Issue link: https://read.dmtmag.com/i/657337
30 • april 2016 • world fence news How much is your fence company worth? by tom luby, president, 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, "Knowing what your company is really worth is not an easy calculation." Hopefully, your business is more than just the assets minus lia- bilities, but how do you determine that number? In the business world there are many methodologies for making such calculations and it is difficult to say if one is more valid than another. The three most common valua- tion methods are: • Asset–based business valuation method (which is assets minus liabil- ities). • Income–based valuation meth- ods (which is based primarily on the profitability of your company). • Market–based valuation method (which is based on what other similar businesses have been recently sold for in your area). The only problem is, in my opin- ion, no single method is reliable enough to show the true value of a fence company. Why? First off, looking at the last method first, it is rare to have a fence company in your immediate area re- cently sold, and if that were to occur, how was that fence company valued? And fencing is very market area specific; a fence company in Florida, for example, may not be worth the same as a fence company Iowa or in California. True, fence companies of the same size may be similar in value, but not the same. Also – yes – it is true that fence companies are bought and sold all the time, but, again in my opinion, many times this occurs on the basis of need, emotion or "gut" feelings, not on the basis of scientific or analytic methodology. Also if you base the value of your business solely on the first method, your corporate assets, what about all the years in business and good will you have established in your market area? What about your customer lists, contractor relationships, community bonds and friendships earned? The same is true of basing the value of your company solely on profit and earnings potential, even though that can be more reflective of the good will you have built over the years. Good will and profits usually go hand and hand, which is one big rea- son I always preach the importance of "building relationships" in the fence industry. But your company is surely worth more than just the profits, and even then, profits for how many years? Therefore, the most reliable valua- tion methods in the fence industry are based on a combination of all three methods: your company's balance sheet combined with the "good will" and profit potential that your compa- ny has established over the years, as well as perceived market value of your business. This will indicate what fu- ture rewards or profits your company is capable of and what a new prospec- tive buyer might hope to gain by pur- chasing your company. That being said, naturally, keep- ing good financial records of past earnings, master budgets, accurate P&L's that demonstrate historical profits and indicate future earning po- tential, as well as a written plan for fu- ture growth will help a lot in demon- strating the value of your company beyond the balance sheet. Going back as many years as pos- sible (five is usually sufficient), com- piling good financial data is a start to putting together a plan for valuating your company, and next month I will address some more specific details of how you may be able to get an idea on what is the true value of your fence company. Tom Luby, president of Prof- it Builders International (PBI), has developed the Roadmap to Success program, which offers business information necessary to success- fully operate a fenc- ing company. He has conducted seminars as part of the educa- tional programs at the FENCETECH and Jackpot conventions. Tom's en- tire Roadmap to Success program is available on CD, along with The Close and The Roadmap to Success user manual. Phone 941-981-3677 or e-mail tluby@profitbuilder.org. Visit www.profitbuilder.org. Going back as many years as possible (five is usually sufficient), compiling good financial data is a start to putting together a plan for valuating your company.