KEN OLISA - RICH OR RIGHT?
In this regular monthly column, Ken Olisa will try to ensure that pundits Professor Right and Ms Rich provide meaningful answers to readers' questions on how to build value in IT businesses. Please address your questions to: ([email protected]).
As an accountant, I am often involved in calculating company valuations.
The way I was trained involves determining the net value of a company's assets and then adding on a small amount of goodwill. To check the sanity of the calculation, I then look in the Financial Times to see what a typical price/earnings ratio is for the sector in which my client operates and apply that to their company's profits after tax. So long as they're about the same, I am comfortable with the value. Recently, I have tried this on a couple of computer companies but the two numbers are so different that I haven't been able to calculate a value. Can you recommend a book that might help me with this problem?
Professor Right: No, I can't see anything wrong with your logic. The error must be in the calculation. Put a new battery in your calculator and try the sums again.
Ms Rich: There are several books you might find useful, but first you have to get the old-fashioned concept of 'goodwill' out of your head.
In the days of relatively low inflation and limited international valuation of businesses, goodwill was the rounding factor between the price calculated mathematically by the buyer and the larger one negotiated by the seller. Today in IT, companies are bought for more than their value as a business. Although that provides a base line, premiums are paid for companies that have very valuable assets in addition to their profits or revenues. These assets include the people, the technology and the customer base. To understand how this works you should read about the market successes of Microsoft, Netscape or Intel, whose market values contain a lot of goodwill, and contrast them with the stories of IBM or Apple whose value has often reflected a discount for the opposite reasons. Whichever way you look at it, valuing IT companies is still more of a marketing-centred black art than it is a calculator-based science.
My legal firm has traditionally been a quill pen outfit, concentrating principally on family and property matters. But that area has become less profitable over time and, as younger, IT-savvy partners have joined us, they have put me under considerable pressure to consider broadening our focus to include the needs of IT companies. Is there any point? Do we have a chance, or have the big boys cornered the market?
Professor Right: It all depends what you mean by including the needs of IT companies. IT company needs are not very different from those of any other commercial enterprise. You need help with property law, employment law, contract law and the like whether you're making software or soft furnishings. Therefore, I would have thought that you could satisfy 95 per cent of the IT community's needs without any special training. The other five per cent you could perhaps obtain by hiring an extra partner or two.
Ms Rich: Yes, the big boys have cornered the market
I started my company back in the early 1980s. It has a decent turnover and has produced a very good lifestyle for my family. Now my younger son has returned from his MBA and started to spread seeds of discontent among the Board. He is always ranting about us having missed the wave or failing to jump the chasm. I have no idea what he is talking about, but he has rather knocked the shine off my achievement. I am thinking of selling out and retiring. How do I go about it?
Professor Right: Simple. Get your auditors to send along their corporate finance partner. He'll value the business, probably based on a multiple of the past year's after-tax earnings. Then he'll circulate the details around his network and someone will be likely to want to buy it. Then you negotiate the price with a little help from your lawyer, sort out the tax implications with your auditor's tax partner and collect the money. Then, depending on how large a cheque you manage to trouser, you can escape for a long holiday before settling down to an easy life watching your son struggling with his gobbledygook in a proper job.
Ms Rich: Are you sure the reason you don't understand your son is necessarily his fault? Or is it just possible that his time on the MBA course has taught him something useful about your business? What he might be trying to tell you is that he admires your achievement but feels it could be developed into something much bigger if only some of the lessons of larger, more successful businesses were applied to yours. Before you decide to throw in the towel, you should test whether your son is talking sense or not. Get him to present his analysis and proposals to you and the rest of the Board. Warn him that he has only one shot and that he will be marked down for using obscure jargon. Then listen to what he has to say. If what he says makes sense, you and he need to figure out a way to test his plans without betting the shop, but his training should have shown him how to do that. Then you can take measured steps into the next era, together with the prodigal. That way you can look forward to retirement with the engine of your wealth still in family hands. And if his plans don't make sense, you need to implement a two-part plan: firstly, bypass the generalists and engage one of the specialist IT mergers and acquisitions practitioners in the UK, and secondly, you must think seriously about whether your son is the product of his environment or of his genes - and if it's the latter, just how much can you blame his mother?
I run a software house in the North. We have had a couple of very good years and I have been nominated for an award by the local business community.
The ceremony is rather a posh affair and some of the area's bigwigs are attending. I find this all very daunting, but worst of all, we have been asked to fill in a form so we can all wear badges identifying ourselves.
My problem is that I'm not married to my live-in partner and I don't know how to describe him so that something appropriate appears on his badge.
Can you help?
Professor Right: Badges! How ghastly. Mind you, it shows just how standards are falling these days. I was at a black tie dinner the other night and there was a chap there who was wearing a tie with blue stripes in it!
Everyone kept looking at him and pointing him out to others. But the real question is why aren't you married? Just like the chap in the dodgy tie, a blatant unwillingness to conform to decent rules marks you out as suspiciously different among your peers. If I were you, I'd either decline or get married in time.
Ms Rich: You could just have your partner's name on the badge and ignore the relationship. Or, if you want to stand out, you could use the handle conferred on a friend of mine who accompanied his wife to a politically correct convention. His otherwise idyllic trip was completely spoiled when he found he had to wear one of those enormous rosette-like badges much favoured by Americans. On it, below his name and in large letters was written 'spouse equivalent'. You should be very proud of your achievements and their decision to honour you. Honours like this matter to your staff and customers, so make sure they learn about your award.