Friday, February 24, 2012

BV Benefit #1 - Exit or Succession Planning

The first benefit of having a professional business valuation is its use in exit or succession planning.

Privately held companies are considered pre-liquid assets because they will eventually be sold or liquidated in some manner.[1]  All privately held business owners will one day exit their business.   The exit will occur voluntarily (at a time of the business owner’s choosing) or it will be involuntary (due to burnout, illness, disability, marital problems or death).   An exit plan is needed to ensure a voluntary exit.   A contingency plan is needed to be prepared for an involuntary exit.   Either way - a plan is needed.

It is estimated that somewhere between 60% and 75% of business owners will exit their businesses within the coming decade.[2]   The largest transfer of private wealth in history will occur over this time frame.   Some estimates have this transfer at approximately $10 trillion in the U.S. and $1.3 trillion in Canada.[3]

Faced with this reality, the importance of having an exit plan, including a business valuation, becomes quite clear.

A professional business valuation is one of the cornerstones of the exit planning process. Without a business valuation, a business owner cannot effectively plan for retirement, conduct comprehensive tax planning, formulate an effective estate plan, measure the impact of value enhancement initiatives or understand the full extent of the exit options. A business valuation impacts virtually every component of the exit planning process.[4]

An exit plan identifies: (a) the business owner’s current situation (including the current value of the business); (b) where the business owner wants to be in the future (i.e. 3 or 5 years); and (c) precisely how the business owner will get there (i.e. what strategies will be employed to overcome the obstacles that could prevent the owner from accomplishing his/her goals).

With this in mind, the main components of an exit plan include:
  1. Goals assessment
  2. Financial needs assessment
  3. Business valuation
  4. Exit option analysis
  5. Net proceeds analysis
  6. Action plan 
Preparing the business owner and the business for a smooth transition takes time.   There are no quick fixes. The planning process must begin at least three to five years before the intended exit.

The increasing supply of businesses for sale over the coming decade will create a buyer’s market and buyers will only pay top dollar for the most attractive businesses.   Without a proper exit plan, including a business valuation, business owners may find themselves selling their businesses at a significant discount to those that come to market prepared.

Having a business valuation prepared by a professional valuator provides an independent perspective of the value of one's business from the perspective of a potential purchaser.  Use in exit or succession planning is one of the many benefits of a business valuation.  Stay tuned for further discussions on the many other uses of a business valuation.

1.   Source:  The One Percent Solution, Z. Christopher Mercer, 2007.
2.   Source:  Surveys by the CFIB and the CICA/RBC Business Monitor.
3.   Source:  The $10 Trillion Opportunity, Richard Jackim & Perry Phillips, 2007.
4.   Source:  The $10 Trillion Opportunity.

Thursday, February 16, 2012

10 Benefits of a Professional Business Valuation

"Knowing the value of your business is just good business.  It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business."

Source: RBC Business Succession Planning: Your Essential Road Map

Most business owners intuitively understand the importance of knowing the value of one’s business. However, many business owners do not know the current value of their business, which can represent a significant portion of their overall wealth.  Obtaining an independent, professional business valuation is a critical step in wealth management and succession planning. However, there are many other reasons to have your business professionally valued, including:

  1. Exit or Succession Planning - provides a basis for planning and assessing exit options
  3. Wealth Management / Enhancement - identifies key value drivers and provides a benchmark for measuring value enhancement
  5. Pre-Sale Planning - buyers will only pay top dollar for the most attractive businesses.  A valuation can help the business become more liquid and more easily monetized
  7. Sale of Business to Third Party - used as a basis for negotiations with potential purchasers (e.g. determine asking price, assess unsolicited offer, etc.)
  9. Internal Transfer of Business - establishes a price for a shareholder buy-out, management buy-out or employee share ownership plan
  11. Tax and Estate Planning - provides support for the value being transferred and acts as insurance for potential disputes with CRA (e.g. estate freezes, reorganizations, related party transactions, etc.)
  13. Life Insurance Coverage - provides support for amount of life insurance coverage to obtain (e.g. key person, fund buy-sell agreement, fund taxes on death, etc.)
  15. Shareholder Disputes - can help avoid legal disputes over value (i.e. full disclosure to all shareholders)
  17. Matrimonial Separation - provides support for value of the business to be included in net family property (NFP) statement for the division of assets
  19. Trustee / Executor Protection - protection against possible estate administration tax (EAT) reassessments

Follow me over the coming weeks as I explore the above noted benefits in more detail. 

Friday, February 10, 2012

5 Reasons to Sell Your Business

There are some positive signs that the economy is improving and beginning to turn around.  At the same time, however, there are those that believe we are destined to repeat 2008.   This future uncertainty is precisely why a lot of business owners are looking to get out.   If you’ve been thinking of selling your business, here are five reasons to get out now:

1. You’ve had enough:  A lot of business owners took a major set back in 2008/2009.   If your business has since stabilized and the prospect of fighting through another recession leaves you panic-stricken, it’s time to get out.

2. The worst is behind you:  Were you getting ready to sell back in 2007?  Then 2008 hit, and 2009 was your worst financial year in recent memory.   You cut everything you could in 2010, showed a profit in 2011 and now you’re starting to see some profit and revenue growth.   The best time to sell is on an upswing with the expectation of continued growth.   With your numbers going in the right direction, now might be just the right time to get out.

3. The demographics are not on your side:  As the Baby Boomers start to retire, there will be an oversupply of businesses for sale on the market.   This will create a buyer’s market which will put downward pressure on prices.  You may want to get out ahead of the flood.

4. The closing window:  It’s been tough for private equity companies to raise money since 2008. Many firms had their last successful round of fund raising in 2007 and many of these funds have a five-year window in which to invest.   Some private equity firms will make investments in companies that have at least $1 million in pre-tax profits.  If this includes your business, you could get a bidding war going among private equity buyers keen to invest their money before they have to give it back.

5. Nobody is lucky forever:  If you’re lucky enough to be in a business that actually benefits from a bad economy, that's great news. You’ve probably just had the best three years of your business life. But no cycle lasts forever and right now may be a great time to get out of the game.

If you feel like a gambler at a blackjack table with everything riding on the outcome of one hand, it may be the right time to take a few chips off the table.

Do you have a sellable business?  The Sellability Score is a quantitative tool designed to analyze how sellable your business is.   After completing this short questionnaire, you will immediately receive a Sellability Score out of 100 along with instructions for interpreting your results. Take the test here: