MICHAEL CARTER AND SCOTT GABEHART
We all know small businesses and entrepreneurship are the engines driving the economy and our only hopes for future
economic expansion and American Exceptionalism. Over 30 million small businesses operate in the U.S. and despite the
recession entrepreneurship continues to flourish and foster optimism. Entrepreneurship is in America’s DNA so we will
continue adding new small businesses to the market despite the best efforts by some.
These “best efforts” not only stem from the domain of politicians holding office but also from components of the infrastructure that exist to support the small business owner and entrepreneur. I am not talking about infrastructure in terms of roads and transportation, but the business data infrastructure and its consumption by the small business ecosystem. The ecosystem contains lenders, creditors, service providers, investors, investment banks, and the entrepreneurs themselves.
A few very old and successful powerhouses I liken to the old roads leading into Boston before the “Big Dig,” dominate the multi-billion dollar business data market. To date, small business data has been created “about” the small business rather than “for” them, even though business data is something that constantly affects the small business owner and entrepreneur. Despite this fact, large data companies collect billions of trade records—including utilities, telecom providers, and financial entities, with the aim of providing“risk insight.” For many small businesses this sort of data collection is something they are unaware of and have very little access to, placing them out of the loop in their own evaluations. The giants of the 30 billion dollar commercial data industry possess very different goals when it comes to business data, focusing on two primary questions—will this company survive and will it pay its bills on time? Their data models and business data scores are built on a sampling of actual data, which are important to lenders despite being two dimensional. However, it is not as important to the small business owner or entrepreneur. Equity and growth data are what’s missing from the picks and shovels of the current risk data infrastructure under serving the small business ecosystem. For small businesses and the ecosystem, the third dimension goes beyond just “risk” metrics, but focuses on actual, real “growth” metrics, which makes it the most important in the eyes of the entrepreneur. Small businesses not only fail, but conversely grow into the Apples and Googles of the business world. Without real growth data, business decisions are made based on incompletely modeled risk data and leave the full picture unrealized—akin to watching TV on an old black and white when HD 3D television is available. Thanks to the Internet, we are at the dawn of the democratization of data for the small business owner, adding necessary depth to the valuation picture and bringing with it a great deal of empowerment to those that run the very engine of the American Economy.
Entrepreneurs need to ask themselves two questions; “what is my business worth today and what can it be worth tomorrow?” However, an understanding of the real value of small businesses has, traditionally, been very costly and time consuming to acquire. Small businesses need to arm themselves with data that matters, data that is “for” them, and data based upon not only risk but growth. While risk is a constant, financial growth is unique and what truly matters, forecasting it allows owners to make informed decisions by weighing their risks and rewards in real-time. Such projections must be patterned by the business data provider of tomorrow given that business valuations are needed for the business owner and their lenders, clients, and partners. Working for nearly two decades with small business owners of all types as a venture capitalists, business brokers, and business appraisers has given us the opportunity to participate in a wide variety of situations involving the valuation of companies. Given the array of transactions that require accurate insights into the probable value of a small business, which often represents the primary retirement asset for the business owner, it is truly critical that entrepreneurs understand the key value drivers impacting the fair market value of this important asset. While the assistance of professional appraisers is often mandatory, it behooves the individual owner to take the steps needed to properly assess the current value of their enterprise on their own and without incurring the exorbitant price demanded by certified business appraisers.
Regardless of the situation, there is tremendous worth associated with properly and credibly evaluating and estimating
business value. However, various scenarios present different and, many times, subjective factors that influence value. To a corporate professional privy to merger and acquisition rumors and details, the often mystical elements of the stock market play a major role in assessing the “value” of proposed acquisitions. Business brokers or investment bankers guiding buyers and sellers through the acquisition/sale processes may turn to rules of thumb passed on from friends and relatives as critical determinants of perceived value. In divorce or other adversarial environments, a business appraiser receives the biased, typically one-sided view of a company emphasized by the hiring party, creating a special challenge to ultimately arriving at a fair estimate of market value. For a merger and acquisitions specialist, the unique vantage point of buyers in search of synergies and economies of scale often drives the valuation process. Entrepreneurs may find themselves at the table discussing and capable of playing a key role in any of the above transactions. Few events are more important to business owners than those that require an estimate of firm value for one reason or another. An improperly valued business can cost owners thousands or even millions of dollars in money either “left on the table” upon sale or lost due to overpaying for an acquisition. Inaccurate assessments can be problematic as well when trying to pass a business from one generation to the next in the interest of minimizing estate and gift taxation. Parties to a divorce that rely on “gut feelings” or try to avoid the hassle of a valuation may also needlessly suffer. Small business owners trying to sell their businesses via SBA/conventional bank financing will improve their chances of receiving the most cash at closing if they obtain a credible, accurate business valuation as part of the loan application. The “value” of valuations or appraisals (or the ability to measure such value) can be measured in many ways. For example, if a credible business valuation helps a seller obtain a higher sales price, the extra cash will undoubtedly far exceed the cost of the valuation. Even if the valuation result is lower than anticipated or desired, a seller at least has the ability to make a rational decision as to whether or not a sale at the present time is desirable—perhaps avoiding the cost and time associated with listing a business for sale and spending valuable time with the broker and prospects.
In our experience business owners who become actively engaged in contemplating and answering the many questions relating to their own businesses operations and financial performance, industry environment, and economic climate can benefit immensely when forced to directly evaluate the pertinent “strengths, weaknesses, opportunities and threats,” which drive the valuation outcome. In short, they utilize the valuation process as a means of ultimately enhancing business value in the future. Owners who fail to do this turn their backs on the elephant in the room, the missing layer of business valuations, and forfeit a key right afforded to them by the new democratization of business data.
Historically, the business owner, entrepreneur, banker, and data provider could hide behind the fact that the valuation data for a particular company was difficult to find, costly, and time intensive—more of an art than exact science. The rise of the Internet, together with the public availability of real-time comparable metrics, social media technologies, and well-published rules of thumb and expertise, lead us to believe it can be made a science. Valuation and growth data should be retrievable in real-time and for a fraction of the cost of traditional methods—assisting the small business owner along with their clients and partners. A new data democracy has arrived to fuel the growth and performance of the entire small business ecosystem.
ABOUT THE AUTHORS
Michael M. Carter is the Founder, President, and CEO of BizEquity. Their new online service was created to help usher in the new Data Democracy needed by the Small Business owner and their advisor, through powering the first and leading online valuation system and service of its kind. You can try it at www.BizEquity.com. Scott Gabehart is the author of The Business Valuation Book and former professor of business valuation at Thunderbird School of Global Management. He has completed over 900 business valuations. Scott is VP of Valuation Support and Services of BizEquity.