PART I: Company Value - The Ultimate Indicator.
When you think about all of the parts that make up your diesel repair shop and how they are measured, you may wonder; “Is there any single indicator that takes everything into account and determines how successful, or unsuccessful, my repair shop is?”
The answer is yes, there is such an indicator. It’s called Company Value. But it’s hard to find and means different things to different people. There are many ways to measure it, and experts often disagree on the number itself and how it’s measured.
Depending on who is interested in knowing the value of your repair shop, their view of its value will differ, often dramatically.
- Accountants are interested in book value, which is based on historical financial information.
- Bankers and other lenders are interested in book value and liquidation value (how much they can get by selling the assets of your repair shop). They view your repair shop as collateral for their loans.
- Taxing authorities are interested in the tax revenues they will collect from your business, and that means they’re interested in income as well as assets, and something called “fair market value.”
- Financial investors are interested in the financial value of your repair shop, and they base their perceptions on the present value of its future cash flows.
- Strategic investors are also interested in financial value, but they’re even more interested in the synergies they could realize by “partnering” with your business to create greater profitability than each could do on its own. They want to know what you bring to the table that will make the combined business better than the sum of its separate parts.
- Heirs see the business in terms of their own particular perspectives. Those who want to operate the business see it as a going concern (the assumption that the company will remain in business for the foreseeable future). Others see it as a financial resource they may want to “cash in” for as much as they can get. Still, others see it as a long-term source of wealth and security. There are any number of other possible views held by heirs, and they’re all further influenced by the tax consequences of inheriting your business, or shares of it.
- Owner-operators have their own perceptions of the value of their repair shops. It’s usually a higher number than that believed by outsiders because it’s based on an intimate understanding of what the business does and what it took to get it where it is today. Often, their views aren’t obvious or shared by outsiders or potential buyers.
The point is, “value, like beauty, is in the eye of the beholder.” While company value is the most comprehensive overall indication of your business success, there is little agreement among the different interested parties on the number itself and how it should be determined – it depends on your situation. We’ll get to that later. First, you must become familiar with all of the methods for determining your company value.
There are four ways to look at the value of your diesel repair shop: Book Value; Liquidation Value; Owner’s Perceived Value; and Market Value. While market value is the most realistic measure of the true value of your business, it is useful to look at the other methods of valuation:
Book Value is an accounting fiction based on historic facts and accounting rules. Your balance sheet contains “values” based on costs that can be years out of date and often don’t reflect today’s asset values. The accounting information is accurate and true, yet can have little to do with your current situation. Furthermore, much of the value of your business lies in its potential to produce future profits and cash flows, none of which are reflected in your current period’s financial statements.
Liquidation Value is the market value of the company’s assets, less its liabilities. It views the business not as a going concern, but as a collection of assets that can be sold. It bears little relationship to the true value of the business as a profit and cash generating entity.
Owner’s Perceived Value is what the owner thinks the business is worth. Any owner worth his or her salt believes in the future potential of the business, and attributes value to the business that often can’t be substantiated to a non-involved third party. Usually, the owner’s perceived value is higher than that of an outsider.
Market Value is the only valuation that takes into consideration everything about your business – its history, earnings potential, market conditions, attitudes of potential buyers – everything.
The problem with market value is that you don’t know the true market value of your business until you sell it. Until money changes hands, it’s all speculation. But you can, and should make useful estimates of what would be a fair price for your business if it were to be sold to a competent buyer. The general term for this estimate is “Fair Market Value.”
We will cover how to estimate the Fair Market Value of your diesel repair shop in Part II of this blog series; “Fair Market Value - the Best Measure of a Company's Value.”