While the wealth of the stock market exploded during the 1990s,
the wealth of entrepreneurs fizzled. As the decade dawned, small
firms held just over 59 percent of the $5.7 trillion in total value
of U.S. businesses, according to a study by the SBA. By 2000, that
share had fallen to 42 percent as soaring stock valuations more
than doubled big public valuations during the decade.
A lot has changed since then, and one of the changes is a switch
in the relative performance of small and big companies. The $11
trillion in big-company value seen in 2000 had slumped 25 percent
to $8.3 trillion by the middle of 2002, the latest period for which
figures are available. Meanwhile, small-company value had fallen
just 4 percent, to $4.1 trillion. What happened? "Big
companies have been hurt by the stock market. Most small companies
are not public. That's why the small-business share rose the
last couple of years," says Kathryn Kobe, chief economist at
Joel Popkin and
Co., the Washington, DC, research firm that conducted the SBA
study.
If you're thinking this means investing in your own company
is smarter than investing in the stock market, you're right.
Not only have small-company values held up better than the stock
market, but right now, formerly scarce and costly items such as
labor, facilities and equipment are plentiful and cheap. As a
result, entrepreneurs like Dave Ratner, owner of Dave's Soda
& Pet City, a pet-supply retailer in Agawam, Massachusetts, are
finding that investing in their companies has the allure once
restricted to Internet IPOs. Says Ratner, 51, "Now's the
time [entrepreneurs] can really build value in the
company."
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After more than a decade in which other forms of investment
stole the limelight, business owners are only beginning to wake up
to the hidden value in their own enterprises, adds Ray Manganelli,
managing director at New York City management consulting firm
Strategic Decisions Group. In his book, Solving the Corporate Value Enigma
(Amacom), Manganelli says the average business creates only 60
percent of the value it is capable of creating.
Is that all bad? Not necessarily. That means entrepreneurs may
be able to increase the value of their companies by 40 percent
simply by paying more attention to it. "It's a tremendous
prize," Manganelli says. "And that prize can be the
difference between profit and loss, between surviving and
folding."
Why Build
Wealth?
Dean Dinas, senior economist and director of the Center for
Economic and Industry Research for the National Association of
Certified Valuation Analysts (NACVA), a trade group for valuation
professionals, estimates only about 5 percent of small businesses
have had a formal valuation done by a qualified professional. One
reason is entrepreneurs are too busy running their companies to be
concerned about the value of those companies. Also, some don't
think they need to build or measure the value of their companies
unless they plan to sell.
There are, however, dozens of reasons to know and increase your
company's value, none of which have anything to do with selling
it. Before you set up a buy-and-sell agreement with a partner,
decide how much life insurance to buy as part of an estate plan,
create an employee stock ownership plan, or apply for an SBA loan,
you must have a documented value for your business, Dinas says.
Many entrepreneurs rely on balance sheets, income statements or
a gut feeling to estimate their companies' true value. But
balance sheets and other financial statements used in the daily
operation of a business are only the beginning when it comes to
valuing a business. Intangibles such as customer relationships and
human resources don't show up on balance sheets but are
essential to accurate valuations.
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