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New online business e-valuation tools:
Useful, but you still need the human touch

Online business valuation toolsNeed a bargain-basement way to determine your company's worth? Look online.

Electronic business valuation programs are readily available, both online and through Internet-marketed software programs that retail for a fraction of the cost of a full-blown study.

The good news is, depending upon your needs, these programs may save you tens of thousands of dollars.

The bad news is, they all fall short of providing an accurate market estimate of what your company might be worth. For that, you'll still need the human factor.

How business valuation works
Business valuations are typically done prior to the sale, purchase, reorganization or dissolution of a business, to obtain a loan, establish an Employee Stock Ownership Plan (ESOP), for estate planning, to settle a divorce or simply to keep investors informed.

Financial analysts use a two-step process to arrive at the value of a business.

Step one is to crunch the numbers. That is, feed complete financial information into one or more standardized appraisal systems:

  • Discounted cash flow analysis isolates the company's cash flow to capital ratio and projects it over time.
  • Asset appraisal analysis determines the worth of a company's property, plant and equipment, often as a prelude to liquidation.
  • Replacement cost analysis evaluates a company by what it would cost to replace its assets, usually as a prelude to a merger or acquisition.
  • Comparable companies analysis provides a relative business valuation based on the selling price of similar companies that recently sold. In the case of public companies, stock price is also compared.
  • Comparable transactions analysis uses, as a benchmark, companies that recently sold all or most of their equity.

Each method provides a slightly different picture of the company, rather like photographing a building from different angles. Alone or in combination, they yield a rough estimate of the company's worth.

Step two involves analyzing the company's market value. It takes into account economic and market conditions, selects and applies performance indicators and multiples based on the analyses mentioned above, and factors in results of a due diligence review before issuing a valuation opinion, often in terms of asking price or per-share price.

Free is the best price
Malon Wilkus, chairman and CEO of Capital.com, spent five years developing a valuation method for private companies and three years bringing it online. By using Capital.com's Automated Online Valuation, financial analysts, chief financial officers and owners of private companies may crunch their own numbers, password-protect the result, and even return in the future to generate an updated report in minutes.

The cost? Zip. Nada. Absolutely nothing.

"It's very hard to get a business valuation of a private company done, period," Wilkus says. "It costs a lot of money; typically, with a company of $28 to $30 million in revenues, it's going to cost them somewhere between $15,000 and $25,000 to get an evaluation done the first time and subsequent valuations tend to cost somewhere between $3,000 and $8,000. This is quite new, and Capital.com provides it for free. It's a powerful capability."

It's a freebie Capital.com provides in hopes that small to midsize business owners might use one of its financial analysts or ready financial institutions. Looking to raise financing? Considering an acquisition, recapitalization or buyout? Thinking about selling? Help is just a mouse click away.

Wilkus hopes to lure financial professionals back time and again with the high-powered automated online valuation program.

"For the first time, the CFOs of private companies can actually make valuation presentations to their board of directors every month or every quarter and have a real good sense of where they stand vis-a-vis the public companies that are in the same industry," he says.

Wilkus admits his free online service isn't intended to replace a full business valuation.

"It's not meant to be an opinion as to value. There are a variety of assumptions that the system allows you to manipulate, but it does tend to take a professional valuation firm to know what assumptions are appropriate and what aren't. However, if you keep the same assumptions each time you run a valuation of your company, you can start to see trends of how you're doing, how the marketplace is performing in terms of public company comparables and how it impacts you in terms of value."

Nor is Capital.com the only system out there. Business Equity Appraisal Reports of San Carlos, Calif., offers a $250 "snapshot" valuation report. E*BizValue of Petoski, Mich., offers a $295 online valuation within 48 hours and guarantees it will be within 5 percent, plus or minus, of any other service or your money back.

Software programs abound, as well, from the $67 Business Valuator offered by the Australian software company MicroCourse Ltd., to the $695 Valuation Master, endorsed by the National Association of Certified Valuation Analysts.

The human factor
Richard Pollack, business analyst with Berkowitz, Dick, Pollack and Brant of Miami, isn't scared by the emerging e-val empire.

"You can't apply a cookbook approach in doing a valuation," he says. "You've got to go out and visit the company, you've got to understand the business, the strengths and weaknesses of the business, you've got to know something about the management, about the product they're making, about their customers, their suppliers. That is the only way you can develop appropriate valuation and capitalization rates."

Pollack admits computers make his job easier. He uses many of the same programs to crunch his own numbers. But without someone to connect them to a living, breathing business, he says they just won't make it to market.

"There's no way that you can do an evaluation just by applying a mechanical technique off of a computer. That's just not going to cut it. It may help you with the numbers, but it's not a substitute for the financial analyst doing the work and spending the time and exercising good judgment."

Colin Gabriel, author of How to Sell Your Business and Get What You Want, agrees for another reason.

"If you are really trying to find the true value of a business, there's only one way to do it in my view, and that is to talk to potential buyers," he says. "You want to find out what the traffic will bear, and you can't find out what the traffic will bear from an academic analysis of data."

The goal: to get more
Gabriel says the real point in getting a precise bead on your business is so you can then go to market and get more than it's worth.

"When you have something for sale, you hope that somebody will be irrational in their interest, or what you have to offer fits into a broader strategic plan of theirs and they are therefore prepared to pay more than what would appear to be its value," he says.

It's one of several reasons he recommends having a financial analyst in your corner.

"People get wrapped up in the emotions of it, and they can kill a deal when emotions come into play too much," he warns. "Their judgment is not as sound as it would be."

Bottom line: While a full business valuation opinion may still be too costly for many small businesses, it is now possible to get very useful data reports for little or nothing online.

Jay MacDonald is a contributing editor based in Florida
To comment on this story, please e-mail the
Bankrate.com editors

-- Posted: June 9, 2000

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