This Issue: What Is It Worth? Secret Strategies for Evaluating a Business

For more than a decade, the Family and Medical Leave Act has allowed parents to take up to 12 weeks of unpaid leave for the birth of a child, to deal with serious illness, or to care for a relative - all while still keeping their jobs.

Supporters of the bill have been trying to expand the law, hoping to make some of that paid time-off.

However, it looks like there are some plans to actually scale back family leave. Some business groups say that the law is abused.

It’s OK, they say, to take time off for pregnancy or cancer treatment. But when employees start taking off every time they get a headache or catch a cold, then employers are faced with major productivity problems.

Personally, I agree. It’s great for employees to know they can take time off for a serious family crisis and still have their jobs, but I can see how this can be abused. Maybe the law needs to have more checks and balances so employers need to know their businesses won’t suffer in the process.

You have to remember, if the business goes bad, everybody is out of a job.

Richard Parker, professor of our Art of Buying a Business course, tells me that getting a realistic estimate of a business’s value can be a much simpler process than many professional valuators would like the rest of us to believe.

The challenge for you, the buyer, is to formulate a price that will provide you with an acceptable return on your investment and also allow you to service any debt, pay yourself and build the business.

To give you an overview of how that is done, let me crack open the door of Professor Parker’s virtual classroom and give you a glimpse of the different approaches that his students learn for placing a value on the businesses they are considering. Some of these approaches work well for small businesses, as you will see - and others yield poor value estimates. For sake of discussion, we’ll use the term “small business” for ones with revenue of under $10 million. 

• Asset Valuation calculates the value of all of the assets of a business. Asset-based valuations do not work well for small businesses. If a small business is “asset rich” but doesn’t make much money, how valuable is the business? Conversely, if a business has limited assets, such as computers and office equipment, but makes a ton of money, isn't it worth more?
• Liquidation Valuation determines the value of the company’s assets if it were forced to sell all of them in a short period of time (usually less than 12 months). As with Asset Valuation, Liquidation Value might be interesting to know about, but it cannot serve to predict the profits that a business will generate for you.
• Rules Of Thumb Valuation utilizes the selling price of other “like” businesses as a multiple of cash flow or a factor of revenue. Since it is difficult to find two businesses that are exactly the same, the “Rule of Thumb” method is too general to help you know how much a particular business will earn for you.
• Owner Benefits Valuation calculates the total dollars that you can expect to extract from the business, based on what it has generated in the past. That’s another way of saying, current owner’s cash flow! It is the best method to use to value a smaller business. Of course, a smart entrepreneur can increase the income generated by a business - but it is nice to get a glimpse of how an established business is likely to perform in the weeks and months immediately after you buy it. Remember that valuation should tell you, the buyer, what you can reasonably expect to generate in your pocket.

“Above all,” Professor Parker says, “keep in mind that the 'Asking Price’ for any business is not the purchase price. Quite often, the asking price does not even remotely represent what the business is truly worth. Naturally, a buyer’s valuation is usually quite different from what the seller believes their business is worth, because sellers are emotionally attached to their businesses. They usually factor their years of hard work into their price calculation. Unfortunately, this has no business whatsoever being in the equation.”

I am happy to share this information with you this morning. For even more, be sure to investigate Professor Richard Parker’s Art of Buying a Business course. It can put you at the controls of your own business much sooner than you expect. 

I’ve been working in the front office of The Trump Organization since September of 2001. My office is just outside of Mr. Trump’s, and the acoustics are perfect for hearing everything that goes on. It also helps that Mr. Trump rarely closes his door, and that he doesn’t use an intercom.

People often ask me what it’s like here, in this rarefied environment, made more famous because of The Apprentice, which brought the workings of The Trump Organization to public interest. My first response is that it’s loud. That was one of my first impressions when I started to work here. As mentioned, Mr. Trump doesn’t like to use an intercom, so he just yells. We are expected to yell back, and loudly enough for him to hear us on the first take. This isn’t for dramatic purposes, I realized, but because it’s more efficient. If you can imagine the number of phone calls he receives every hour--and these are the important calls that make it through to him--you might see why. His average is to receive 400 calls per day, and sometimes more. Using an intercom is just an extra step that isn’t really necessary provided you can speak or yell loudly and clearly. Seconds are saved, which matter when you’re someone like Donald Trump. I had some serious work to do on my voice projection, but it didn’t take long. Adrenalin can do that for you.

My second impression is that there were a lot of blueprints. In fact, they were everywhere. In closets, or piled up in every corner, or falling over the edges of conference tables, they were ubiquitous.  But that makes sense--Donald Trump is a famous real estate developer, and the biggest developer in New York. It’s just that sometimes, with his fame being in so many areas, this aspect of his life gets eclipsed. Some people have skeletons in their closets, but I can tell you that Donald Trump has blueprints in his. Just try to hang up your coat in one of them if you ever come to visit. Good luck.

Another question I am often asked is, What is Donald Trump really like? I know they mean, what’s he like behind the scenes? I can tell you he’s a lot like the boss you see on The Apprentice--he’s tough, fast, demanding, funny, and unpredictable--but he’s also fair. When people were surprised by his personality when they got to see him in action on television, none of us who work with him were surprised. That’s what he’s like. It’s not an act. Fortunately for us, however, he doesn’t go around firing someone at the end of every week. In fact, he prefers to keep people around for a long time, provided it’s working for everyone. He’s had a substantial number of employees who have been with him for three decades or longer.

I’ve co-authored four books with Mr. Trump thus far and he’s a writer’s dream--there is never a lack of material. Every week is a history lesson, a business lesson, a life lesson, a media lesson, or an entertainment lesson with Donald Trump around. I’ve learned a great deal from him about a lot of things, and so will you.

Which reminds me, I’d like to give you a word to the wise: Pay attention to your boss! You’d be surprised how much you can learn. Granted, I am in a very fortunate position to work for someone like Mr. Trump, but make sure to learn as much as you can in whatever situation you might be in. It all works to your advantage in the long run. But it’s up to you to plug in and pay attention, whether you’re in the front office or not.

More from my desk to yours soon.

Editor’s note: We are delighted to welcome Meredith McIver as a contributor to The Trump Blog. Ms. McIver is uniquely qualified to explain what it really is like to work Inside Trump Tower, because that is where she spends every working day. Watch for more posts in the future from her. Welcome, Meredith McIver!

For most small businesses, hiring a professional to perform a valuation is not necessary. First of all it is expensive, and more often than not, it simply does not reflect reality.

For example, I recently read a valuation on a local company handling specialized telecom components in a very restricted marketplace. This company was doing $700,000 a year in sales and netting $100,000. The valuation started off:

“The company is focused upon the B2B telephony segment which is a $42 billion industry in North America.”

I threw out the entire report after reading that one sentence. Why? How on earth can you possibly compare a $42 billion dollar industry and a $700,000 local distributor of telephone systems? 

So my advice, based on a lifetime of experience in buying and selling businesses, is don’t waste time or money getting a professional valuation done. Let the sellers do that if they so choose. If you want to look at a variety of scenarios, there are some very good, inexpensive software packages available that will do the same thing at a fraction of the cost. (Do an Internet search for the key term “business valuation software” and you will find them easily.)

Key Points to Remember

• Valuations are not scientifically based; they’re subjective. In other words, valuation is an art, not a science!
• Uncover how the seller established the asking price.
• Valuation is a personal formula - The real question is, what’s the business worth to YOU?
• Consider the potential return on your cash investment.
• Use a variety of methods to value a business you are considering. We explore these valuation methods in depth in my Trump University course, The Art of Buying a Business. For a quick introduction to them, be sure to visit this blog again next Tuesday to read Michael Sexton’s post.  

The Final Word: Never, ever buy a business just because the price is right - if you want to create wealth, be certain that the business itself is right for you!