Book Value Vs. Appraised Value Vs. Selling Price

One Thursday last April, about 8:30 in the evening, I received a telephone call at home from one of my sales representatives who was following-up with attendees from a recent workshop. He was speaking with an attendee who proclaimed that our workshop was so great and he learned so much that he really didn't need our services.

Upon probing deeper our salesperson learned that the client had just received an offer for $1.1 million for the shares of his company and he thought that it was a good price. It became obvious he was looking for confirmation that $1.1 million for the shares of his company having a book value of $1.1 million was a good price.

Payment of the purchase price was to be $600,000 cash, along with a note of $500,000, payable $100,000 per year for five years plus interest at bank prime. The client was also offered a job at $125,000 a year for five years to manage the company, which was his present salary.

Further probing revealed that the company had assets of $1.5 million and liabilities of only $400,000. There was no bank debt. The assets comprised of inventory of approximately $300,000, fixed assets of $50,000, accounts receivable of approximately $550,000, and cash on hand of $600,000. Liabilities were comprised only of Accounts Payable and accrued liabilities of $400,000.

The company's revenue was approximately $4.5 million, generating an EBIT of $350,000 per year after paying two partners $125,000 each.

The prospective client was encouraged to come into our office for a free assessment of his offer and verbal evaluation of his business. All he had to do was to bring his financial statements, along with the offer.

He arrived with his partner promptly at 11:30 on Friday morning and I was surprised that they were relatively young to be selling their business (about mid forties). Upon reviewing their financial statements and the offer, I asked if they were satisfied with the proposal. They both said they were. I then called my secretary to bring my checkbook and I offered to write a check to them for $1.1 million cash, provided one of them would run the company for the next five years. They both immediately became suspicious, that perhaps, the offer wasn't as good as it initially appeared.

After much discussion we were able to encourage them to retain us to do a proper valuation of the business. They were sincerely surprised at the quantity of information we requisitioned, and the amount of detail that we delved into as we were assessing the business. Both partners challenged the need for a psychological assessment, but when we explained its principal purpose was to prepare for “life after business”, they hesitatingly agreed to, at least, chat with our Psychologist.

We then contacted the buyer and explained that we had been retained to value the business and that we would be back to him in approximately 60 days. The buyer was agitated and then called the sellers to advise them that they were wasting their money, and that the offer on the table was a great offer and that he couldn’t wait sixty days. Once again we had to console the partners that they were doing the right thing by having the business properly valued.

Approximately sixty days later, I believe they were dumb-founded when we handed them the formal valuation. It was comprised of more than 60 pages. The valuation came in at $1.55 million for shares having a net book value of $500,000 (after removing the surplus cash).

During the evaluation process, the in-depth analysis coupled with the psychological assessment, revealed that the underlying problem was that the partners could no longer get along, and could not agree on how best to operate the business. Neither was prepared to buy out the other. It became apparent that the only way to resolve the partnership issue was for the business to be sold. The interesting thing was, that in spite of the anger and frustration between the two partners, they were able to agree between themselves that the business needed to be sold to a third party, as soon as possible.

We took the business to market utilizing the Robbinex “nap program™” (no asking price). We contacted approximately 50 synergistic buyers and ultimately sold the business four months later for $1.85 million in cash, (after removal of the surplus cash, netting the clients $2.45 million) before income taxes or commissions. One of the partners executed an employment contract to operate the company for five years at a salary of $125,000 per year, and the other partner chose to leave.

 

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