Catton Communications

Bringing success to small businesses

Determining Value

Determining Value

I've recently been examining how things are valued, from products and services to intellectual properties and entire companies. There are many ways that value is determined, depending on what is being sold and who is buying it. Above all else, those are the two most important factors.

Market Value is "the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may or may not differ in some circumstances."

I recently traded my phone in and the fair market value was lower than what I was expecting, but I had initially went into the transaction thinking anything for my old phone would be great, so it was still a bonus.

If you've ever traded in an older car toward the lease or purchase of a new car, you probably have experienced the disappointment in the trade-in value the dealership offered, even if your car was in perfect condition and had lower miles. It is only based on what they could get for it at an auction, not what they think they could sell it for on the lot.

Jumping up to homes, this can vary greatly depending on location, lot/land size, age, quality of construction, and many other factors. This is how the same house could be worth $100,000 more in a neighboring city or county. In most cases sellers think their home is worth more than what the buyer is willing to pay or the bank is willing to finance. In rare occasions, you have people who will pay above what the bank is allowing (i.e. more than market value) because of the uniqueness of a property.

There are also things that are bought and sold through specialty auctions or online stores that don't really have a standard value. Sometimes the uniqueness or rarity of an item really drives up the sale price, such as with collector's items. This is how a painting can sell for tens of millions of dollars.

For businesses, there is book value, which is generally just looking at its accounting of income and assets vs. depreciation and liabilities. For many companies, using the book valuation method leaves a lot on the table still. This can be enhanced by the brand value, which may include the company's reputation among buyers or clients. It also doesn't take into account companies that may have huge overall value but are not profitable. A great example of this was Twitter, which didn't generate a profit during its first 12 years of operations, yet was worth billions of dollars all along.

Newer businesses can have some hurdles to determining valuation. When raising money for startup valuation, investors and entrepreneurs look at anything from patents or copyrights to management team and track record to of course market potential. Most of this is speculative, which is why investing in startups is very risky, but when something takes off it can be very lucrative - enough so that one big hit can easily out-perform all of the losses. Tech startups get the most buzz and also raise insane amounts of money sometimes before ever even having a working product. But, when it hits, it can be worth billions.

What is Your Business Worth?

Is there a valuation method above that seems to be the right fit for your company? If not, don't worry. Just because there are typical groups or patterns, it doesn't mean those are the only ways of determining value. Case in point, I recently had partial ownership in some intellectual property that we were shopping around for buyers. We knew we had a range in mind we were looking for, and we were determined to get it. The problem was, the potential buyers were only fitting it into their own business formulas to see how much it was worth to them. We knew that we just had to keep looking for the right buyer, and eventually we did.

Yes, we could have gone for the quicker sale and accepted less money based on some market valuation that we were being pitched, but in the end we knew it was worth more and were willing to wait. There are other ventures I'm currently a part of or working on that have somewhat similar situations - book value or market value don't tell the whole story. Brand value, uniqueness and potential market share play a huge role on the continuing valuation. The great part is, if you're not desperate to sell, you can usually find the right person willing to pay the price you're looking for.

How to Choose the Right Partner in Business

How to Choose the Right Partner in Business

There can be a lot of differing opinions about the pros and cons of whether or not to partner up with one or more people when you start a business. I am someone who definitely advocates for partnerships, when appropriate. While some people think that having partners just means you're having to share your profits, I firmly believe that the right partners help you reach your goals faster and to achieve more. I like to use the example that 50% of a million dollars is still twice is good as a 100% of a quarter million.

There are a few questions to ask yourself that may be beneficial when deciding first, whether or not to have a partner, and second, how to choose the right one(s). Much of this may seem pretty elementary at first, but when it comes to moving from a concept into actual operation and growth, these otherwise simple questions or tasks soon become very important to your success.

Sharing a Vision for the Business

Although you may not always see eye to eye on every detail about your business, you and your partners should at the very least share the same overall vision in what you're trying to accomplish and a general agreement of how to get there. As long as those remain in place, you'll continue to work toward those goals and not let minor details get in the way or distract you from the more important stuff.

Use your Mission Statement or Purpose as a good grounding mechanism to bring things back on track. Make sure and have these written down from the beginning. If your potential partner doesn't share the same mission, then it's not a good idea to proceed.

Complimentary Experience

One of the first things to do is to examine your strengths, weaknesses, contacts, relationships, talents, abilities and areas of expertise. Then do the same with a potential partner and find areas that overlap and also areas where you are able to compliment each other and fill in the gaps.

Two of my most successful businesses to date include partners that primarily fit completely different roles than what I do for the companies. Although there is definitely some overlap in abilities, it is important to define who will be responsible for what and try to stay within those roles as much as possible. I have had to learn the hard way not to stick my nose into areas I shouldn't, as it can often create confusion and even chaos at times. You have to be willing to trust your partners to fulfill their roles.

You will have to decide if those things that you're looking for could otherwise be hired out (and still done to your level of satisfaction) instead of needing to give up a portion of equity in your business. You may also have to look in another direction if you're too similar and would therefore be stepping on each others' toes too much along the way.

Some examples of complimentary roles can include one partner having key relationships for sales while another has them for manufacturing, or one has the time and drive while the other has money and guidance. One may have a building and connections while the other has marketing experience and loyal customers to bring. There are endless possibilities here. The point is to find out what pieces of your puzzle fit together the best.

Overcoming Disagreements

Inevitably, there will be times when you have disagreements with your partner(s). One of the best pieces of advice I was given regarding this is to clearly lay out in writing what to do when that happens, well in advance of any issues. An example would include how to vote on something or who the ultimate decision-maker is in a conflict, keeping in line with the goals of the business. Too often people ignore this and think that things will magically work themselves out, and although it may be easy to address most of the time, there is going to be something along the way that requires more depth to resolve.

Have Questions?

If you have other questions about your business and partnerships, feel free to reach out to us any time via info[at]cattoncommunications.com.

Starting a New Business

Starting a New Business

There are a lot of people out there who feel they have a million dollar idea. Unfortunately, most of them stop at the idea phase and never take action. Others may start to take action but either give up too easily or make some major mistakes early on. These are the main reasons why most great ideas for new businesses fail within the first three years.

If you have an entrepreneurial drive at all, you've probably seen many episodes of Shark Tank and thought "that should be me." You're certainly not alone there. What if there was someone who could help you out, but on a smaller scale? The majority of new small businesses haven't achieved enough stability to be worthy of big time outside investment yet and need help getting off the ground. Even more people are still in the concept stage and need help bringing their ideas to reality.

That's where we can help. We have started several successful small businesses that have generated millions of dollars in revenue and we have also served as consultants for others to do the same.

Now we want to be able to help even more people be successful. If you have an idea for a business and want help getting it off the ground, or if you already have a company and need help growing it, contact us to see if we may be a good fit.