By Alison Anderson
CEO, SuccessionMatching.com
Earlier this month we released a step-by-step guide of things to consider in a transition plan, which you can download below. However, I wanted to take the opportunity to delve a little more deeply into one topic of particular importance: knowing your business value.
One of the most important things for a business owner to understand is what the transferable value of their business is and why. Unfortunately, I have seen negotiations and deals break down because one side or both do not understand what the business is actually worth.
Not having the books in order can be the first delay in any succession plan, which makes it extremely difficult to determine a value.
Business owners usually fall within two categories: someone who knows what the business is worth and wants a valuation complete to prove it to the buyer, or someone who doesn’t have a clue what their business is worth and needs a valuation in order to not scare off any potential buyers.
Before looking for a buyer, or discussing price with your staff and/or family members, determining the value of the business and understanding this process is critical. It allows you the important opportunity to identify areas that can be improved or enhanced to maximize the asking price. Bookkeepers, accountants and Chartered Business Valuators (CBV) can be very valuable at this stage to understand the transferable value of a business and why.
Depending on the time frame for the transition, the valuation should provide a company with discernable areas of improvement and the chance to take concrete action steps to implement worthwhile changes. By doing this exercise early in the process, the business owner will also better ensure the business isn’t dependant on one person, which will increase the value and likelihood of the sale.
How much your business is worth is contingent on a wide variety of factors, from the current state of the economy through your business’s balance sheet. Here are a few helpful tips to keep in mind as you start the process:
1) Get Expert Advice
Hire a CBV or at the every least, choose two or three accountancy/corporate finance firms and have them put a price on your business.
2) Consider the Market
Assess your competition, recent changes in the market, the management team, your own contributions to the business, and any other factors that could serve to either enhance or compromise your price.
3) Be Aware of Various Valuation Methods
Some of the methods include the asset-based approach, earning-value approach and market-value approach. Make sure you do your research!
4) Be Realistic and Never Inflate Numbers
Nearly every entrepreneur estimates that their business is worth more than it is actually is. Objectivity is an important key to getting a fair and fast deal. As are your ethics, so never, ever pad the actual figures!
According to The Canadian Federation of Independent Business, 70% of business owners are looking to transition. Up to now, there have been a lack of resources to assist business owners, as well as prospective buyers, navigate this process. As an economic development organization, Community Futures Saskatchewan is helping to address this issue by providing 300 coupons to SuccessionMatching.com, which will give business owners in the province access to our system free of charge.
As your business valuation is just one important aspect that should be considered in successful business transitions, I would encourage you to download the step-by-step transition guide for more helpful details.
For additional resources, please visit a Community Futures office nearest you!
