When my partner and I were attempting to buy our first small business, we quickly learned a very important lesson about buying small privately held companies. All small businesses are worth $1 million. More accurately, every small privately held company is worth $1 million....per owner.
This small business owner valuation principle had a tendency to price our target companies out of the ballpark. An unrealistic opinion of value based on the seller's objectives rather than an objective review of earnings and, perhaps more importantly, future earnings forced us to disqualify some interesting acquisition prospects. It also may have cost some small business owners the opportunity reap some of the rewards of a lifetime of work.
A TEC member of mine is currently negotiating to buy a competitor. There are three owners of the target company. They are all in their late 60's. The owners have not kept up with technology in this capital intensive business. The management team is weak, at best. The company has not made money in three years. The owners want to "get out." Asking price? $3 million.
My member doesn't want the outdated equipment. He doesn't want the people. He doesn't even want some nicely located real estate, owned personally by the sellers. He is willing to buy the customer list. Fair market value? To be determined.
There is a better way. Kraig Kramers, a TEC Resource Specialist, has been instructing TEC members on the use of a relatively straightforward process for valuing companies that turns out to be remarkably accurate. Many members run the formula every year to get a realistic picture of how their companies are doing and how they are doing as CEOs.
The Kramers' estimate of fair market value can also save small business owners from pricing themselves out of the market. All business are not actually worth $1 million.
If you would like a copy of the Kraig Kramers formula, please e-mail me at dennis@globenational.com.
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