Corporate Finance in Atlantic Canada

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

Posts Tagged ‘business valuation

Selling your small business during the pandemic

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https://www.cnbc.com/2020/05/14/how-to-sell-your-business-and-retire-during-coronavirus-pandemic.html

At the link above is an interesting CNBC op-ed about selling your small business during the coronavirus pandemic.  While the statistics quoted are US, there are strong similarities with the Canadian small business market.  For example, while the average small business owner is 60 years, we believe that is higher in Atlantic Canada due to the demographics in our region (see my earlier posts about the last census).

“Many business owners who want to cash out and retire are worried they won’t be able to do that for years because of Covid-19. Nothing could be further from the truth. Investors with capital are always looking for opportunity, no matter what is happening in the market.”

There are certainly plenty of buyers in Atlantic, and they have access to debt & equity capital.  While many paused at the outset, we’ve seen transactions close in Atlantic Canada during this pandemic.  We also agree with the article that there will be many business owners who will want to sell once the economy re-opens.  There is some expectation of slightly lower valuations (due to the uncertainty of the economy), but we’ve seen some evidence that any declines will not approach that of the public market declines in March (where most industry multiples were down at least 30%, although significantly improved since then).

Some good points in this article about exit planning steps to take coming out of the pandemic:

  1. Understand your goals (such as desire for retirement) and what they mean for your business.
  2. Clean up your financials (identify normalizing adjustments, etc).
  3. Mitigate the risk factors that could prevent a sale (such as resolving outstanding litigation that could mean a buyer won’t acquire shares).
  4. “Battle-test” your operations (prove that your staff and management team can run the business without you there every day — this will improve the value of your small business).

One of the themes of this blog — there are plenty of buyers and capital to fund them — still holds true as we come out of this lockdown due to the covid-19 pandemic.

Written by Dan Jennings

June 2, 2020 at 10:22 am

Business valuation is much more than financial statements

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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

Ingredient to a Successful Exit – Valuation

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http://www.divestopedia.com/2/4605/pre-sale/reason-to-sell/the-third-ingredient-to-a-successful-exit-valuation

Good article on Divestopedia on getting a valuation as part of exit planning.

“Now that we have determined where the business owner needs to be upon exit (i.e. the financial needs), the next step involves assessing the business owner’s current net worth, which includes the value of the business. For many business owners, this can represent a significant proportion of their total wealth.

An independent business valuation is an important benchmarking tool that can be used as a basis for enhancing the value of the business over time. It can also be used for insurance coverage purposes and for tax & estate planning purposes ” 

Written by Dan Jennings

August 16, 2013 at 10:03 am

Dragons Den business valuation

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http://www.cbc.ca/news/business/story/2011/05/12/f-vp-buckner-small-business.html

CBC’s Dianne Buckner’s views of business valuation on the show Dragons Den … apparently she just discovered the CBV designation and specialty that’s been around for 40 years!

Written by Dan Jennings

June 9, 2013 at 11:07 am

EBITDA multiples are only part of the story

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http://www.inc.com/david-lonsdale/three-pillars-of-valuation.html

Good article on Inc.com on why EBITDA multiples are not the only consideration in business valuation.

See my earlier post on a similar topic about EBITDA multiples:  https://smallbusinesscf.wordpress.com/?s=EBITDA

The following quote from Inc.com is also a theme of my blog — you need competitive tension among prospective buyers to ensure you get the best possible price and terms for your business, and that multiple prospective purchasers will prove to you that you are receiving ‘true’ market value.

“Finally, when it does come time to sell, make sure that you market the company to a large number of qualified buyers, so that the competition in the marketplace will drive your company’s value to a peak.”

Written by Dan Jennings

May 28, 2013 at 8:48 am

A business valuation as a planning tool for your firm

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http://www.profitguide.com/manage-grow/success-stories/the-appraisal-you-cant-afford-to-miss-49139

Good article from Profitguide.com about using a business valuation to show you how to improve the value of your business … one of my favourite topics when speaking to entrepreneurs!

It starts with the initial challenge that many small businesses are not priced by the market at the same value levels as that expected by the entrepreneur … not an easy conversation to have with the client.  The reality is that most small and mid-market business owners have never bought/sold a business before, and they are sometimes shocked by how the market views their business.

But the good news is, if you have some time, there are ways to lift the value of your business in advance of when you want to sell.

Written by Dan Jennings

May 9, 2013 at 12:04 am

Warren Buffett plugs business valuation

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http://www.forbes.com/sites/steveparrish/2012/08/14/if-you-value-your-business-you-should-value-your-business/

One doesn’t often get a mainstream article promoting the science and art of business valuation, and in particular quoting Warren Buffett!

“At this year’s Berkshire Hathaway annual meeting,  Warren Buffett made a key point all business owners should pay attention to:  “If business schools could offer just one course, it would not be on stock trading, the efficient market hypothesis or modern portfolio theory.  Rather, B-schools should be encouraging students to learn the boring, but critically important, discipline of business valuation.”

“Valuing a privately held business can be complex, but the overall process can be simply explained.  A standard — what I’ll call “baseline” — business valuation seeks to address three basic questions:

  1. What is the value of the business’s assets?
  2. What is the value to an outside party of the firm’s ongoing business (for example: revenues, profits or brand)?
  3. What does the current market look like for similar businesses (comparable sales, what banks are lending on, etc.)?” 

And I’ll add, that the latter is the key for private companies … who will be interested in buying your business and how do they price similar businesses?

Written by Dan Jennings

March 16, 2013 at 10:56 am

Posted in CF Musings

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