Below is an interview of Alan Melton with Empire Business Brokers by Chelan David of DaySpa Magazine. Although these questions are for the DaySpa industry, most of the answers are pertinent to all businesses.

Chelan: Why is it important for a dayspa owner to determine the worth of their business?

Alan: The value of a business is the ultimate measure of its success. Certainly revenues are one important measure, market share is also important, and profits and cash flow are important. Your balance sheet will give you an accountant's view of net worth, but the accountant will not know the business value. In the same way that real estate values are very important to a real estate owner, the business value is a primary indicator of the success of an organization.

The business value is also important to business succession; what would happen if you become disabled or pass away? Would you want the business to continue? Will your family receive payment for your hard work? Knowing your business value will help you to know and to grow its value, and then when you sell, to maximize its value.

Chelan: How should they go about determining the value of their business?

Alan: The most reliable way to determine value is to find a professional to help you with the valuation. A professional will recast your financial statements, making adjustments and adding back discretionary expense items such as cell phones, car payments, insurance etc. Additionally your interest, federal taxes, depreciation and amortization will be added back, along with the owner’s compensation and benefits. Once this is done, we calculate what we call Seller’s Discretionary Earnings, or SDE. Your SDE is one important factor in determining business value.

In order of highest cost to lowest cost, a few CPA’s have this training, there are companies and individuals that do business appraisals or valuations, and of course business brokers do this every day as part of their job. Since most business brokers are focused on the sale of businesses rather than only valuation, let them know up front that you are only looking for a valuation.

Chelan: What are some of the main drivers behind the value of a service business?

Alan: Two of the main drivers are Revenues and SDE. The larger your revenues, the greater your chances are of selling and the greater the selling price will be. The larger the SDE, the more your business will bring at the closing table.

Chelan: How do service businesses differ from other businesses as far as valuations go?

Alan: In many cases inventory will add value to a business, and since most service businesses have little inventory, this is not a significant component of the value. A service business can also be highly dependent on the owner’s involvement; this reduces the chances of a successful transition to a new owner.

Chelan: What are some common mistakes made when determining the value of a business and how can these mistakes be avoided?

Alan: One of the greatest mistakes is not identifying all the components of value in a business; some examples might include goodwill, inventory, or intellectual property. Other factors such as customer concentration (How dependant a business is on one or two large customers) can also influence how marketable the business may be.

Here are some other common valuation mistakes.

Chelan: When should a dayspa owner begin preparing their business for sale?

Alan: Most professionals believe that an Exit Plan should be in place on the first day of business! Practically speaking, 3 to 10 years in advance is a good rule of thumb. Over the next decade, approximately half of all business owners will exit their business! These retiring baby boomers will likely create a buyer’s market for acquisitions. Historically, only 1 in 5 small businesses that attempt to sell are successful. You know the drill, “Those who fail to plan, plan to fail.” Planning in advance will help increase your value and chances of getting top dollar for your business.

Chelan: What steps can be taken to increase a dayspas’s value?

Alan: As mentioned earlier in the interview, grow your top line and bottom line. Curb appeal for your DaySpa location, keeping your facility updated, keeping your excellent staff members happy, and growing a positive reputation will increase your market value. If you do not own your real estate, considering purchasing it rather than paying rent.

Chelan: How can a dayspa owner best preserve the value of their business when in the selling process?

Alan: Service businesses are highly dependent on the individuals delivering the service; their training, experience and skills. If you lose your employees, your business is dead! Make sure you have “golden handcuffs” to retain your excellent staff members.Keep the sale confidential; if your competition finds out that your business is for sale, they can use this information against you. If your customers or your employees find out that your business is for sale, they may depart. Stay focused on the growth of the business; don’t become emotionally divorced when you decide to sell.

Chelan: Should a service business determine the value of their enterprise on their own or seek outside help?

Alan: Unless you are trained in the area of business valuation, I would recommend hiring an expert to help you. It may cost you a few hundred dollars, but this investment will give you valuable knowledge about your business health. Think of it like an annual physical; would try to do that for your self?

Chelan: How should a dayspa conduct a search for a good valuation professional?

Alan: You can go to www.ibba.org . In our industry the stamp of approval is on the Certified Business Intermediary; look for “CBI” by their name. If you are willing to invest some more money, you can find a Certified Business Appraiser, with the Institute of Business Appraisers, a Certified Valuation Analyst with the American Institute of CPA’s, or a Senior Member of the American Society of Appraisers.