Long-Term Viability

Appraisals Critical to Companies’ Long-Term Viability

By Donald A. Kruschke
Stopol, Inc. Vice President of Business Services, and Director of Thermoforming

Headquartered in Solon, Ohio, privately held Stopol is the leader in arranging the acquisition and sale of manufacturing equipment, parts, businesses, divisions, product lines and manufacturing licenses in the plastics industry. With its vast inventory and technical expertise, Stopol not only helps plastics manufacturers stay on stream but allows them to quickly add capacity and capabilities. Well known for its live auctions, Stopol further enhanced its reputation as an industry innovator in 2004 when it launched www.stopolauctions.com, an interactive, online marketplace that allows members to buy and sell new and used plastics equipment and other assets. Regarded as a vital industry resource, Stopol uses its unparalleled market insight and extensive network of contacts to connect buyers and sellers, and provide appraisal and liquidation services. Stopol also offers merger and acquisition consulting expertise through its Business Services division.

Whether for insurance, lending purposes, potential sale or succession planning, an accurate appraisal is an indispensable and critical business tool. A proactive approach to appraisals provides you with a proven method of protecting the value of your business and ensuring your company’s long-term health and viability.

There are five primary methods of using appraisals to your advantage to positively impact your operation: insurance, financing, meeting market demands, succession planning and mergers and acquisitions.

Ensuring Insurance

Maintaining and ensuring the value of assets is vital to the survival of any enterprise. If fire or a natural disaster strikes, you need to be prepared. An accurate and updated appraisal of your assets will save you time and money, and provide you with the leverage needed to deal effectively with your insurance company.

Many business owners have an initial appraisal on their commercial property to secure insurance, mistakenly believing that this one-time effort will provide them with sufficient protection for the lifetime of their assets. However, a general and dated appraisal leaves businesses vulnerable in a variety of ways. Without a timely and objective assessment of your property and its contents, the determination of their value rests primarily with your insurance provider. As a result, you more than likely will not receive fair market value for your assets and will spend valuable time haggling with insurance companies.

More importantly, the time you spend arguing with insurance companies or waiting for compensation for your claims can have an even-more damaging ripple effect on your company and its reputation. Time spent without a critical piece of machinery or property often translates into lost production time, which can lead to lost customers and a damaged reputation. With an updated and detailed appraisal, a company that files an insurance claim due to a fire or natural disaster will experience less aggravation and receive its fair compensation in a more timely manner. An appraisal provides you and your insurance provider with a third-party validation of your assets’ values, which eliminates the debate over how much you are to be compensated and accelerates the entire process.

Securing Financing

In today’s ever-changing economic climate, financial flexibility isn’t a luxury; it’s a necessity. Almost every enterprise needs the financial flexibility to access additional funds when growth opportunities arise or when more cash flow is needed to ride out the lean times.

When a big job comes your way, you need to be prepared to add the additional equipment or personnel needed to increase output and deliver the results your customers expect. Continually walking away from opportunities because you cannot secure the financing not only impacts your bottom line but your reputation as well. Word gets around and pretty soon those opportunities stop surfacing entirely.

During times of flat economic growth or when more cash flow is needed to boost a venture that is not reaching its full potential, fast access to additional funding can be a real difference maker.

During times of feast or famine, an accurate and updated appraisal on your inventory, equipment and/or real estate holdings provides you with the documentation requested by banks and other financial institutions to extend your credit lines and procure the financing you need.

Meeting Market Demand

Often overlooked are the market intelligence an appraisal provides and how this valuable information can be used to make your company more agile and responsive.

Appraisals are great resources of information for formulating feasibility, marketability and “best use” analyses. Appraisers are involved daily in the buying and selling of used machinery. This experience gives them first-hand knowledge and understanding of the marketplace as well as insight into the dynamic economic swings of our industry, which can have a significant impact on the value or pricing of machinery and other assets. When you conduct an appraisal of your assets, you are capitalizing on the market intelligence your appraiser possesses and further preparing yourself for whatever the future holds. In doing so, you increase your company’s flexibility and position it to react and respond quickly and efficiently to unexpected changes in the marketplace.

Succession Planning

A company’s future often resides with those who have been groomed to move into key leadership roles. That is why it is so important to have a clear, well-defined succession strategy in place. Without one, you severely jeopardize your company’s ability to operate uninterrupted when crisis or the unexpected occurs – a situation that can be devastating to any business’ credibility, reputation and image.

An appraisal is a key step to developing a succession planning strategy, particularly with family-owned businesses. We all know that family ownership can bring unique dynamics to the workplace. One sure-fire way to hold those dynamics in check is to have appraisals conducted on a regular basis to ensure that all family members are aware of and agree to the worth or value of assets. That way, if one family member wants to obtain a controlling interest in the company, less time is needed in trying to reach a consensus.

In addition, the data used in preparing the appraisal and final analysis of the situation may further benefit the succession planning process by providing a snapshot of a company’s needs, strengths and weaknesses. This information is incredibly helpful in identifying potential candidates and determining which kind of leadership is needed.

Mergers and Acquisitions

Determining the value of a business is no simple task. Each business brings unique characteristics that impact its worth. But unlike an automobile, there is no industry-wide authority or resource such as the “Blue Book” to verify or determine the value of a company. In this era of consolidation, companies and their financial managers must be prepared to quickly assign values to the entire company, a division, just one department or even a single piece of equipment. Credible appraisal figures also are key to any M&A negotiation process.

But without the proper guidance, where do you start? An accurate and updated appraisal is the first step in ensuring that a merger or acquisition is successful and beneficial to your company.

Credibility

As important as appraisals are, they are only as good as the appraiser conducting them. To have any real value, an appraisal must have credibility, which only comes with knowledgeable and experienced appraisers. Appraisals are not an exact science, but they are not guesses either. Appraisals are opinions based on informed judgments supported by facts. The accuracy and credibility of an appraisal can have a profound bearing on the outcome of your transaction. That is why the selection of an appraiser is so critical. Choosing a firm that does not understand your needs will most likely result in an appraisal report of lower quality. Credentials, objectivity and experience are integral qualities to any appraiser.

To determine if the appraisal company you are considering is right for you, ask the following questions:

• Does the company specialize in your industry?

• Does it understand your technology?

• Does the firm have historical data on the equipment it is appraising?

• What are its methods of obtaining historical data?

• What are its sources and how accurate is the data?

Conclusion

Appraisals are invaluable tools when conducted in a timely fashion by experienced and knowledgeable professionals. Appraisals, in and of themselves, do not create value; they merely reflect it. Essentially, appraisers study the market and historical data to assign an estimated value to a particular asset. It’s How you use this information is key to your company’s survival. Appraisals allow you to maximize and protect your assets, bolster your flexibility in responding to market fluctuations and needs, and prepare your company for future challenges and opportunities. By taking action and using appraisals to maximize your assets, you are further positioning your company for growth and success.

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About the Author: Donald A. Kruschke serves as Stopol, Inc.’s Vice President of Business Services and Director of Thermoforming.