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This article was originally published on Connected For Business.
If you’re a small-business owner, you ought to know the value of your company – even if you’re not seeking buyers or pitching to investors on Dragons’ Den. The insights from a business valuation can help you assess your company’s progress and make strategic decisions.
For more details on why valuations are important, Connected for Business talked to Catherine Tremblay, a chartered business valuator (CBV) and chartered professional accountant (CPA) at MNP LLP in Montreal and a board member at the Canadian Institute of Chartered Business Valuators.
Figuring out a company’s value involves more than adding up the assets and subtracting the liabilities. Valuators analyze several factors to estimate what price a purchaser would be willing to pay and what price the vendor would be willing to accept, explains Tremblay. “There has to be a return on investment for the seller, and the buyer has to feel it’s a fair price.”
A valuation is usually done before a sale – before a business owner even decides to sell. Or, if an owner receives a purchase offer, a valuation will help determine if the amount is fair. Valuations are also needed for tax planning, estate planning and succession planning. If you want to transfer ownership of a business to your children, for example, you need to know its fair market value. “There’s no exposure to the open market, just a transfer between parents and children, but the transaction price has to be acceptable to the income-tax authorities,” says Tremblay. “You need back-up in those cases – a formal valuation.”
Tremblay adds that valuations often follow “triggering events,” such as shareholder disputes, shareholders wanting to sell shares, the addition of new shareholders, or even shareholders getting divorced and needing to know the value of their stake in the firm. Valuations also appraise intangible things, such as brand names or customer contracts. Companies trying to raise their value in preparation for a sale often use valuations to check progress.
“Our starting point is usually historical financial statements, to assess the company’s evolution and its current situation,” says Tremblay. If sales and earnings fluctuate, the valuator will determine representative levels. If the business isn’t yet mature – say, a startup still ramping up sales – the valuator will consider cash-flow projections.
Valuators also scrutinize risks in key areas – such as operations, financing and human resources – and external factors like competition, economic conditions and industry regulations. “It’s not just a number-crunching exercise. Qualitative factors go into it,” says Tremblay. “We want to get behind the numbers and understand how the business has evolved, and if there are things that should be normalized. For example, after an ice storm in Quebec, many businesses had to shut down for three weeks. If we did a valuation a year or two after that, we’d adjust for it in some way, such as normalizing results for that year or excluding that year from the selection of representative years.”
There’s no set time unless your company has a requirement – for example, some shareholder agreements require annual valuations. Still, it’s advisable for business owners to get one done every few years as a way of tracking progress and measuring the effectiveness of different strategies.
“From a strategic point of view, and especially if you’re contemplating a sale in a few years, it’s good to have a starting point,” says Tremblay. “Selling a business isn’t a [process that takes a] matter of months – it’s years, by the time a business owner starts thinking about it, does the tax planning, estate freeze and valuation, and starts looking for buyers. The valuation should be done at the early stages of that process.”
It depends on the size of your company. “We ask for preliminary info, like financial statements, which will give us an idea of the size of the business, and from that we can estimate fees,” says Tremblay. “For a small business, it could be $10,000 to $15,000, more for larger businesses.”
“Chartered business valuator,” or CBV, is Canada’s professional designation for business valuation. Candidates must complete specialized training and rack up experience before they receive accreditation. (To find a CBV in your area, visit cicbv.ca/find.) “In addition, choose someone you feel comfortable talking to,” says Tremblay. “You’ll spend a lot of time explaining your business, and you need to feel like that person is really listening and getting a good understanding of it.”
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