Development of Useful “Gut Reactions” when Operating Your Business
There are some concepts in business valuation and forensic accounting that are fundamental! These concepts are generally, but not categorically, true. When understood and mastered, they serve reliably to give you a meaningful “gut reaction” to what the proper treatment is likely to be. They are a foundation for what I call my “smell tests”!
A client once asked me, “Chuck, what is my business worth?” I replied, “It depends on the purpose of the valuation! You can, in fact, appropriately get different values for the same business on the same date, depending on the purpose/use of the valuation!
I also told the client that today’s value is the present value of future cash flows coming out to you in your role as the owner—over and above what you are getting/will be getting in terms of a fair market value salary. So, several factors come into play:
- What percentage of the total outstanding stock do you own?
- How much experience do you have in this line of business?
- Are you working in the company, as well as holding some stock?
- What is the economic outlook for this industry?
I once had a client that was a large and very profitable regional firm with both wholesale and retail sales. The owner was the sole owner with both manufacturing and retail sales experience. Upon that owner’s premature death, he left all of his stock to one of his four sons—his only son who had never worked in the business. In less than three years, the 20-year-old company was bankrupt because the new owner had tried to run the business without industry knowledge or operational know-how.
