Tuesday, October 16, 2012

Do You Think Like a Potential Purchaser?

While some business owners think they know what their business is worth, others have no clue.  Do you really know what a potential purchaser would be willing to pay for your business?
According to RBC Business Succession Planning, Your Essential Road Map:
"It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business."

Value is in the eye of the beholder and value is different under different value definitions.  Fair market value (FMV) is a great starting point as it takes the perspective of a potential purchaser and is a very common value definition applicable in many situations.
Getting your business professionally valued can help you think like a potential purchaser.  Here are 5 other advantages to having a professional valuation done for your business:

1.  Enhance Business Value:  a business valuation provides a benchmark from which to measure value enhancement as well as helping to identify the key value drivers.  Documenting the increase in value over time will increase the business’ attractiveness, which will help maximize the price a purchaser will be willing to pay for the business.

2.  Manage Family Wealth:  privately held businesses often represent a significant percentage of a family’s wealth.  Business owners simply cannot manage and protect their family’s wealth without knowing the value of their family assets (including the business).  A professional valuation also prepares the family in the event that they receive an unsolicited offer.

3.  Prevent Costly Legal Disputes:  periodic business valuations allow the shareholders to discuss and agree on the current value of the business before any potential disagreements arise.  The valuations are also helpful in the event of a marital dispute because the valuation issue will have already been dealt with.

4.  Tax and Estate Planning:  a valuation provides support for the value transferred and acts as insurance for potential disputes with the CRA (estate freezes, reorganizations, related party transactions, etc.).  Price adjustment clauses may be disregard by CRA if it determines that a reasonable attempt at value was not conducted at the time of the transfer.

5.  Shareholder Life Insurance:  a valuation provides business owners with third party evidence for ensuring that adequate life insurance is in place (e.g. key person or buy/sell agreements).  This in turn provides the shareholders with peace of mind and comfort that their families and/or businesses are sufficiently protected.
You may not be ready to sell your business at the present time, but it is never too early to start thinking like a potential purchaser.  Find out how a potential purchaser would view your business today by taking the short "Sellability Score Questionnaire" at:

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