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Building Business Value

17/12/2009


As the economy emerges from the recession and the baby-boomer generation marches into retirement, you may be one of the many private business owners contemplating selling your business. Years of hard work have gone into growing your business and profits, but you may have not considered growing intangible value. While current profits can provide satisfactory income for you, it is often the value realized upon eventual sale that will allow you to have a comfortable, early retirement or the ability to pursue other endeavors. Unfortunately, many business owners do not understand what truly drives the value of their business.

To maximize the value of your business, it’s important to discuss the following with a trusted business advisor:

Commercialize personal goodwill.
Goodwill is an intangible asset and relates to items such as your business’s name, reputation, customer loyalty, location, products, and similar factors that you cannot identify separately. Many owners develop a significant amount of personal goodwill. Personal goodwill relates to the value of key relationships, personal reputation, skills and abilities contributed as an individual. These attributes are generally not transferable and have little to no commercial value to a potential buyer of the business. To maximize the value of a business, an owner must transform personal goodwill to commercial goodwill.

You can take steps to reduce reliance on the business owner. This involves putting qualified management in place, securing key suppliers and customers through the use of contracts, and ensuring all employees are adequately trained to carry out their responsibilities. If the business can sustain ongoing operations without owner involvement, personal goodwill has likely been successfully commercialized or transferred to the business.

Develop an experienced and knowledgeable management team.
Potential purchasers want a management team in place that can run the business without the vendor’s involvement. Manager autonomy includes the ability to create a vision for the future and to develop and execute strategic plans.

Secure and leverage intellectual goodwill.
Intellectual property includes patents, trademarks, trade-secrets and copyrights. These assets should be protected in order to prevent imitation by competitors. In some cases, intellectual property can be leveraged to create additional product offerings or users. For example, Superstore’s private-label brand “President’s Choice” was transformed from a retail grocery brand to a retail financial services brand, President’s Choice Financial.

Develop consistent and maintainable earnings and cash flow.
A potential purchaser of a business does not want volatility in annual earnings and cash flow but will want consistent, positive growth trends. Consistent earnings and cash flow can be obtained by diversifying products and services, reducing customer dependency, securing customer and supplier contracts, increasing geographic market share and having a qualified management team in place to develop and execute strategic plans.

For example, a recent MNP client expressed interest in selling their business. However, a number of issues were identified that would prevent the owner from realizing the full potential value of the business. A primary deficiency was the lack of a contract with a key customer that generated a significant portion of the company’s total revenue. After implementing our advice to secure this customer through the use of standard contracts, the owner was ready to sell. The terms, length and any geographical limitations or exclusiveness of contracts can significantly impact the value of the business.

Create a strong balance sheet.
Potential purchasers like to see tangible assets with strong-market values and minimal debt. In addition, any redundant assets or liabilities not required for daily operations should be divested separately as a purchaser may not give full value for these assets.

Exploit the business’s growth potential.
Similar companies can have significantly different values due to differing future growth potential. Your business should maximize its market share and growth potential through increasing geographical reach, ensuring continuous product improvement and diversification, meeting market demand and if applicable, ensuring current site production capacity.

Diversify and reduce concentration.
You must identify customer, supplier and product concentration or dependencies, while making efforts to diversify these relationships. A business that is overly concentrated is perceived to be more risky by buyers. For example, Wendy’s acquisition and merger with Tim Hortons in 1995 was seen as an effective way to reduce reliance on a particular menu style for Wendy’s and to increase geographical and customer reach for Tim Hortons.

Implement quality financial and operating systems.
You will create greater value by ensuring you have quality financial and operating systems that are well documented, followed, and updated. Well-documented systems will provide timely and relevant financial information, allow for streamlined processes that employees can understand and follow, and should provide for a substantive audit trail that will help facilitate the due diligence process. These systems should ultimately help mitigate fraud risk through the implementation of key controls that both prevent and detect any abnormalities in the financial reporting and operational process.

Understanding what drives the value of your company and taking the steps you need to implement these strategies will help you realize the full value of your business. For many owners, the sale of their business represents the accumulation of years of hard work and sacrifice, with the proceeds making up a significant portion of their retirement fund. An experienced, professional business advisor can help you identify and maximize your company’s value.

Steven Hacker, CA • CBV is a Partner in Meyers Norris Penny’s Toronto office and provides business valuations, litigation support and other financial advisory services to his clients in a wide range of industries.To find out what MNP can do for you, contact Steven at 416.596.1711 or [email protected]

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Jason Hatch, CA, is a business advisor with Meyers Norris Penny. He is actively involved in providing business valuation services to business owners and prospective purchasers of small- to medium-sized companies in a wide variety of industries. To find out what MNP can do for you, contact Jason at 250.763.8919 or [email protected].