Corporate Finance in Atlantic Canada

Commentary on corporate finance issues for small- & mid-market private companies in Atlantic Canada

Archive for July 2015

Business valuation is much more than financial statements

leave a comment »

When we’re starting a business valuation assignment, we are often asked why we want a relatively long list of information (i.e. much more than just five years of year end financial statements).

The reason we ask for a collection of financial and non-financial information is that a business valuation is attempting to predict how the market will value the business, and the buyers in the market don’t just consider the financial statements.

The value of a business is driven by 3 primary factors:

  1. Annual cash flow.  Every buyer asks for the last 5 years’ financial statements, but history is only a guide to the future.  In addition, historical cash flows have to be normalized for non-recurring or discretionary items.
  2. Multiple or rate of return.  How the market perceives risk in that cash flow stream impacts the multiple to apply to that cash flow.  While there is no such thing as a risk-free business, the market perceives different levels of risk in different industries (and even within the same industry), and that qualitative risk assessment has an impact on value.
  3. Capital.  How much capital will be required to buy and operate a business is critical to the price a buyer can afford to pay for a business.  For example, high inventory levels that may not be all financeable by an operating line will mean a buyer will need more equity to finance inventory, and that will impact price/value.

If your accountant is valuing your business by only considering the financial statements, then perhaps you should have a discussion with a valuation/M&A advisor.

Written by Dan Jennings

July 23, 2015 at 5:24 pm

Is now a good time to sell your business?

leave a comment »

As M&A advisors, we get asked this question a lot … “is now a good time to sell my business?”

The answer is yes … for example, the last two businesses we’ve sold in NS yielded an average of 9 offers each (signs of a very strong M&A market!).

But the timing still has to work for you and your family.  If you’re 50 years of age selling a small business, the market will typically not yield a high enough price to warrant you giving up the stream of profits from the business (unless you have other income-generating things you want to do after selling).  Of course, that assumes you don’t have health or other issues that could prevent you from operating the business for the next 10 years.

If, however, you are closer to retirement age and want to crystallize the value in your business, the market is very strong right now.  For quality small and mid-market businesses, we estimate there are at least 10 buyers for every seller.  That means a general rise in pricing, but also an improvement in terms (such as lower amounts of vendor financing).

Written by Dan Jennings

July 20, 2015 at 3:54 pm

Selling auctions actually do work

leave a comment »

When we discuss the local M&A market with clients and target clients, they are often surprised when we tell them that there are many more buyers than sellers for small & mid-market businesses (SMEs).

Every month, we are approached by at least one new buyer who hasn’t been able to find a quality business for sale.  In addition, most financial institutions have excess capital they need to place in order to generate sufficient returns for their shareholders.  Finally, the rise of private equity funds (both formal and informal) as pools of capital have also increased the demand for deals.

This means that when we sell a business, we don’t approach one buyer at a time … we create a ‘quiet and controlled’ auction that brings multiple prospective buyers through a process that forces them to pay the best possible price and terms (because if they don’t, another buyer will).

Given the activity in the market in Atlantic right now, if you’re selling your business without talking to more than one buyer, we’re very confident in saying that you’re not getting the best possible deal.

Written by Dan Jennings

July 17, 2015 at 10:16 am

Did you know there are 10 buyers for every selling small business?

leave a comment »

Most entrepreneurs are surprised when we tell them there are (at least) 10 buyers for every good quality small & medium-size business for sale.  That’s why when we’re marketing a business, our process brings multiple buyers through a funnel designed to obtain the highest possible price (and best possible terms) in the marketplace.

The last business we marketed yielded 10 offers.  Even when we weeded out the 5 worst offers, our client was able to choose from 5 quality offers for their business … and nothing proves the value of a business better than 5 competing offers.

If you’re selling your business today and you’re negotiating with only one buyer, please pause … and ask a qualified M&A advisor whether there are other buyers who’d likely be interested in your business.

Written by Dan Jennings

July 9, 2015 at 2:12 pm