Whether you're passing on the company to a family member or selling to outside interests, you will require a business valuation that establishes a realistic and fair price. This value will be an important focal point of your transition plan.
Valuating a business is not a simple task. The number you have in mind may differ from that of your family successors, potential buyers or tax assessors. It's probably best to call in a specialist who can look at your assets, liabilities and goodwill with clear-eyed detachment.
Different methods can be used to arrive at your business valuation, and they can be used alone or in combination.
This method totals up all investments made in the business to date. It does not account for the depreciation in the value of machinery that may be several years old, or other assets that have declined in value.
This approach determines a company’s market value by comparing it to similar companies in the field and transactions that have occurred in the recent past. For a highly specialized business, it may be difficult to research comparable transactions.
Company's past earnings
This method calculates a company’s value by its past earnings and profits. Those earnings and profits, however, are not a guarantee of future growth.
Doing it yourself
If you are intent on determining the market value of your company yourself, here are some pointers. First, determine just what it is that will be sold — or passed on — to your successor(s) or buyer(s).
- Do you have significant physical assets, or are you selling goodwill and client lists? How valuable is that client list, and does it include quality clients? Can you charge a premium for your client list, business name or logo?
- If you have equipment, how much equity do you have in it? If it's not leased, consider asking a machinery dealer for an appraisal.
- How about receivables? What state are they in? What per cent are at 60, 90 or more days?
Once the assets have been added up, look at your liabilities. These include all outstanding company debts, of course, as well as variables such as unresolved lawsuits.
Some industry groups publish business valuation data based on sales and net cash flow. This data can be used to estimate the value of your business. Research firms that are similar to your own to see how much they sold for. Your company, however, may be a model of efficiency and profitability that outstrips all the rest, so those numbers are not necessarily the best basis of valuation.
Getting professional help
Business valuation requires some legwork and a lot of research. Do you have the time, the proper tools and the inclination to do it? If not, you might consider using a business valuator, who may be an accountant or a lawyer and should be experienced enough to determine the best method or combination of methods for the task at hand.
Your present lawyer or accountant may be able to recommend someone. Be sure to ask for references of similar business valuations that he or she has done.
Improving that number
Whether you’ve done the valuation yourself or had it done by a professional, once you've arrived at a realistic number, it's only reasonable to wonder how that number can be improved.
- One way of enhancing value is to increase sales — the "top line" — and reduce expenses such as owner perks to improve the "bottom line."
- Do you have variable liabilities such as outstanding lawsuits? If so, these should be settled before you begin the transition process.
- If you are the business — that is, if you are closely identified with the company — consider giving more responsibility to employees. They can make the transition to ownership and thereby render your company more valuable.
- Finally, your business may be more valuable in pieces than as a whole. A buyer may find your real estate holdings more attractive as an asset than as part of a potentially risky business.
There are many ways to estimate and enhance the value of your company prior to your business succession, and it pays to do your research and find a qualified business valuator. A professionally derived valuation will contribute to a smooth transition and continued harmony among family members.
Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.