Maximizing the multiple: How savvy business owners get top dollar for their business

Tim and Jamie’s story will resonate with many entrepreneurs. The tenacious and driven couple started their oil and gas valve manufacturing company, Valvex, three decades ago. While they never had children, they often joked it was because they spent every waking moment nurturing their business to its full potential.

As they neared their mid-fifties, Tim and Jamie started thinking about their path to retirement. It was hard to let the business go, but they agreed to sell Valvex within five years and use the proceeds to start a winery in the Okanagan.

They met with Shane King, National Leader of MNP’s Succession Services practice, to share their retirement dreams. He gave them an appreciation for the sale process, including how long it would take. Since the partners didn’t have a family member in mind to take over the business, he also introduced them to Aleem Bandali, the B.C. Lead for MNP's Corporate Finance team.

“A sale is a complex process that has several moving parts. It usually occurs over months — sometimes more than a year,” says Shane. “Our process is usually to have someone knowledgeable in mergers and acquisitions take a leading role. They pull expertise from MNP’s various service offerings to ensure the business will command top dollar when it goes on the market.”  

One of the first steps for Aleem and his team was to assess the timing and financial readiness of Valvex for sale. They analyzed the business's financial position, the current market conditions, and the economic outlook over Tim and Jamie’s ideal selling window. After factoring in the regulatory and tax implications, they determined that the optimal timing for a transaction was sooner than five years.

However, they also noted that the current management lacked the necessary skills and experience to run the business without Tim and Jamie.

“Uncertain management can derail the sale process,” says Shane. “If the owner doesn’t proactively address those issues, it could put years of hard work and their retirement plans in peril.”  

Building a strong management team

Tim and Jamie had always believed that their hands-on approach to managing the business and supporting their team members was their competitive advantage. They never expected to hear that they could be too involved in the day-to-day operations. Shane empathized. He explained that their hearts were in the right place, but their focus was slightly off target.

“Potential buyers want a business that can stand on its own two feet, with or without the original owner/managers,” says Shane. “The presence of a competent management team goes a long way in enhancing its potential value.”

To help illustrate the issue at hand, Shane performed a quick holiday test to gauge Tim and Jamie’s importance to Valvex’s day-to-day management.

Both agreed that they rarely took vacations. They also admitted that they spent their time troubleshooting issues from the beach or their hotel room on the few occasions they had stepped away from the office.

Aleem then sat down with the owners to identify the activities they were personally responsible for that were essential to running the business. He encouraged them to identify the managers that could be handling those tasks.

Tim and Jamie made a list of the roles and core competencies required so they could step back from their heavy workload at Valvex, then communicated their plans to their senior leadership teams. Over the next several months, the owners grew increasingly confident in delegating their operational workload.

Diversifying customer base and supplier relationships

Although their business had grown steadily and had a solid financial foundation, Aleem and his team noted that Valvex relied on a handful of major customers for most of its sales. He explained to Tim and Jamie why that would be a significant concern for a potential buyer.

“The current owner might see a large, long-tenured account as a sign of stability and excellent customer service,” says Aleem. “That may be true. But a potential buyer will also worry about what will happen if that client runs into financial trouble or finds a better deal elsewhere.”

Aleem also noted that Tim and Jamie had a similar concentration problem with their suppliers. While they negotiated favourable rates and had strong working relationships, they did not have many contracts or assignable agreements.

“Buyers do not want to inherit potential supply chain issues or pricing uncertainty. An acquisition is costly, and it is critical to have as much stability as possible in the months after the deal closes,” says Aleem.

“They cannot afford work stoppages or customer delays if vendors can’t deliver on time. Strong contractual relationships and assignable agreements can make the business significantly more attractive to buyers.”

Enhancing operational efficiency

Another issue Aleem and his team uncovered: Tim and Jamie had lovingly maintained their business and invested heavily in hiring the right people, but the partners were also tight-fisted and resistant to change. They’d never seen a reason to expand their business beyond the original product line of oil and gas valves. Their physical and digital infrastructure was older than many of their employees.

He encouraged the partners to explore opportunities for growth and innovation by investing in new equipment and expanding product lines.

They were initially skeptical of his recommendations; Aleem was far from the first person to tell them they needed to modernize. However, they became more receptive once he helped them see the potential efficiencies of moving away from spreadsheets and expanding their manufacturing lines.

“Initiatives that demonstrate the potential for increased profitability can positively impact the valuation of the business,” says Shane.

Valuation and financial forecasting

Once Tim and Jamie incorporated Aleem and Shane’s recommendations for readying the business for sale, they brought in MNP’s Valuations team. They comprehensively analyzed Valvex’s financial performance, industry dynamics, and potential buyer expectations.

“Ahead of a transaction, Corporate Finance teams will generally employ a financial forecasting model to showcase the business's growth potential under new ownership. These models emphasize the value drivers that make it an attractive investment opportunity and ensure the seller can command a premium price for their business,” says Aleem.

“We often use EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a critical metric to value a business. EBITDA provides a clear picture of a company's operating performance by excluding non-operating expenses and non-cash items. It allows us to focus on the core profitability of the business and compare it to similar companies in the industry.”

As Aleem updated Tim and Jamie on their progress, he explained how the MNP team normalized the business’s financial statements to reflect its true earning potential. They did this by eliminating one-time or non-recurring expenses and any personal or unrelated expenses that distorted the company’s financial performance. This presented a more accurate representation of the business's profitability and financial health and allowed for a fair comparison with industry benchmarks.

The team then applied a multiple to the normalized EBITDA to determine the business's enterprise value.

“The multiple represents the market's perception of the company's risk profile, growth prospects, and industry dynamics,” says Aleem. “By multiplying the normalized EBITDA with an appropriate multiple, we can estimate a business's potential sale price or value.”

Finally, Aleem was able to provide the partners with a final valuation. He outlined how they arrived at their number, reiterating the importance of normalized EBITDA and how they arrived at a fair multiple. He also outlined the other factors they considered, such as market conditions, industry trends, growth potential, competition, and the company's assets and liabilities.

Tim and Jamie were pleased with the value Aleem and his team presented and agreed that it reflected Valvex’s unique characteristics and position in the industry. 

Streamlining due diligence

Once the valuation step was complete, MNP's Corporate Finance team collaborated with the firm’s accounting and tax teams to ensure a smooth due diligence process.

“Due diligence is typically the final hurdle for a business to complete a transaction. Still, it’s a critical step that can make or break a deal,” says Aleem. “The purchaser will bring in an advisor who uses the same techniques and methodologies we use to value a business to validate our calculations and ensure all the records and financial details are in order.”

For Tim and Jamie, it was essential that Valvex’s financial records were up to date and aligned with all relevant accounting standards. Their MNP advisors also helped prepare reports and addressed buyer inquiries to ensure they promptly received all the relevant information.

“We aim to provide accurate and transparent information,” says Aleem. “We want the buyer to know we’re confident in our work and eager to showcase the company’s financial stability and growth potential.”

Emotional support and trust

Selling a business is often an emotional experience for owners who have poured their hearts into their companies. Advisors often end up providing more than just management and financial expertise. They provide an element of emotional support throughout a lengthy process — fostering the trust necessary to establish solid relationships.

“That kind of trust can only be built by spending the necessary time to fully understand the owner’s business and personal goals,” says Shane.

By engaging MNP so early in their thought process, Tim and Jamie significantly enhanced the success of the sale transaction, earning an impressive multiple from Valvex and ensuring a smooth transition to the new ownership.

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