices, which leads to fraud.

According to the Association of Certified Fraud Examiners the following are red flags for fraudulent behavior:

1. Most frauds are committed by people who have worked in the organization for a number of years. People who have ten years or more of experience with the organization cause higher fraud losses. Why? The answer is simple: the longer a person is employed within a company, the greater the trust and responsibility. Likewise, trusted employees are not often considered likely candidates for fraud.

2. Individuals in one of six departments commit the vast majority of all frauds: accounting, operations, sales, executive/upper management, customer service and purchasing. If fraud occurs in your business, it is likely by someone who has opportunity; individuals in these six areas have the greatest opportunity to violate trust.

3. Fraudsters displayed one or more of these red flags before or during the commission of the fraud: living beyond means, financial difficulties unusually close association with vendors or customers, and excessive control issues. Any of these behaviors could be a sign of impending danger.

In looking back on the situation, Reverend Bobby could have seen disaster coming. Sue was a trusted member of the church holding her position for more years than Reverend Bobby had been there. Not that longevity is a bad thing, but church leadership could have required a change of roles from time to time disrupting the natural flow of funds. Typically when things change inappropriate behavior comes to light.

But, beyond Sue’s tenure, she was quite protective over the money and monetary processes for the church. Excessive control is a significant sign that something might be amiss. When people are unwilling to let go of their control, take a vacation or insist that only they can do the task, leadership should step back and examine the role and function more carefully.

Finally, in Sue’s case, there never seemed to be enough. Sue received calls often from creditors. Consistently she would either quickly hang up, showing her dissatisfaction with the call received, or take the call on her cell phone, out of ear shot, and return to work irritated at the interruption.

Final Outcome: In the end, Sue embezzled over $200,000 from the church where she was trusted. The discovery was both a shock and disappointment to Reverend Bobby and the entire congregation. Every choice has a consequence. Sue’s choices – made over time – created significant consequences. Today she is serving a prison sentence that will leave a permanent scar on her and those close to her.

Bobby shared that he now understands the importance of his role in this whole troubling problem. As management, Bobby has a responsibility to understand the three components of unethical behavior and often-illegal behavior: need, opportunity and rationalization. Most importantly, Bobby knows that with some minor changes Sue might have, although tempted, been prevented from making those dangerous choices, which led to an outcome that no one wanted.

As a manager of your organization, what steps are you taking to protect your most valuable assets – your employees – from making dangerous decision that impact them and your organization?

Chuck Gallagher is the President of the Ethics Resource Group and an international expert in business ethics. Chuck provides training, presentations and consultation with associations and companies on ethics and creating ethical cultures where people do the right thing, not because they have to, but because they want to! Information can be found at chuckgallagher.com or Chuck can be reached via email at chuck@chuckgallagher.com or by phone at 828.244.1400.