Once I ran medical office businesses. Some were urgent care facilities. After several years, it became clear that there was no rhyme or reason to the revenue flow. The only thing that was clear was on the days I would visit any specific location, there were no patients. They had either come the hour or day before or would after my visit. This period of my professional life was when my first gray hairs arrived. My hair is now graying (or should we say has grayed) at a more normal pace. I have become accustom to the erratic nature of at least some businesses’ revenue streams.
Now, this understanding is one driver for the work I do as a business broker. Many businesses have these ebbs and flows. Sometimes a day, month, or quarter makes the single difference in a positive annual performance. This must be compounded into the valuation process particularly when a partial year is used to project year -end performance.
Cases in point:
Santa Fe art: Most visitors to Santa Fe come in the summer. Collectors of fine art often do not. They come when it makes them happy and some try to avoid the summer crowds. They might buy one piece for $100,000 and nothing else all year. That gallery had a big month.
Emergency departments: Depending on the snow season, there could be more or less skiing injuries and the colds and flues that come in do not ebb and flow. The doctor’s revenue could peak in a good skiing month or year.
High-end real estate: Those who deal in high-end properties may make their entire year’s earnings in one or two transactions. These transactions may not happen in the traditional season for real estate.
Cleaning services: One cleaning service has routine customers. But, in any given month, a customer can ask for a one-time large-invoice special cleaning service. If they get several of these in one month, that month can make their year a huge success.
Retail of Personal Items: We all know that retail businesses very typically don’t meet their income goals until that magic period between Thanksgiving and Christmas.
The point to this discussion is that the value of these non-consistent businesses can change depending on when the valuation is done.
In my valuations, I look at the last three years. However, if we are part way, ½ or more, through the current year, the current year can be considered as well. In a recent valuation, including the last two years and the current year, annualized from ytd August numbers, the cash to owner was less than the prior year. If we use this the value will be lower than if we wait one month and include the big job that is waiting.
Someone reading this is saying WAIT, WAIT, then you will be inappropriately over valuing this year #$%#@!
Not necessarily so. In the prior year, those one-time jobs happened to fall earlier in the year. Each case is unique and a month can make a difference, a big and honest difference. Just think if we valued a company using ytd November information but this company has consistent high December sales due to Christmas gifts. If we left December out, what a valuation tragedy. Obviously every situation needs to be evaluated independently.
