In a NY Times article, “Failure Isn’t Always a Bad Thing”, an interesting formula on determining a start-up’s potential for success is presented which was extracted from venture capitalist David Sliver’s book “Smart Start-ups”:
V = P x S x E
Valuation = Problem solved x Solution’s elegance x Experience of management
The maximum score for P, S, & E is 3; where the highest score is 27. The higher the score, the greater odds for start-up success. If “V” (valuation) is less than 5, it can be assumed the business idea is destined for failure.
If you are a business owner, take a moment to apply this very simplistic yet eye-opening formula to your own business valuation. On the surface, this is a good exercise for budding entrepreneurs, investors, and/or potential partners. Give it a try and let us know your thoughts.
Putting this model to the test, we examined our own business, Fair Market Valuations:
P = 3
S = 2.2
E = 2.2
3 (P) x 2.3 (S) x 2.3 (E) = 15.9 (V)
You’ll obviously have a bias towards your own company or business idea, but ask a handful of mentors or trusted advisors to rate your business using this simplistic model; take the average valuation and reflect on your potential. Good luck and as always — Know your value. Know your business.
Businessweek.com put out an article today under its Small Biz section titled “How to sell your business”. We want to draw your attention to the section discussing business appraisal. In summary, the author of this article suggests that the business owner conduct an analysis of their financial statements and an exercise known as “recasting”. Bottom line, this is an adjustment of owner’s salary, discretionary expenses, one-time fees, interest, depreciation and other expenditures. Then, the writer suggests the owner adjust fixed assets to fair market value. Once complete, THEN hire a business appraiser. Huh?
This is a slippery slope for a business owner. The aforementioned recasting of financial statements and fair market value asset adjustments should be conducted through the work of a business appraisal company. Most firms will identify these key factors through extensive data gathering, questionnaires, and owner feedback. It is our professional recommendation that if a business owner plans to sell a business, they conduct a business valuation first and rely on those hired professionals to walk them through the entire business appraisal process. You are paying for professional advice, so let the pros do their jobs.
Otherwise, if an owner begins doing their own recasting, odds are they get overly creative and add-back too many expenses which would then be disputed by a savvy buyer — thus negatively impacting sales price and putting doubts in a buyer’s mind about the seller’s transparency and honesty.
Know your value. Know your business.
An interesting alert came across our desks this morning, from Forbes.com: The Most Valuable College Basketball Teams. I somewhat choked on my coffee and had to read again. The value of a collegiate basketball team? FMV is a proud supporter of the University of North Carolina at Chapel Hill and it was no surprise to see the Tar Heels top the list. The metrics used in this assessment were unique and certainly different from the world of small business valuation, but it was an interesting read. While the methods used by Forbes are based on ticket sales, tournament earnings and a teams impact on its school and athletic deparment, one major factor was completely ignored: team apparel sales! While it could be difficult to extract basketball apparel sales from football, one could quickly assess official basketball jersey, shorts, and other official merchandise sales directly associated with a collegiate basketball team. The valuations would skyrocket, especially for UNC as they are the #1 in licensed collegiate apparel sold world wide! Hmmmm, do you think that is because of basketball or football? In addition, with the limited data collected, Forbes used a conservative multiple of profit ranging from 1.5-1.75 to determine a teams valuation. Forbes “valued” the top 20 NCAA basketball teams and the valuation gap from 1st to 20th (UNC vs Xavier) was not even 2x! How can UNC men’s basketball only be 2x more valuable than Xavier men’s basketball — that is way off.
Now compare the college basketball valuation to the college football valuationconducted by Forbes back in November. Notre Dame ranked first with a value of $100M on generated revenues of $45M receiving a more than 2X multiple on profit. On a global basis, who has more popularity and generates more university income on licensed merchandise: UNC or ND — I think that one is pretty easy!