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& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | SEPTEMBER 6, 2000 SMART ANSWERS Succession Strategies for a Family Business -- Part II A third party can provide an objective evaluation of the business at a delicate moment of transition
Q: My stepmother wants to sell her half of our 20-year-old family business back to the company for $1.5 million. My father is 80 and ill with cancer. Upon his death, the company will be mine (I've been with it since 1993). We have: $1 million in liquid assets, $2 million in inventory, $200,000 in accounts payable, gross 1999 sales of $5 million, pretax net profit of $1 million, including $400,000 in salary for my father and myself. There are no outstanding loans. We have five stores and are opening one more. My father gets angry when I suggest that an appraisal should be done, since he and my stepmother set the $1.5 million figure. How do I know if this is a fair price? --B.B., Maui, Hawaii Part II A: Pricing a retailer is part science and part art, say experts. That's because a company's worth is not determined solely by its financial data: Intangible assets like goodwill, customer loyalty, and community standing count as well. In fact, statistics alone can be misleading since they don't take into consideration such important factors as age and condition of fixtures, equipment, and properties; organizational strengths and weaknesses; competition (increasingly important because of the rapid growth of so-called big-box stores and Internet retailers); purchase terms; and company and industry trends. That said, it's possible to take the numbers you've provided and come up with a rough idea of your company's total value. John L. Bates, a business broker at Spectrum Corporate Resources in Laguna Hills, Calif., offers this analysis: "Based on transaction data for retail companies, a company grossing $5 million, with a $1 million pretax net, would sell on average for approximately 30% of its gross sales, and/or 1.9 times its pretax net, plus inventory value at cost." Crunching those numbers would put the company's total value at $1.5 million to $1.9 million, plus inventory value. Given that estimate, $1.5 million for 50% of the company seems high. Bates cautions, however, that more information needs to be considered before a truly valid number can be derived. NEUTRAL ASSESSMENT. A third party can provide an objective and comprehensive analysis that will give you the right price for your family business. You can choose to have either an appraisal or a valuation done. Appraisals cost more than valuations because the former are very detailed -- virtually audits of the entire business, says consultant Gene Pepper, principal of Alliance Business Consultants in Glendale, Calif. "Usually a team of appraisers comes to the location and inspects and examines everything," Pepper says. "My guess is that for a business such as you describe -- with inventory of $2 million -- an appraisal could cost $20,000 to $40,000." A less-detailed valuation, which deals mostly with financial documents and less with auditing, would probably cost you about $6,000 to $8,500, Pepper says. Another challenge you face will be finding the money to cash your stepmother out, whatever price is ultimately set. If your company doesn't readily have this money, the pressure of producing it in a lump sum could undermine the ongoing viability of your business, especially if opening a new store puts additional strain on cash flow and assets. Talk to an attorney or CPA about the need to find a mechanism for stretching out the payments. Sadly, many estates have been decimated because the parties involved didn't look ahead to what would happen at the death of a key person. Good luck.  By Karen E. Klein  | | |
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