What’s It Worth? Determining Your Company’s Market Value
By David L. Walker
Selling a business without knowing its market value is like playing poker without looking at your cards—only a lifetime of hard work and sweat equity is at stake.

Picture this scenario: On the same day, the owners of two different private companies complete transactions to sell their respective companies to two separate buyers. The companies have similar products and services, serve similar markets, and have similar revenues and profitability. Yet one sells for $11 million while the other sells for $17.5 million. Why such a difference?

Despite surface similarities, there are probably hundreds of factors that increase or reduce these companies’ respective values to a buyer. Understanding what makes a company more or less attractive to a buyer is important for any home builder or remodeler planning to sell his or her business.

However, it’s good to know your company’s true market value even if you aren’t planning to sell your company anytime soon. The information comes in handy when you’re seeking a loan from a bank, looking for investors, want to take on a partner, want to know how your company compares to the competition, or want to see if that new handyman or custom home division is adding value to your company.

Many business owners don’t want to spend the time or money to learn their company’s true value in the market. Some believe it’s too difficult or they don’t have the right skills or resources; others think they already have a pretty good idea of what their companies are worth—but they’re usually wrong.

Find an Advisor

Determining market value requires extensive market research and financial analysis to reveal a company’s future potential under new ownership. Since most business owners sell only one business in their lifetime, a professional, experienced mergers and acquisitions advisor can help by providing a valuation that gives an owner confidence when approaching and negotiating with prospective buyers—or talking to a lender.

If you do less than $1 million in volume, look for a business broker or an accountant who specializes in mergers and acquisitions. (You can find them by consulting the International Business Brokers Association’s Web site at http://www.ibba.com/.) In addition, you’ll want a good investment banker and an attorney who handles mergers and acquisition on your team. Your advisor can probably give you referrals to locate these professionals

Once you’ve located an advisor, broker, or accountant, don’t expect him or her to do all the work. The key to obtaining a “full” valuation is to understand everything good and bad about your business, and to anticipate how this information will be received in the marketplace.

Study Your Financials

The process usually begins with recasting the business’ financial statements; typically the past three years’ balance sheets, income statements, and statements of cash flow. Recasting includes extracting information that lenders, investors, and potential buyers want to see, eliminating certain expenses and extraordinary items legally used by private, owner-managed companies to define tax benefits, and making other adjustments to conform to Generally Accepted Accounting Principles (GAAP).

These adjusted financial statements offer potential buyers a normalized view of the company’s past performance; that is, they provide a basis for judging credibility by showing how the company operated in a given period.

Remember, however, that buyers buy the future, not the past. Adjusted historical financials help you build pro forma financials, which look five years into the future and are the foundation of market value. Pro forma financials require extensive market research to determine reasonable, supportable assumptions regarding revenue and profitability trends, growth rates, market dynamics, and other factors.

Study the Market

If it isn’t economically feasible to hire a market research firm, do your own research by examining trends in the industry, studying your competition, and reading industry publications as well as general business-related periodicals.

Identifying and examining intangible assets is also integral to the valuation process. These are attributes like a loyal customer base, patents and licenses, supplier contracts, trade secrets, and many others that contribute value to the company but aren’t necessarily represented in the financial statements.
 
Combining all of these elements—adjusted historical financials, reasonable pro forma financials, and intangible assets—reveals a company’s future potential and establishes a valuation range that informed buyers will likely be willing to pay for the company.

Armed with a perceptive, comprehensive valuation of his or her business, an owner can then enhance the value by increasing sales and marketing efforts, investing in cutting-edge technology, divesting an under-performing division, or adjusting the capital structure. That in turn provides leverage at the negotiating table and increases the likelihood of receiving an attractive value for the company—or funding for future ventures—regardless of market conditions.   
 
David L. Walker is president of RSM EquiCo’s Professional Services Group, which conducts research and analysis for client companies to determine accurate valuation ranges.  Based in Costa Mesa, CA, RSM EquiCo specializes in mergers and acquisitions, divestitures, and corporate finance for private middle-market businesses and is part of RSM McGladrey Business Services, a business segment of H&R, Block Inc. For more information, visit the company’s Web site at http://www.rsmequico.com/association.aspx or contact Gerry Gacek, senior vice president, at 888-900-0411.

Business planning is the bedrock of a valuable, profitable company. The PRO Builder Business Plan Guide offers step-by-step exercises and proven methods for establishing your company’s goals, developing strategies, setting priorities, and evaluating results. It includes an electronic spreadsheet developing the financial section of your business plan. The price is $22.46 for NAHB members and $24.95 for non-members. Call 800-223-2665 or go to www.builderbooks.com to order.

Drainage Ditch Decision Is All Wet
You can’t pilot a boat or even a canoe on most drainage ditches, but the Army Corps of Engineers and the Environmental Protection Agency consider them “navigable waters”—even if the ditches are located miles from lakes, rivers, and the like.

Scratching your head over that logic? So are land developers and home builders, who were dismayed by a June 12 court decision in U.S. vs. Deaton that regulation under the Clean Water Act includes manmade roadside ditches.

James Deaton hired a contractor to dig a three-foot-wide drainage ditch on land in Wicomico County, MD, where Deaton planned to build five homes. The Army Corps of Engineers halted the excavation and sued Deaton for discharging fill material into navigable waters without a federal permit, claiming that he’d violated the Clean Water Act.

The excavation contractor had placed the soil on either side of the ditch he’d dug. There are five dams that stand between Deaton’s property and the Wicomico River more than eight miles away. Nevertheless, the U.S. Fourth Circuit Court of Appeals ruled that a county drainage ditch Deaton’s property is next to was a tributary to the river, and that Deaton’s property was therefore subject to federal Clean Water Act authority.

The decision is troubling for NAHB’s members, as it can stymie their ability to adequately develop land for home sites, increase job costs by requiring remediation to fill low-quality wetlands, and potentially squeeze the already short supply of land even tighter.

To protect against unnecessary—and nonsensical—environmental regulation, NAHB plans to file for a rehearing of the case in the U.S. Fourth Circuit Court of Appeals, and may possibly take it to the U.S. Supreme Court. We’ll keep you posted. [return to top]

Builder Bright Ideas

• Schedule regular weekly meetings with customers right on the jobsite during business hours. Knowing that they will see you each week tends to reduce the number of times clients call, and allows you to better manage your time without constant phone interruption.
  
  
• Enclose a home maintenance checklist that includes items like “change the furnace filter regularly” in your customer handbook. It helps define what isn’t included in your company’s warranty service, and is especially helpful at the end of the warranty period

You’ll find hundreds of terrific tips on accounting, personnel, customer service, sales and marketing, management, trades, production, and design in Management Ideas That Work and More! Management Ideas That Work from NAHB’s Business Management Department. Each book costs $25 for NAHB members and $31.25 for non-members. Both are available from BuilderBooks; call 800-223-2665, or visit  www.builderbooks.com to order online. [return to top]

Accessible Housing Pays Off for Builders
A Michigan city is promoting accessible housing by becoming the first community to enact a cash incentive program for builders. In early June, the city council of Escanaba, MI, unanimously approved an ordinance to encourage home builders to build more visitable homes.

Visitability Ordinance No. 1024 implements a voluntary compliance policy that rewards local builders of new, single-family homes for including design features that promote greater access for people with physical disabilities. Builders who incorporate features such as wider doorways, ramps, and no-step entrances can receive $150 cash rebates after the city completes compliance inspections. Click here for more details on Escanaba's decision. [return to top]

Business Opportunities From NAHB’s Councils

Sharpen Your Marketing Skills

Head south this fall for brand-new Institute of Residential Marketing (IRM) educational programs offered through NAHB’s National Sales and Marketing Council (NSMC). Earn a designation from IRM while you attend seminars on understanding housing markets and consumers and developing marketing strategies, plans, and budgets. You can also participate in a MIRM case study workshop and take a housing tour of Tampa Bay communities. The programs take place October 20-24 at the Wyndham Westshore hotel in Tampa, FL.

To register online, go to www.nahb.org/ and click on Education. For more information, call 800-368-5242, x8338, or e-mail: registrar@nahb.com. For information about the NSMC, click here.

Idea of the Year Contest

Good marketing campaigns fuel phenomenal sales and profitability, and point you out to the public as one of the most innovative builders in your market. Show off your sales and marketing acumen by entering the 2003 Idea of the Year Contest presented by NAHB’s Sales & Marketing Ideas magazine (SMI).

Eligible ideas include special promotions developed to sell more new homes; incentive or giveaway programs that have increased referral sales, prospects, or sales traffic; or any cost-effective, yet exceptional marketing idea that has created strong word of mouth and increased your company’s bottom line. Ideas must be generated between July 1, 2002, and August 1, 2003. The deadline to submit entry forms and statements is August 5, 2003.

An entry form can be found in the January/February issue of SMI and on the Web at http://www.smimagazine.com/. The Grand Prize winner will receive two complimentary passes to the 2004 International Builders’ Show in Las Vegas and an award plaque. Additionally, the idea will be featured in the January/February 2004 issue of SMI and in NSMC handouts at IBS. Three Merit Award winners will have their ideas featured in the March/April 2004 issue of SMI.

Building Systems Contest

The rising popularity of systems-built housing means more opportunities for home builders. For the first time, any NAHB builder member can enter the Building Systems Councils’ 2003 Excellence in Marketing & Model Home Design Awards. In addition to BSC manufacturer and associate members, any NAHB builder member who uses systems-built components can enter marketing materials or a completed home in the competition. Winners of both awards programs will be recognized on the floor of SHOWCASE 2003, the BSC’s annual trade show, education conference, and networking event.

For entry forms, entry guidelines, a complete category list, and information about the BSC, visit www.nahb.org/buildingsystems or contact Eric Fulton at efulton@nahb.com or 202-266-8577.  Submission deadline is September 12, 2003. [return to top]

Register Early for IBS and Save 50 Bucks
Make plans now to attend The 2004 International Builders’ Show®, the biggest home building industry event of the year. See thousands of new products and technologies from 1,400 of America’s foremost suppliers. Learn the latest on design and construction, land development, housing finance options, business management, and more from a selection of more than 200 educational seminars.

tecHOMExpo, the show within The International Builders’ Show, will be better than ever with Discovery Day. You’ll discover the latest breakthroughs in building industry technology on Tuesday, January 20, 2004 throughout both tecHOMExpo and the entire show floor of the International Builders’ Show.

Register now and reserve a hotel room for next year’s Show, which will take place January 19–22 in Las Vegas, by visiting http://www.buildersshow.com//. You can SAVE UP TO $50 if you register on or before December 17, 2003!

To receive news throughout the coming months about The 2004 International Builders’ Show, click here. [return to top]

Member Advantage: Save on Dell® Computers
With all types and sizes of businesses, NAHB members keep coming to Dell to save money on computers and equipment from one of the most respected brands in the business.

To get your discount, call 888-577-3355 and identify yourself as an NAHB member. The discount will be automatically applied and will be reflected on your invoice. The NAHB discount cannot be combined with other Dell discounts or promotions.

To order online and for details on more than a dozen other money-saving Member Advantage discount programs, click here, or send a blank e-mail to membersavings@nahb.com.

Go to www.nahb.org to explore the numerous advantages associated with membership in your local, state, and national home builders association. [return to top]