End of Tax Season Ramble

A little over two weeks remaining in tax season; it has been one of the harder ones in recent memory.  Clients received their tax information late, and as a result sent us their stuff much later than in prior years.  We never forget that we are in the client service business, but with so many clients sending their tax stuff at the last minute, each probably thinking that they are the only one, but not realizing that they are one of at least a hundred.  At KRS we all work very hard to get it done, and done right, but as April 18 draws closer, it becomes physically impossible to get all the work done at the last minute.  I guess that is why the IRS invented extensions.  If you are one of those who has not yet sent us your documents, let us know and we will get an extension.

Speaking of customer service, when did the US Post Office forget, or when will they figure out, that they are in the customer service business?  This week we learned that after six years in the same office, mail that did not include our recently assigned suite number (585), was returned to the senders.  We attempted to contact everyone to let them know that the suite number is required, but, as people do, many forgot.  Our office is in a relatively small town, and the post office knows who we are, and what we are.  There is no excuse for returning our mail without so much as a telephone call.  I see a lot of news about the Post Office financial problems and how to solve them.  Thinking about customer service would be a step in the right direction.

A friend just turned me on to Joe Bonamassa, a great young blues guitarist.  He has a fair amount of stuff on YouTube; my favorite is at Royal Albert Hall where he performs with Eric Clapton.  His music is also on itunes.  I have not liked most of the new music I hear, but Joe is breath of fresh air.  Check him out and let me know what you think.

Capital Grill opened up in Garden State Plaza mall.  Great food, great service, and the biggest wine list I ever saw.  Not inexpensive, but definitely worth it.  I had a steak with a Kona coffee crust, it was delicious.  If you are going, be sure to make a reservation.  On the Saturday we were there,  the wait was over two hours for those without reservations.

This is my favorite time of year.  Three things I love are the NCAA basketball tournament, the Masters, and the end of tax season.

Next time I will get back to business, that is, how to improve yours.  I also welcome comments and suggestions.  I see that I have many readers in England and France.  If you are one of them, please let me know what you think.

What Is Your Business Worth?

What is my business worth?  I am often asked that question by business owners who think the answer is as simple as multiplying some number (usually gross receipts) by some other number (usually five) to come up with the answer.  Trust me, valuing a business is not that simple.

In order to know what a business is worth, one must understand what is being sold, and how the buyer evaluates how much he will pay for it.  The price paid for a business is based on a thorough and unemotional analysis, one that evaluates the subject company and compares its potential risks and rewards to other potential investments.  What does this mean in plain language?  No one cares about the sacrifices you made in starting the business, or how much money you made last year or last week.  The buyer is interested in projected future cash flow (reward) and the chance that the cash flow will not be achieved (risk).  The bottom line is this: if I buy this business, how much money will I make?  If the business is a risky one, there is a greater chance that the projected cash flows will not be achieved, so he will probably require a higher return to compensate me for taking the risk, and pay less for the business.  If there is little risk associated with the business, he is probably willing to pay a higher price.  But if the business does not have positive cash flow, it probably isn't worth much more than the value of its net assets.

There are two types of risk; those that can be controlled and those that cannot.  Examples of risks that cannot be controlled are the economy, unemployment, tax law, and other government policy.  Risks that often can be controlled are diversification risk (customer, product, supplier), technology, competition, and management depth.  For example, when the economy is in recession, almost all business is affected, and little can be done about it.  But a business that lacks diversification can take steps to diversify.  For example, if the continued success of your business is based on one product, customer, or supplier, you should take steps to diversify; the loss of the one customer or supplier upon which your business depends would be viewed as a great risk by any potential buyer.  Management depth is a risk that is often overlooked.  I know so many business owners that are so proud of the fact that they know everything about their business and no one else knows anything.  Guess what?  This is very bad.  If something happens to that person, the business is not worth much.

Another way to decrease the perceived risk, and increase the price of your business, is to maintain excellent accounting records,  records that tell the story of your business without explanation.  Time and time again, I see businesses sold where the seller left dollars on the table because the accounting records did not tell the complete story.  Every business owner thinks they can explain away the problems, but each explanation adds to the buyer's perception of risk, until there are so many explanations that the buyer just walks away. There are many excellent accounting software packages available, and there is no reason why every business does not have computerized accounting records, that tell the financial story of your business.

When should you start getting ready to sell your business?  Right now is the perfect time. Even though you think you are not a seller, you never know when the time will come, and when it does you have to  be ready.  What can you do right now to improve cash flow?  A few ideas are reducing payroll, managing inventory, and dropping unprofitable products or customers.  What about risk?  When was the last time your looked for new customers?  Can you identify other sources for your products?  What are you doing to be better than the competition?  You should be thinking about these things every day!  What about your accounting records?  Do you have accurate accrual basis financial statements within two weeks after the end of every month?  If not, something is wrong.  Go to Staples and buy QuickBooks.  You will be glad you did.

We welcome your comments, both positive and negative, and are happy to respond to all questions.