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WEST MICHIGAN — Got a used car to sell? Consult Kelley Blue Book.

Inherit a great uncle’s collection of vintage mechanical cast iron banks? Call an antiques appraiser.

But where do you go to find out what price tag to hang on an invention or a business?

“What’s my company worth?” That seemingly simple question can be answered in two ways:

1. Gathering a lot of information, crunching numbers and making projections.
2. Hiring a business valuation expert to calculate a price.

“The value of anything is ultimately what someone is willing to pay for it,” said Rick Adamy of Adamy Valuation Advisors, West Michigan’s largest independent valuation service. “It can be very difficult to translate value into dollars and cents, especially for something fairly new.”

Adamy outlined methods for determining how much a novel idea, patented product or business could be expected to fetch in the marketplace at the Oct. 11 meeting of the Grand Rapids Inventors Network.

Calculating a company’s worth is essential for mergers and acquisitions, litigation, succession planning, gift and estate planning, and divisions of marital assets in the event of a divorce.

Arriving at a value is most difficult in the early stages of developing and testing a product, which is when investor risk is highest, Adamy said.

Inventors may be eager to morph intellectual property into cash, especially if they lack the funds for capital outlay and the expertise necessary to bring the product to market themselves.

“Inventors are bright, energetic, enthusiastic people, but holding a patent doesn’t earn you a dime,” Adamy said. “A lot of good ideas fail because running a business is the hardest part. “

If an inventor doesn’t possess the business skills and financial resources to operate a company that can capitalize on a novel idea, he or she is probably wise to sell his or her patent to a business that can, Adamy said.

To attract investment or a buyer, inventors must demonstrate that a product has a good shot at becoming a viable business.

It’s important to show that customers are interested in the product and that it will likely generate the level of returns investors expect within a time period they accept, Adamy said.

Investors will expect higher rates of return on new products than proven products, he said.

Placing a value on businesses is straightforward if it’s large and publicly traded, but complex if it’s small, unique and privately held.

There are three primary approaches to business valuation:

• Income-based – Price set on an estimate of a business’ future revenue streams.
• Asset-based – Price reflects the combined value of the assets of a business.
• Market-based – Price determined by comparing it to similar companies that have sold recently.

The best method for valuation of a business often depends on its size and what its business is, said Don van der Zwaag, senior consultant with the Grand Rapids office of ROCG, an international consulting firm that helps businesses navigate transitions to higher sales or new ownership.

The assets-based approach works best for manufacturing businesses with big investments in equipment. A market-based approach works better for software companies where the real value is beyond nuts and bolts, van der Zwaag said.

For companies at least two years old, an income-based approach called EBITDA — which stands for earnings before interest, taxes, depreciation and amortization — is the most popular valuation tool.

Valuation of very new or very small companies employing three or fewer people is often benchmarked at one or two year’s earnings, van der Zwaag said.

“A small business is usually an owner’s largest single asset, yet he or she rarely thinks of himself as an investor in a company,” van der Zwaag said. “Sitting down with someone who knows how to calculate the value gives them piece of mind as they plan retirement or as they decide what it will take to move the company to the next level.”

ROCG representatives will give a ballpark estimate of a business’ worth during a complimentary hour-long consultation. Specialist Steve Wilber also conducts thorough appraisals, which cost about $2,500 and take a few weeks to prepare.

Greg Light, senior manager at the business services company Rehmann, said business valuations in Michigan fell during the recent recession but are beginning to climb again.

Values of heath care businesses held fairly stable during the downturn. Automotive manufacturing businesses were hit hardest, but they are beginning to gain access to capital again, Light said.

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