two engineers meeting in factory

A guide to formal valuations for engineering firms with ESOPs

A guide to formal valuations for engineering firms with ESOPs

Synopsis
4 Minute Read

In part two of this three-part series, MNP’s Lynne Fisher and Dany Le explore the importance of valuations by Chartered Business Valuators for engineering firms and their ESOPs.

When a formal valuation by a Chartered Business Valuator (CBV) should be done and what it can offer your firm and employees

Planning for the future, in any endeavour, can take many forms. When it comes to owning a business, mapping out your succession plan is a distinctive and evolving process.

Increasingly, engineering firms are experiencing employee retention challenges as more young engineers look to shore up their futures with organizations willing to give them the opportunity to grow.

Employee Share Ownership Plans (ESOPs) offer these firms a way to retain key people, build a succession plan from the inside, and attract strong engineering talent.

A key part of any ESOP involves the business itself. Knowing the true value of the firm, and the data used to make that assessment, gives deep insights to both the owner(s) and participating employees.

A critical component of any ESOP, (including MNP’s SmartShare program) is a formal valuation, prepared by a CBV. A CBV is a specially trained and independent third-party, tasked with getting you and your employees the information you’ll need to make informed decisions.

What makes a CBV valuation unique?

Once the preliminary groundwork has been laid for an ESOP, the valuation level becomes a critical piece of the puzzle, especially as the starting point for all ownership growth and participation discussions going forward.

Formal valuations, done by a CBV, are impactful for many reasons, such as:

  • Data gathered to create and present the valuation gives insights into the business beyond its current value and can be used as a future tool for the ESOP participants to boost business value, and therefore, their investment.
  • Gaining insight into qualitative operational factors and their direct influence on achieving financial objectives. This entails comprehending the intricate interplay between various operational aspects such as management practices, market positioning, customer relations, and innovation strategies, and how they shape the financial trajectory of the company.
  • Provides a look into the future, both short and long-term, going through back-logs, staffing structure, revenue targets, etc., to assess historical performance and future growth opportunities.
  • Helps measure efficiency within the firm and could uncover areas where improvements are needed to increase efficiencies and enhance business.
  • Preventing misunderstandings or disagreements down the line. A formal valuation enables an independent assessment of value to be made and helps create an understanding of why the business is valued at a certain level to prevent compromising the overall plan.
  • Existing as a concrete deliverable to help develop trust and legitimacy with the ESOP plan members. Everyone is clear how value is determined now, when they enter shareholding, and when they eventually retire or leave.

Depending on the extent of valuation reporting conducted, a valuation by a CBV provides a comprehensive overview of the organization, highlighting both its operating strengths and weaknesses.

With an MNP CBV, valuations offer a uniquely independent look at the business’s value. A methodical approach to your firm’s valuation, following specific guidelines and procedures is a key part of the ESOP process. Abiding by national standards set out for Canadian valuators, they’re able to get a full understanding of what your firm is worth and why.

It’s important to note that many firms use a simple valuation standard based on deals they are aware of, and what they perceive to be industry knowledge. This seldom captures all the value locked up in an engineering firm. Additionally, there are significant risks associated with using a simple valuation formula that shouldn’t be underestimated.

A simplified formula is a one-dimensional approach whereas a formal, structured valuation examines the many variables that make your firm, and the climate it operates in, unique. Formal valuations are able to capture the particulars a simplified formula would miss.

While it may save money in the short term, a simplified valuation formula can complicate the ESOP, share transactions, or selling process if the formula is weak or missing vital aspects of the business in its calculation. A formal and structured valuation provides a solid platform for all ownership and equity discussions and goes a long way in maintaining peace between all shareholders.

The value proposition of doing it right

Following the valuation process, the CBV and firm leaders have a chance to discuss and dissect the information, looking closely at the calculations and assumptions laid out in a comprehensive document.

Not only are they important for owners, but also employees looking to acquire a minority percentage of the business will want to know what they’re getting into and how to improve their overall investment. This playbook helps the entire firm plan the evolution of ownership for the future, whatever that might look like.

Following a valuation, MNP can provide a firm with additional resources and service line access to help rectify or improve existing challenges as identified during the process. MNP’s Innovation Workshop allows clients to look at ways to improve their cyber security, succession, or management consulting strategies, among others, and find solutions to existing problems. 

Contact us

If your firm is in need of a formal valuation from a CBV, and to learn more about the valuation process, contact Dany Le, Partner, Valuation and Litigation Support Services, at [email protected] or Lynne Fisher, National Team Leader, SMART Services, at [email protected].

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