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Bears Business Brief: What is your business worth?

By Rayanna Anderson, MBA

Rayanna Anderson
Rayanna Anderson

In 2008, 60 percent of small business owners reported they wanted to leave their business within 10 years and 70 percent revealed they wanted to leave their companies by 2020, according to the Apogee Center, a nationwide group that works with businesses to complete business exit or succession plans. History reveals that one-third of these owners will sell their business, one-third will transfer the business to a family member and one-third will close their doors. The first step in planning to leave your business is determining the value of the company. Many times, valuing someone’s business resembles telling someone his or her baby is ugly. Understanding the valuation process is the starting point to improving the business appraisal price in advance of a sale.

A certified valuation, a valuation prepared by someone certified by one of the national certifying agencies, will likely be a requirement or recommendation at the time of the actual sale. In fact, any SBA-guaranteed financing for the sale of a business with goodwill value over $250,000 now requires a certified valuation. Goodwill value is determined by subtracting the market value of any hard assets of the business from the purchase price. However, prior to that time, there are several key contributors to pricing methodology that should be reviewed years in advance of the sale.

A starting point for your business valuation may include researching general rules of thumb for the particular industry of your business. Consider this a gut evaluation check or sanity check on your way to a fully certified valuation. Rules of thumb generate a quick-sale price, providing an approximate value of a business. This is a popular method in many industries including restaurants, manufacturing, service and retail. Despite all the cautionary limitations in using rules of thumb to price a business, they are a lot more common than you might think and, if used correctly, do surprisingly come close to what a company’s selling price turns out to be. The reason behind this correlation is that most rules of thumb are market driven (i.e., industry experts base the rule of thumb calculation on actual business sales). Nevertheless, a business is worth what a buyer is willing to pay for the business.

Generally, rules of thumbs offers two different methods to determine a company’s value — the Percentage of Annual Sales method or a Company’s Earnings Multiplied method. Let us look at the Percentage of Annual Sales method first. Many experts consider this calculation more reliable than the Company’s Earning Multiplier rule because there are usually no adjustments made to the annual sales figure, just a determination of what percentage to use. An industry expert typically provides that information.

My favorite resource for rules of thumb is the “Business Reference Guide, The Essential Guide to Pricing Businesses and Franchise” written and compiled by Tom West. The publication updates annually and is available in printed or electronic form.

As an example, for full-service restaurants, the rule of thumb for the Percentage of Annual Sales method from West’s publication suggests estimating, “30 to 35 percent of annual sales plus inventory” as the business value. In addition, included with rules of thumb for restaurants data are caveats of pricing tips that include everything from adding a liquor license value to suggestions of variances based on different categories of sales levels. Mathematically, if a restaurant produces $500,000 of sales annually and maintains $10,000 of inventory, this rule of thumb would estimate a selling price of $510,000.

In contrast, the Company’s Earnings Multiplied method uses several judgment calls to establish a market price. The most common uses a multiplier between zero and four times the Seller’s Discretionary Earning or SDE. Calculate SDE by adding back in, to the annual net profit of the business: income taxes, nonrecurring and non-operating income and expenses, depreciation and amortization, interest expense or income, and the owner’s total compensation package.

Returning to our full-service restaurant, the SDE multiplier is 1.8 to 2.5 times SDE plus inventory. With an average after-tax net profit of 6.3 percent, the suggested business value could climb substantially after adding back in all of the above expenses before increasing the total by the prescribed multiplier.

Critics of the rules of thumb pricing guidelines argue that it does not allow for variations between businesses, instead presuming an average business. Despite the fact that there is no such thing as an average business, the rule of thumb methodology is a noteworthy starting point for small business owners as it introduces them to the fundamentals, techniques and theories of business valuation.

This article appeared in the December 13, 2014 issue of the Springfield News-Leader.  It is available online here

Rayanna Anderson, MBA, is director of the Small Business Technology Development Center and the Management Development Institute at Missouri State University’s E-Factory. Anderson writes about issues she sees regularly in her consulting with small businesses in Springfield and the state of Missouri. Email: randerson@missouristate.edu.

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Missouri State University ranks in Best Online MBA programs in the U.S.

mbalogoThe Missouri State University (MSU) Master of Business Administration (MBA) has been ranked a Best Online MBA Program 2015 by Affordable Colleges Online.

“We are thrilled with the recognition of the excellence and affordability of the MSU MBA program. Our students obtain the skills necessary to be successful in a variety of areas, while in a flexible, judiciously priced program.  With our seated or online format, we provide a quality educational opportunity for the working professional,” states Dr. Elizabeth Rozell, Associate Dean of the College of Business and Director of the MBA program.

Affordable Colleges Online (ACO) reviewed 500 online MBA programs and selected 68 programs based on a number of factors, including full accreditation from the Association to Advance Collegiate Schools of Business (AACSB), low student-teacher ratios and faculty with demonstrated excellence in business and management.

ACO is an online resource designed to help students find affordable college options and provides information about financial aid and college rankings.  To see the complete list of the 2015 Best Online MBA programs visit http://www.affordablecollegesonline.org/online-colleges/mba-programs/ .

For more information on the MBA program visit http://mba.missouristate.edu/ .

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Construction Club members make an IMPACT donating 125 shoebox care packages to Operation Christmas Child

L to R: Sergio Lescano, Dr. Gebken, and Christine Crocker
L to R: Sergio Lescano, Dr. Gebken, and Christine Crocker

In early November Construction Club member, Sergio Lescano, was inspired when he heard about Operation Christmas Child and introduced the idea to his fellow club members. Operation Christmas Child provides gifts in shoeboxes to children around the world who have likely never before received a Christmas gift.  Each box is filled with around $10.00 worth of items including toys, hygiene products, clothes, and school supplies.

“I thought what a great impact MSU could have contributing to a project like this. It is really easy as a student to get wrapped up in your own world, especially during this time of year with projects and final exams approaching… I thought if my classmates and I came together, we could make a big impact in a small amount of time,” states Sergio.

Sergio was not mistaken as the Construction Club embraced the project with great enthusiasm even though they only had about two weeks to get everything prepared.  Members were excited when the word spread through to their classmates on campus, and others also became involved.

“The Accounting Club with the help of Kristen Jones, and the MBA Association with the help of Lanae Flatness, found out about the project and also jumped in to help fill the boxes. The Modern and Classical Language Department even invited members of the Construction Club to speak in some of their classes about the project. Killian Construction Company, in Springfield also heard about the project from Construction Club member, Christine Crocker and filled several boxes as well,” states Sergio.

Dr. Gebken, associate professor in the Technology and Construction Management Department, helped find a place to collect all the boxes and assisted in transporting the filled boxes to the local drop-off location. Thanks to the help of all those involved, the Construction Club was able to collect 125 shoeboxes that are now on their way to be delivered to children in Mexico!TCM xmas child 2014 1

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Executive Advisory Council Members Make Bi-Annual Visit to Campus

The College of Business is proud to have 31 Executive Advisory Council members, made up of individuals from diverse business backgrounds, each at the top of his/her field. This group advises and guides the college throughout the year and visits campus twice annually.  They held their fall meeting on November 21 at the University Plaza Hotel and had a full agenda.

The main topic for the meeting was “A Spotlight on Curriculum: Advertising and IT.”  Professor Melissa Burnett, along with Tony Sgro from EdVenture Partners, discussed the national award-winning AdTeam and the 2015 competition year.  Members of the 2014 AdTeam also presented to the Council, to give members a more in-depth perspective of what AdTeam is all about.  Professor Chuck Hermans led a discussion about the Marketing Department curriculum as a whole.

Council members also discussed IT and “big data,” including integrating data analytics into the classroom and what that will mean for our students.  Special guest Jack Blair, Predictive Analytics and Business Intelligence Specialist at IBM, contributed greatly to this conversation that will be continued at the spring 2015 meeting.  Other special guests at the meeting included Missouri State Provost Frank Einhellig and President Clif Smart.

College of Business Executive Advisory Council
College of Business
Executive Advisory Council

We thank all of our dedicated council members for their time and support.  Current members of the Council represent the following organizations:

  • Accenture
  • American National Property & Casualty Co.
  • Bank of Oklahoma
  • BKD, LLP
  • Ernst & Young
  • Guaranty Bank
  • Hammons Products Co.
  • IBM
  • Ingram Enterprises
  • Ingress Investments, LLC
  • JKJ Associates, Ltd.
  • Kellogg US Sales
  • McBride & Son Enterprises, Inc.
  • Meyer Communications
  • Nspire Entertainment, LLC
  • Ollis & Company
  • O’Reilly Auto Parts
  • Elliott Robinson, Co.
  • Springfield First Community Bank
  • SRC Holdings Corporations
  • St. Louis Integrated Health Network
  • KPMG
  • Wal-Mart Stores, Inc.
  • Wells Fargo Advisors

 

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Student Spotlight

William Boughton
William Boughton

William Boughton, Certified Project Manager advances skills in MSU nationally accredited graduate program

Certified Project Manager Professional William Boughton knew he wanted to further his education, and MSU’s nationally accredited project management program was just the place to do it.  Not only is the program accredited, but it is also available 100 percent online.  This allows William to balance his busy professional career, personal commitments and classes easily.

The following story has been shared here via the Missouri State University Alumni Spotlights page.

Career title: Fiber Technical Project Manager at Charter Communications in St. Louis

Degree: Bachelor’s of Art and Business Administration, Lindenwood University, 2008

Why I chose Missouri State: MSU’s program has accreditation via the Project Management Institute (PMI), and I liked the ability to have 100 percent online classes. I also felt a sense of pride when I selected MSU; several of my relatives have graduated from MSU, and several other relatives are current students.

Why I chose my program: I am a certified Project Manager Professional, and work as a project manager. I wanted to further my studies.

How MSU has prepared me to be a professional in my field: MSU is proactively preparing me for my field by offering core-competency classes that are current and relevant to Project Management Institute standards. MSU also offers other electives that are business-industry current and offer added value.

How faculty help students succeed: The MSU faculty and staff definitely care if I succeed. Both faculty and staff seem to communicate early and often and promote learning with new tools and techniques.

How MSU has set me up for a lifetime of success: MSU provides a solid foundation based on sound practice and theory in areas of science and industry that are in demand. MSU offers professional certificates that can be pursued after graduation to help the student succeed not only in the short-term but also for a lifetime.

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