Wednesday, March 07, 2012

BV Benefit #3 - Pre-Sale Planning

The third benefit of having a professional business valuation (i.e. share valuation) is its use in pre-sale planning for business owners.

As previously mentioned, between 60% and 75% of business owners will exit their businesses within the coming decade.[1]   Over $10 trillion in private wealth will change hands in North America over this time frame, the largest transfer of private wealth in history. [2]

The increasing supply of businesses for sale will put downward pressure on sale prices. Buyers will only pay top dollar for the most attractive businesses and preparing a business for sale takes time.

Effective pre-sale planning must begin at least 3 years before the sale and it should begin with a business valuation.   A current share valuation provides:
  1. An indication of what the business owner could reasonably expect to fetch on the open market today; and

  2. A benchmark for enhancing the value of the business prior to an actual sale. 
The business valuation process involves a careful assessment of the company’s risk profile and the key value drivers for the business.   A share valuation conducted by a professional valuator identifies areas of weakness and key value drivers to focus on for the business to be made more attractive to a potential purchaser.   If conducted early enough there will be enough time to implement the key value enhancement initiatives required to maximize the value of the business and the price that is ultimately received in a sale.   This process, which begins with a valuation, leads to a business that is more liquid and more easily monetized.

All business owners will one day exit their business.   The importance of pre-sale planning must not be overlooked. In a Newport Partners survey of more than 100 Canadian business sellers, 62% recommended methodically pre-planning the sale of a business two to three years in advance.   However, less than 25% actually did so themselves.   Business owners today should learn from the mistakes of other business owners that have actually been through the process of selling their business.

Pre-sale planning is especially vital in light of existing demographics and the expected increase in the supply of businesses that will be put up for sale over the coming decade. The planning begins with a business valuation so there is a frame of reference for measuring the effectiveness of the pre-sale planning activities.  Without one business owners may never realize just how much money was left on the table.

Stay tuned for continued discussions on the many other uses of a business valuation.

1.  Various studies including surveys by the CFIB and the CICA/RBC Business Monitor (Q1 2010).
2.  Source: The $10 Trillion Opportunity, Richard Jackim & Perry Phillips, 2007.

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