Strictly Business

Tuesday, Apr 09 2013 12:00 PM

RUSS ALLRED: Business value can be elusive as diamonds

BY RUSS ALLRED Contributing columnist

Would you rather have a million dollars worth of diamonds or a million dollars worth of peridot? Except for their color, sparkle and bulk, the monetary worth is the same.

Diamond is my wife's birthstone and that of everyone born in April and peridot represents August, the month of my birth. Diamond is worth more per karat because it has greater demand, but if you ever need a dirty, lime-green colored gemstone, then peridot is for you.

This comparison is indicative of the relative value of any two assets. The monetary value may be the same, but which is easier to liquidate or exchange for cash? Combining the stones in a setting can also enhance the value of both.

I have represented a septic pumping company and a fashion boutique for sale. Each yielded about the same income to the owner. Interestingly, the pumping company generated more buyer calls than the shop. Beauty is relative.

If you are interested in self-employment, don't be blinded by the bling of a pretty business. Consider the monetary yield and personal satisfaction above the flamboyance of fashion. As my friend the junkyard owner once told me as we were sharing the buffet at the Bellagio in Las Vegas, "There's a lot of money in trash."

Value is relative. The fashion store owner enjoyed buying trips to Paris, Milan and New York. Profits were of secondary importance to her. Most business owners, however, need to make a profit, or else all their capital investment bought them was an expensive hobby. An unprofitable business is an investment that keeps on taking.

The age of a business can enhance value. An inventor might want to buy an old business so they can claim the longevity in promotional materials. The cognitive dissonance in the mind of a buyer can increase name recognition. The brain acts like a filing system. It searches for a place to store useful information.

Where would your brain store this statement? "We've been in the healthcare business for 20 years and now offer a pill that will take a decade off your appearance." Most would be skeptical of that last phrase, but you must be credible to be in business that long. Your brand name would at least be brain-filed on top.

Many business owners also own the real estate that houses their business. Both the building and the business cash flow have independent value. It is possible to sell one or the other or both. Commercial real estate is appraised based on the rental income it generates. Because the owners own both assets they can increase the value of the real estate by raising their own rent. If they want to get more money for their business, they can lower their rent and show a bigger profit. Of course the changes have to remain within market norms or no one will buy. Some businesses like a carwash are like combining two gems in one setting. The business and real estate are intertwined. They could be sold separately, but with more difficulty.

On my bookcase there is a precious gift from a friend, made of a slab of beautifully polished petrified dinosaur dung. To end this column on the value of businesses and stones, every buyer has a unique perspective of value, making it more important in a sales situation to concentrate on the buyer's needs and not the features of the product.

-- Russ Allred, MBA, is a business consultant and author with Sunbelt Business Brokers & Advisors. These are his opinions, not necessarily those of The Californian.

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