Determine Your Company's Worth

Before making a major business decision, know your company's real worth. It's a more complex process than you think

Torgove was thinking of selling her herbal products company and starting a women's clinic, but a valuation showed it made more sense to do a spin-off Ray Ng

by Jeremy Quittner

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Armed with an appraisal of his company's value, Platt is in a much stronger negotiating position—and knows exactly what his share will be worth Brenden Moore

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Shelley Torgove founded apothecary tinctura, an herbal extract company, in 1998 with a $50,000 advance on her credit cards. Thanks to her prowess scouring the jungles of South America for homeopathic medicines, Torgove was able to expand the Denver business to eight employees and $725,000 in sales by 2007. But she'd become deeply interested in women's health and considered selling the company to open a clinic specifically focused on that. How much would Apothecary Tinctura fetch? Torgove had no idea. "I needed someone from the outside to take a hard look at my business and the facts," she says. She hired an appraiser for about $3,500, and three months later was told that her company was worth $450,000.

In the end, Torgove decided not to sell. Thanks to the valuation process, she could see which parts of her business were growing the most, and those turned out to be her women's health and fertility products. "When we broke down cash flow based on different services and offerings, it helped me see some of the pieces were already active," says Torgove. She could keep focusing on those areas and eventually spin off a women's health clinic.

Before you can sell your business, merge with or acquire another company, or take on investors, you need to know how much your business is worth. Think you already know that magic number? Fewer than 25% of small business owners actually do, say experts. Most entrepreneurs just guess, and those estimates are usually inflated. Says Brendan Kennedy, president of Phoenix appraisers Canyon Financial Services: "A lot of people get emotionally tied to the business because it is their baby," leading them to think it's worth more than it is.

INTANGIBLE ANGST

Finding your company's value takes more than multiplying your current cash flow by a number of years and projecting that forward. Your assets and leverage count. So do prospects for your industry, your location, and the local labor pool. The overall economy has an impact, too. In 2007's fourth quarter, sale prices were down 6% from the third quarter. But prices in industries including manufacturing (up 21%), services, and restaurants are rising, according to BizBuySell.com, an online business brokerage.

Besides the many hard numbers you have to tally, things get really sticky when you measure intangibles such as intellectual property or the creativity of your staff. With all that to consider, it usually makes sense to call in a professional. Then be prepared for a process that takes both time and money.

Valuation experts are frequently certified public accountants. Your state CPA association might be a good place to begin your search for one. There's also a national association of CPAs, the American Institute of Certified Public Accountants (aicpa.org). Appraisers also have their own national associations, such as the American Society of Appraisers (appraisers.org), the Institute of Business Appraisers (go-iba.org), and the National Association of Certified Valuation Analysts (nacva.com). Their sites can help you find an appraiser. There are also business brokers who will appraise your company with the goal of selling it; find one through the International Business Brokers Assn.

Valuation experts will charge between $3,000 and $5,000. Brokers typically take a commission from the sale—at least 10%. But because brokers likely have a quick sale in mind, they may not care about getting the highest price. No matter which route you choose, you'll need to gather company paperwork for the past five years. That means everything from profit-and-loss information to details on benefit plans and the company's hard assets and liabilities. Plan on spending up to three months sifting through your company's financial statements with your appraiser.

Calculating your business' worth can be done in three ways.