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UFB Newsletter Issue #068 Rules of thumb
June 28, 2007
The Key To Family Business Success
ISSN 15465640

Understanding Family Business brings you articles and tips from Family Business Experts who understand family values and business systems.

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Understanding Family Business

June 28, 2007 Issue #068

We can always tell when summer comes around by the amount of web site activity on our family reunion pages, especially the interest families have in the FamilyLore Game. We have had this family trivia game available on our site for several years and each year the interest increases. In the last two months we have had nearly 3,000 visitors to the FamilyLore Game page. Some of the testimonials are pretty interesting - check them out here.

We want to wish our Canadian friends a happy Canada Day (July 1st) - and of course a happy Fourth of July to all Americans.

Hopefully everyone will take time during the holiday to remember the men and woman of our Armed Forces serving in harm's way in Iraq, Afghanistan and other dangerous places around the world.

Business Valuations: How Useful Are "Rules Of Thumb"?

Business owners commonly use rules-of-thumb to value their business. A rule-of-thumb typically expresses the value of the business as a calculated formula based on a financial metric (e.g. “one times sales” or “five times cash flow”). While this number may be useful as a general sanity check, it rarely reflects an accurate value of a business. Some rules-of-thumb are expressed as a range (e.g. 1-4 times EBITDA) which can lead to a broad value range, proving to be of no use in business planning. Beware, rules-of-thumb do not provide an accurate basis for business planning.

The fact is current financial status represents only one aspect of a company’s value. A rule-of-thumb omits key data that influences the value: relative profitability, organizational structure, growth prospects, and tax status to name a few. A quality valuation analyst may use multiple approaches to determine the business’ value and will work with the owner and management team to understand all of the unique factors relevant to the business.

Consider two dry cleaning businesses, each doing $1 million in sales. Both should be worth $1.5 million (according to a rule of thumb that a dry cleaner is worth 1.5 times annual revenues). In reality Dry Cleaner #1 is worth twice Dry Cleaner #2. How is that possible? Dry Cleaner #1 is a new business in a hot neighborhood that did $500,000 last year, $1 million this year and projects to do even more next year. Its property, plant and equipment are new; management has a solid strategic plan for growth. Dry Cleaner #2 is located in a declining neighborhood, sales were $2 million a few years ago and have fallen to the current level; the facility has a leaky roof and the old equipment requires a significant amount of deferred maintenance. The rule-of-thumb approach is not appropriate in either case.

Business valuation is an art, not a simple calculation. A professional appraisal will paint a complete picture of the business and its true value.

Our business valuation expert associates are SPARDADTA. Take the SPARDATA challenge. The next time you are tempted to use a rule-of-thumb, engage us to value the business. After we determine the value of the business, compare our professional opinion to the industry rule-of-thumb. Chances are high that the rule of thumb will be off by 50%.


It costs you nothing... zip...nada... to ASK THE EXPERT. Most of our site pages have a link to a form that lets you submit your question to one of our experts. We try our hardest to respond within 48 hours.

Our Family Business Blog [Blog is short for "web log"] mini-journal will keep you updated about site changes and other family business matters. Check it out regularly on the site from the NavBar button. Better still, subscribe to the blog using the RSS feed information on any of our pages, such as

Understanding Family Business.

And remember to Take our fr*ee assessment on the 29 Leadership Practices...

Family eBusiness

Another Independence Celebration... financial independence

Site Sell, our partners for our own web site, have got caught up in the Independence spirit.

Site Sell is all about building a successful online business, not just about creating web sites.

So their $100 Special Offer is a must-see.

Do you have a company web site that sits there as an "electronic brochure" but doesn't attract a lot of visitors?

Do you have children or grandchildren who are out of school for the summer? Who are computer savvy, but not techy nerds? Who are curious about your business, but you don't want to just give them a job on the plant floor?

Well, here's an idea that will make a memorable summer for both of you...

Get TWO copies of Site Build It! using the independence special that's currently running until July 6th. Site Build It! is all about building successful online businesses. Let your youngster work on BOTH copies as s/he follows along the 10-day guided tour.

One copy will build the site that drives traffic to your existing expensive but moribund web site - no need to throw it out, but you do need traffic - visitors! - to get any value out of it.

Site Build It! is all about finding the right keywords and developing content - not gimmicks - so that your potential customers find your business when they search online for your products or services.

In the process of developing CONTENT for your site, you'll be amazed at what your young person will ask for - they'll want to learn about your products and services, they'll want to interview your people, find out what is special and unique about your business. Things you probably take for granted because you've built the business over the years, but that are unique and special to potential customers. They'll find the stories about special extra-effort things your staff have done for customers, and they'll WRITE about it.

As they build up a content-driven site focused on keywords and terms that describe your business, they'll not only feel the pride of accomplishment as they see the site grow each day - their very own creation! - they'll also bask in the respect they get from you, your marketing people and your employees as you find your traffic growing.

Online business success is NOT about building flashy and gimmicky sites that play like a video game - it's about getting people interested in your company and what's unique about it.

What about the SECOND copy of Site Build It!?

Well, if they have any time left over from the excitement of building something of value and benefit for YOU, I'm sure you'll point out to them - just in case they haven't figured it out on their own! - that they are good at capturing the essence of a business and helping it grow online. And that would make a great ongoing business that they can develop and promote with THEIR copy. Something they can work at and earn money at year-round.

Think this is too wild and far out to be credible? Think again! Check out what others are doing.

That's it for this issue. If you have any comments, or if there are any topics you'd like to see covered, please let us know.

Comments, requested topics, blog messages...!

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