Logging timber from the forestry industry

The variables that affect the valuation of your forestry business

The variables that affect the valuation of your forestry business

Synopsis
3 Minute Read

Getting a clear and accurate valuation of your Canadian forestry business requires understanding the factors that can move your valuation up or down. They include:

  • Long-term timber supply
  • Shifting regulations and policies
  • Volatile commodity prices
  • Relationships with contractors
  • Ability to attract and retain staff

In the face of these variables, combined with the current market uncertainty and volatility in Canada, access to the right expertise and knowledge will ensure that the valuation process is as reliable as possible.

Partner, Consulting Services

There’s a myriad of reasons you may need to get an accurate valuation of your forestry business — preparing for a merger or sale, seeking investors, planning for succession, dividing assets during a marital dispute, or undergoing litigation are just some examples. But whatever the reason, one thing remains consistent: Canada’s forestry industry has several nuances and unique traits that make it complex to get an accurate snapshot of a forestry company’s valuation.

As a business owner or leader, you must be aware of these nuances and surround yourself with expert advisors who understand the industry and the valuation process. This will help you identify opportunities to increase your valuation and set your business up favourably before the valuation process begins. It will also give you increased confidence and peace of mind once the process is underway.

What makes Canadian forestry unique?

Aside from the smaller contractors and support services companies within forestry, the industry in Canada is dominated by a relatively small number of large forestry companies. These companies would have a sizable network of assets to consider — facilities, equipment, timber rights, and real estate such as pulp mills, paper mills, and sawmills.

While transactions in Canadian forestry are relatively few, the transactions that do take place are all the more complex.

What factors impact your valuation in forestry?

While it’s tempting to assume there’s little that separates forestry companies from and their valuations should therefore be similar, the truth is more nuanced. Here we will explore a handful of the variables that could cause your forestry company’s valuation to move up or down.

Long-term timber supply

The long-term sustainable nature of timber supply is a significant factor that makes this industry unique. Large sawmills and pulp mills in some regions of Canada have secured timber supply almost in perpetuity.

When assessing what your business is worth, valuators will look not only at today, but how likely it will be that you can replicate your operations and successes.

This is why the value of your timber rights is so crucial; a forecast to run out of timber in 10 years will hurt your valuation versus one that projects it will take 20 years or longer.

Shifting regulations and policies

The forestry industry is primarily based on access to public resources, and that access is interwoven with public policy. Therefore, your company’s valuation can be sensitive to shifting regulations around forest management and environmental protection.

For example, Canada is facing more stringent policies around species at risk and habitat protection. Industries such as oil and gas and forestry are paying close attention to how this will impact their ability to access certain areas of the landscape.

Volatile commodity prices

When you hear about the volatility in commodity prices that Canadians have seen over the past three years, oil and gas prices may be the first thing that jumps to mind. But it’s worth noting that volatility in lumber prices was even more pronounced at times:

Within the past two years, we’ve seen North American lumber prices grow from $500 to $1,600 per thousand board feet.

If commodity prices cause dramatic swings in your revenue, you’ll also see that reflected in your valuation.

Relationships with contractors

Canada’s forestry industry is built on a network of contractors on the woodland side — truckers, logging contractors, silviculture contractors, and more. Given the small number of major companies in each region, your contracting business doesn’t have as large or diverse of a customer base like you might see in other industries. This hinders your ability to capture new market share or new customers. That, in turn, impacts your valuation.

Ability to attract and retain staff

Almost all industries in Canada are facing skilled labour shortages and an aging workforce; the forestry industry is no exception. It’s a top concern for many business owners and organizational leaders. Your ability to attract and retain skilled team members will be something valuators pay close attention to.

When you combine the above variables with the fact that most forestry businesses are extremely layered and asset-heavy — all the vehicles, mills, facilities, and equipment need to be accounted for, as well as the financial value of your timber rights — you get a sense of how complex it can be to nail down the value of a forestry business.

Seeking the right expertise

The good news is that with all the complexity within the industry, you don’t need to go through the valuations process alone. Partnering with consultants with expertise in Canadian forestry — and combining that industry knowledge with someone who holds a Chartered Business Valuator (CBV) designation — provides the right mix of tools for your success.

CBVs must remain independent and objective when assessing the value of your business, and forestry consultants can help you know how the assessment was made. The result is a fair valuation that aggregates all considerations (like your operations and your risk factors), into a single report, along with a team of experts to help explain it to you and answer your questions.

While many professional services firms employ CBVs, you gain more benefits working with CBVs who are familiar with the forestry sector specifically. MNP offers you the benefit of working alongside some of Canada’s leading forestry consultants along with a robust team of CBVs under the same roof.

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