For What It’s Worth: Gauge the Value of Your Business Sooner Than Later

How many miles have you put in on your business journey? Are you still enjoying the ride?

Maybe you’ve started thinking about passing the wheel and your business to someone else.

Will you have enough money for what you want to do next? If not, what will it take as a business owner to get you there?

Putting value in your tank

If you don’t know what your business is worth today, on what basis are you making decisions for tomorrow?

Yet that’s the case for many small- and medium-enterprise owners in Canada who are counting on their business for their retirement nest egg.

Three out of four have started their business from scratch. They know how much hard work and effort they’ve put in, but not if it will translate into sufficient cash when they go to sell. Handing the business over to family members has become less of an option as more heirs-apparent are choosing a different career/life path.

There are many elements that go into the planning for the day an owner will leave their business. And the sooner an owner begins, the more control and options they will have. Our experts recommend starting three and a half to five years ahead, allowing at least six months to analyze the business, two years to build value and another year to sell.

The determination of the business’s most probable selling price (MPSP) is one of the critical first steps. The MPSP represents what the business would sell for on an open market as is, in use, in place. And getting this valuation done before you plan to sell, identifies what you have to do over the next couple of years to make the business worth what you want to get for it. It is also useful for your structuring and tax planning decisions, some of which can take two years to implement. All will help you put more money in your pocket.

Once completed, your valuation can be quickly updated to the present date so you’ll be ready to react if life’s events take a different turn. Health issues–yours or those of someone close to you–for example, can surface at any age and change your priorities, forcing you to leave your business earlier than planned.

A formal business appraisal can also provide the necessary valuation to buy out a partner or split your assets in a divorce.

Thumbs down on rules of thumb

Stay clear of rules of thumb multiples that use cash flow, gross sales/revenue or other financials.

You know that no two businesses are alike. Why then would you base anything on a formula that gives you a ballpark number without any consideration for what is really going on in your market space?

I once had two dry cleaning operations for sale. Both were in Ontario. Although they had similar profit ratios, it was clear that the business in City A would sell for much more. Because this business dominated its local market, it would be hard for a competitor to cut them off. On the other hand, the same-sized business in City B faced bigger competitors who could undercut them. This business was in jeopardy of not surviving.

A rule of thumb doesn’t account for the many variables that determine what the market is willing to pay. At best it’s a starting point.

Valuation is not a do-it-yourself job

Determining the most probable selling price (MPSP), is an art that’s goes beyond valuation. The valuation professionals at our company have expertise in both.

The process involves gathering a tremendous amount of data for analysis on a confidential basis including: financial statements, operational details, inventory, furniture fixtures and assets, market conditions, company history, building details, leases, staff, proprietary technologies and processes. We need to look at every single consideration of value.

An important part of determining the MPSP involves revealing and reflecting some of the hidden value of your business that doesn’t always show up on the financial statements. This process of recasting of financials is essential to more accurately reflect the true value that a purchaser might actually expect as the future owner of your business.

Once all of the information has been collected, digested, analyzed and researched against similar businesses, comparable purchase options and industry standards, we present you with a comprehensive report that forms our professional “broker’s opinion” of what we realistically think your business might sell for in the current marketplace.

What comes next is up to you. You may decide it’s the right time to sell. Or you may want to spend more time building the value of your business—use our findings as a blueprint for what to focus on. Whatever the case, you’re in the driver’s seat. For more information read: Entrepreneurs Know How to Create Value in a Business… Do You?

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Gregory Kells
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