Value Blog

Simply, yes.  When you create systems that will allow your business operations to be transferable with minimal interruption , you create value.  A business has value only when the ability to keep generating cash flow can be transferred.  Read more about business plans from Julia Aquino of The HOW Factor, Inc. (www.howfactor.com) below.

Julia writes:

The “Hit By a Bus” Plan

No one plans to be hit by a bus, of course, but what if a sudden, unexpected event occurred in your life? Accidents do happen, as do other significant events that require a business owner to be away from the business for a lengthy period of time. If this happens to you, who will be running your business bright and early the next morning?

If the answer to that question is that the doors would close, maybe not the next day, but soon, then it is time for you to have a plan. In this tightening economy, most businesses could not afford to shut down for even a short time without losing customers and suffering devastating financial consequences.

Whether it is just you running your business or you have a team of loyal employees, someone is depending on your business to continue to operate should the unthinkable happen. What would happen to your family and the families of your employees if no one else were able to run your business in your absence?

The key to business continuation is having a detailed Operations Manual with instructions for “how things are done.” It should cover all of the different systems you have in place and descriptions of the different positions employees hold in your company. If someone can step in and have a written guide to how the business is run, even if they are unfamiliar with the day-to-day processes, then your business has a chance of surviving, and thriving.

An Operations Manual is the master plan for how your business operates, and should cover all of the “steps” you keep in your head. The content of a manual will vary from business to business because the systems that each business uses are different, but the basic structure of an Operations Manual should be consistent. Even the simplest things should be included, like passwords to access the computers and accounts.

If you have no employees, it is just as critical to have a manual so that your family, friends, or other designated individual can step in and answer clients’ questions, retrieve their projects and information, and keep the bills paid until you are able to return to the helm. In fact, having an Operations Manual can be a selling point for solo practitioners when pitching the company to clients. They may wonder who will handle their work or their concerns if you are temporarily away from the business.

An Operations Manual means the difference between a business that can run while you are out of the office, and one that cannot. It will alleviate the stress of wondering what will happen to your company if you are “hit by a bus.”

© 2010 Florida Business Valuation Group

A rule of thumb is defined in the International Glossary of Business Valuation Terms as “a mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific.”  Typically they are representative of the average price paid in an industry.  So, it would appear that using a rule of thumb would provide a good estimate of the value of a company. Should Company B still be worth twice as much as Company A?

It is the appraiser’s job to look at the facts and circumstances of a particular business operation in arriving at a value.  This includes establishing how the business compares to others within its industry.  Rules of thumb are not a recognized valuation method because often there is insufficient information available about how the multiples were developed.  Some rules of thumb are supported by market data, and others are not.

If you are interested in researching rules of thumb for a particular industry there are a number of sources:

• 2009 Business Reference Guide, published by Business Brokers Press (www.bbpinc.com)
• Handbook of Small Business Valuation Formulas and Rules of Thumb/Third Edition by Glenn Desmond, published by Valuation Press, 1994.
• How to Value over 100 Closely Held Businesses, Fourth Edition, by Stephen M. Zamucen, MBA, CPA, CVA, ABV, CFE, published by The National Alliance of Consultants, Valuers and Analysts, 2002.
• Handbook of Business Valuation, Second Edition, edited by Thomas L. West and Jeffrey D. Jones, published by John Wiley & Sons, 1999.

Additional information is sometimes available from industry trade groups.

Use caution when using rules of thumb as some of them are dated and may not reflect current industry or economic conditions.

© 2009 Florida Business Valuation Group