Landscape Architects, like graduates of other professional schools, are much better trained in providing their services with diligence and professional pride than in developing strategies for maximizing the cash flow and profits generated from their practice, or capturing the full value of their firm when selling their ownership upon retirement, merger, or some other eventuality.

Commanding A Premium Price When Selling Your Business As A ?EUR??,,????'??Going Concern.?EUR??,,????'??

After investing one’s professional career in building up the landscape architecture design/construction firm, it would be a shame to “cash it” for less than what it should be worth to the buyer. However, this would be the likely outcome if the business is sold simply at the “book value” of assets or at some arbitrary multiple or fraction of annual billings or accounting profits. In fact, selling the company as if liquidating its assets resembles a “fire sale”; surely, the landscape architectural firm is worth more than the depreciated value of its desks, telephones, drafting supplies, equipment, etc! Unless a practice is actually being liquidated, the buyer is actually purchasing the present value of future cash flows from the operation.

In practice, it is useful to first “recast” the past years’ financial statements to present a more accurate (and favorable) picture of the cash generating capacity of the business. For instance, large salaries, bonuses and expense payments to the owner, spouse and brother-in-law may not be necessary to operate the business; the buyer can hire a professional landscape architect as a manager on salary to perform the same tasks with lesser cash outflow. Past results look even more impressive when the expenditure levels are thus adjusted.

Secondly, a relatively short “forecast period” (three, five or ten years) is selected because the further we guess into the future, the less credible is the forecast, and present value of cash flows far into the future are not that significant, and because most business investors desire to recoup their investment as quickly as possible to reduce their risk. A residual value is determined for cashflows beyond the forecast period; a common (and easy) method is to assume a “perpetuity” where the company is generating a return at its cost of capital.

Thirdly, an appropriate “discount rate” has to be used in arriving at present value (and residual value) calculations. The “weighted average cost of capital” of the business, comprising cost of the stock (or shares) together with the cost of debt, is used as the discount rate. This reflects the risk of the business as well as earning expectations of investors and creditors.

The fourth is the most crucial step in the analysis, and consists of developing sales growth scenarios over the forecast period, as well as the ratio of earnings (before interest and taxes) as a percentage of sales, or EBIT/Sales. We shall address marketing performance and strategy in a future installment of this article series. Sales growth is entirely dependent on marketing performance; EBIT/Sales ratio (Operating Profit Margin) is partially determined by marketing and partially by operations effectiveness.

The fifth is to develop annual proforma income statements, balance sheets, and cashflow statements for the forecast period, reflecting all cashflows, including interest, cash income tax and dividend payments, and incremental working capital, as well as fixed capital investments required for the projected sales growth.

The sixth step consists of calculating the present value of cashflows in the forecast period plus the residual value which, after subtracting the debt, gives the true value of an ongoing business (compare it with the value of assets!).

Due to assumptions made in forecasts and selection of the discount rate, the last step in the valuation process is to construct a sensitivity analysis table showing how the value of the ongoing business changes with changes in the cost of capital, sales growth rate, operating profit margin, etc. This provides a range of values matching various possible future deviations from current assumptions. When sitting across the negotiating table with the buyer, this information means power!

Coming in future issues:

• Increasing Profits and Shareholder Value while Retaining Ownership of Your Business
• Breakthrough in Marketing Effectiveness for Profits from Professional Services

About The Author

M. Esat Kadaster is one of the leading experts today on marketing and management of architectural, landscape and engineering design and construction firms.

He is President of Newport International Projects Co., marketing management and company valuation consultants serving the design and construction industry from Newport Beach, California. In addition to his B.S. and M.S. degrees in Civil Engineering, Mr. Kadaster received his MBA with Distinction from the Graduate School of Management at Northwestern University.

A Registered Professional Engineer, Esat Kadaster brings an impressive background in management and marketing of architectural/engineering and management consulting firms. He has written numerous articles on marketing, management and technical subjects, and teaches a course on marketing technical and professional services at the University of California Extension in Irvine. Currently, Mr. Kadaster is Chairman of the Engineering Management group of ASCE, Los Angeles Section.

Should you have any questions, you can phone Mr. Kadaster at 714-675-3229