September 15, 2017

The 5W’s of Business Valuations

When speaking with business owners, many indicate that they have thought of having their business valued professionally, but never pursued it. The reasons vary from the cost, to the thought […]

When speaking with business owners, many indicate that they have thought of having their business valued professionally, but never pursued it. The reasons vary from the cost, to the thought that you only do it when you’re going to sell, or simply that they already know the value – in this case, it’s usually a response to the effect of their competitor sold for four times, so that’s what their company is worth (when asked four times of what, the response is usually silence).

Whatever the rationale, it generally comes down to a lack of understanding of what a valuation is, and how it might benefit them as a business owner in making informed decisions about the future of their business.

WHAT is a business valuation?

A valuation is an independent opinion prepared by an expert, specifically trained in the field of valuations, on the fair market value of a business or asset, as at a specific point in time.

Depending on the reason for performing the valuation, there are different levels of reports that can be prepared, ranging from calculations of value, to comprehensive valuation reports. This is similar to the world of financial statements, where in some cases a notice to reader is all that is needed, while in others, a full audit is required.

WHO performs business valuations?

In Canada, Chartered Business Valuators (“CBVs”) are the recognized leaders in the field of valuations. Established in 1971, the Canadian Institute of Chartered Business Valuators is the largest and most recognized business valuation organization in Canada, with over 1,400 members nationwide. CBVs go through a rigorous program of training, including over 1,500 hours of work experience and focused training on the valuation of businesses.

WHEN should I consider having my business valued?

Business valuations are generally conducted for either proactive reasons or reactive reasons:

  1. Proactive reasons are generally driven by long-term decision making and include things such as strategic planning initiatives, tax reorganizations, and succession planning. If you’re beginning to have discussions with employees about future ownership in the company, or with your accountant about your estate planning, knowing what your business is worth allows you to make informed decisions about the future. Also, if you’re considering selling your business, having a valuation done allows you to have realistic expectations about what your business is worth, and may shed some insight into how an outside party may view your company.
  2. Reactive reasons are generally a result of an unforeseen event that requires that an independent expert opine on the value of the business. This could include the death of a shareholder, a divorce (either with a spouse, or a corporate divorce from a shareholder leaving the company), or litigation against the company.

WHY should I get my business valued?

The main reason is to provide additional information to the business owner to help them make informed decisions going forward. Many owners assume that they know what their business is worth, (sometimes they are close and sometimes they are not), and they may be making many key decisions based on an assumption with little science or rigor behind it.

Additionally, many owners we work with fi d the valuation process helpful in shedding light on the current strengths and weaknesses of their business. By understanding how their business is valued, owners are able to identify areas to focus on that will increase the value of their business going forward.

WHERE should I go from here?

For business owners, it all comes down to having the best information in front of you to make informed and prudent decisions for your business. A business valuation can help with this process, and may help answer questions about how your business is viewed by others, as well as identify risk areas that should be addressed.

In the context of succession planning, it’s best to start early – knowing the value of your business today and where to focus on over the next few years can help maximize the value when you ultimately decide to exit the business.

Talking to your accountant or a CBV about the current state of your business and your future plans is a great starting point. For most owners, their business is their single greatest asset, and a CBV can help you understand what it’s worth, and how best to manage it going forward