Issue link: https://read.dmtmag.com/i/63069
36 • MAY 2012 • WORLD FENCE NEWS Accurate business valuation critical if you are considering selling BY TOM LUBY, PROFIT BUILDERS INTERNATIONAL Not long ago a fencing contractor asked me, "Tom, if I wanted to sell my fence company, how much could I ex- pect to get for it?" I told him, "Know- ing what your company is really worth is not an easy calculation. There are a dozen or more methodologies for making such calculations, and it is dif- ficult to say if one is more valid than another. But keeping good records of past earnings and having a plan for fu- ture growth will help a lot in demon- strating the value of your company." So for any of you who are consid- ering putting your firm on the market, I would like to share a few basic prin- ciples to possibly help you understand how companies are valued and what your company may be worth. The first valuation method I uti- lized for the calculations I wanted to apply to my client's fence company was what is called an "industry multi- plier" based on past profits for indus- try specific valuations. But, unfortunately, as far as I could find, no such multiplier exists for the fence in- dustry. I did check with the American Fence Association, a normal starting point for industry specific data on the fence industry, but they did not have the information I needed available. I opted to use a combination of valuation methodologies and I wanted to share some of the basic techniques and financial experts' views on the subject with my readers. Since shortly after the Industrial Revolution, business valuation has be- come an intrinsic part of the corporate landscape. We have probably all heard about the book and then movie "Bar- barians at the Gate," revolving around corporate greed and power in one of the largest acquisitions in U.S. history, the hostile takeover of RJR Nabisco in the Eighties. For many people, when they think of valuations or mergers and acquisi- tions, they think of the corporate raiders we have all heard about, buy- ing up a major company and then breaking it apart and selling off the pieces for a profit. But how do they know how much to pay for any given company and how does that translate to the fence indus- try? Naturally, not all mergers and ac- quisitions are done by billionaires and major venture capital groups. There is the mom and pop and small business element to this scenario, and retire- ment or other valid personal reasons for mom or pop to want to sell or liq- uidate a fence company. In spite of the recent economic downturn and a four to five year lull in corporate turnover, the larger picture of the U.S. corporate landscape has witnessed dynamic changes as merg- ers and acquisitions, corporate re- structurings, and share repurchases have skyrocketed in the past 30 to 40 years. At the core of the dynamics of all these activities stands some notion of valuation or placing a true value on what a company is really worth. The continued on page 38