Valuing the Closely Held Firm

Sometime during the life of every closely held business, the owner must plan for the eventual transition of ownership and control of the firm. To make correct decisions regarding the transfer of ownership interests in the business, the owner must be able to determine the appropriate value of the firm.

Other reasons for valuing the closely held firm include:

1. realignment of operating units;

2. establishing the value of a company considering an initial public offering;

3. the establishment of stock benefit plans; and

         4. determining estate and gift taxes.

In a closely held business, family members or a small group of individuals own the stock. Generally, no shares are in the hands of the general public. Accordingly, establishing a market value for the firm is a difficult and complex process.

Book value often bears little, if any, resemblance to market values since the balance sheet represents the historical cost of fixed assets, which may be substantially different from market value. The asset's ability to produce earnings or positive cash flows is the fundamental determinant of value.

The IRS and court decisions have had a major impact on the valuation process. These parties agree that a range of values is typically preferable to a single value and that the valuation process should consider all relevant information.

Coordinated Marketing

A following of dependable customers has always been a firm's greatest asset. The sage observation, "It is better to own a market than a plant," was until recently only a catch phrase to many manufacturers - more preached than practiced or understood. Except in times of serious depression, it was always possible to sell harder, improve performance, or cut price. Management's word to salesmen and distributors was, "We'll make It - you sell it." Today the successful business leader says, "What does the market want that we can make and market? How can we best please them with both product and service? How can we get that market to be ours - at least a share of it?"

In the early Fifties, a new concept of marketing emerged very clearly. It was a market and customer-oriented approach. For some firms this was not new, but for most industrial goods makers, so long production minded, it was a new idea to start with the needs of the market and work back.

If your training program is to be effective, you must see that your sales trainee understands this fact, is able to translate it into effective sales technique, and understands how his sales effort contributes to the total marketing mix of your company.

What are the most important factors that cause small business to fail?

There are, of course, many reasons for the failure of new small businesses. One way of looking at the causes is to remember that a new business is starting at zero momentum; newly entering a market, having to establish supplier relations, finding proper financing, and training employees. To coordinate all these facets and start them simultaneously is a tremendous job. If you don't have experience and management capability, success won't be very likely. You'll also find that undercapitalized business, those without enough cash to carry them through the first six months or so before the business starts making money, don't have good survival prospects. In such cases, even businesses with good management can founder.