Early in April, I was reading a column in Time magazine entitled, “The Market Mirage,” by Rana Foroohar. Though her column focuses on economics and business, this particular article struck a chord with me. It focused on the current fallacy of using stock prices to determine the value of a company for investment purposes.
Foroohar, who is Time’s assistant managing editor in charge of economics and business, wrote, “Stock prices are usually short-term distractions while true value is built up over time. [Almost] 90 percent of a company’s value is related to its likely cash flow three or more years from the present. Yet, Wall Street analysts, whose opinions help set stock prices, typically base their assessments of a firm on one-year cash-flow projections. What’s more, like all individuals, they have their biases. During boom periods, they tend to believe corporate earnings will be higher than they are during bear markets, regardless of the underlying corporate story.”
Her case in point: the Apple corporate turnaround was based on the introduction of the iPod. She explains that, right after introducing the iPod, Apple stock fell 25 percent that first year, and Wallstreeters were all boo-hissing the company. Yet, that move was, as she says, the technology that kickstarted “the greatest corporate turnaround in the history of capitalism.” Despite the slow start, Apple CEO Steve Jobs stuck with his plan and, today, according to the Time article, “nine Apple iDevices are sold somewhere in the world every 9 seconds.” Wow.
What caught my attention here is the parallel this has for contractors interested in buying or selling HVAC companies. Many don’t have a plan, and those who do don’t always follow it as doggedly as the unshakeable Steven Jobs did. Many contractors just go along with their daily lives thinking the value of their companies are based on physical things like equipment, buildings, tools and instruments, trucks and vehicles, office machinery, and personnel. Many consultants and authors have addressed this subject matter in articles and seminars that span the mechanical systems industry.
For example, my friend Brandon Jacobs, principal of Contractors Financial Opportunity LLC, a consulting firm that specializes in HVAC contracting company valuations and acquisitions, believes “the value of your business is a calculation based on several characteristics and factors that together make your business unique. Furthermore, your business may have more than one value, depending on the end use of the valuation.”
Really. In fact, Jacobs insists there are several methods that can be used to set the value of a firm. Read his article, “A Tune Up on How Your HVAC Business is Valued,” at bit.ly/BJacobsValue. Here are some Cliff’s Notes:
• The Market Approach — In essence, this is whatever someone is willing to pay for the company;
• The Asset Approach — Tangible and intangible asset types are applicable, and Jacobs says both are important to getting close to a value for the business. Typically, this approach is used for companies that haven’t been profitable; and
• The Earnings Approach — This is most often used to determine value based on a company’s ability to produce profits.
Obviously, there is a lot more to this than these really simplified statements, but there is also much more to the value of a company than its physical assets. The sad thing is, most contractors don’t think about the value of their companies or necessary retirement strategies until it’s too late.
During ACCA’s 2015 annual meeting in Dallas, keynote speaker and “E-Myth” author Michael Gerber told attendees a majority of small businesses don’t sell their businesses — they go away with the business owner. Without a plan to sell a business, there’s never any end in sight, he added.
Liken it to Jack Nicholas’ character in “The Shining,” who writes an entire novel that says, ‘all work and no play makes Jack a dull boy,’ over and over and over again, filling the entire novel.
Gerber also said, as business owners, “Your job is to invent a business you can sell.” Well, guess what: As HVAC business owners, you’re already there.
“All you have to do is make use of the resources that are readily available within our industry,” said Jacobs. The good news, he adds, is HVAC businesses actually do sell, and today is one of the best times to either sell or buy one.
In other words, have a plan, work the plan, and success is practically assured.
Stock prices are a mirage today because they aren’t based on long-term planning or strategies. According to Foroohar, they’re based on the immediacy of one-year cash-flow projections and executive incentives (in the form of stock). As she points out, executives will make decisions to hit their numbers “rather than simply making the best decisions for their businesses long term.”
The mirage is that stock prices do not set the actual value of stocks. They are the shortcut to personal wealth at the expense of a company’s long-term success. Don’t fall into that trap when it comes to valuing your business. Work with professionals who can help you set a strategy, build the plan to get there, and keep you on track. Then, stick to it. The reality of doing this will be a win for you, your company, and your customers.
Publication date: 5/18/2015