An independent business valuation is critical to your exit planning for many reasons. After identifying your goals and determining your financial needs, a current business valuation is the next step in the exit planning process (http://jasonkwiatkowski.blogspot.ca/2012/05/exit-planning-6-step-process.html).
Other independent sources also recognize the importance of a business valuation in exit planning:
"At present, being able to measure the value of the business is a critical aspect of the business succession plan."
CFIB Research, November 2012
"It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business."
RBC Business Succession Planning: Your Essential Roadmap
We are on the cusp of something unprecedented. $3.7 trillion in business wealth in Canada (or 550,000 businesses) is expected to change hands over the coming decade. Now, more than ever, business owners need to be prepared for the eventual exit from their business. Not being prepared will have serious consequences. With the increasing supply of businesses for sale over this period, business owners (and businesses) that are not adequately prepared will end up selling for a significant discount or face liquidation.
Exit planning is about regaining control over how and when you exit your business and being prepared for an unplanned exit due to disability, divorce, departure or death. It is never too early to begin your exit planning. It is, after all, a process that takes time and requires the involvement of various experts with specialized expertise at different stages of the process.
Here are 4 reasons why you need a business valuation professional on your exit planning advisor team:
- Enhance Your Business Value – A valuation provides a benchmark from which to measure value enhancement. The valuation process helps identify a business’ 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;
- Manage Your Wealth – Your business may represent a significant portion of your family’s wealth. You cannot manage and protect your wealth without knowing the value of your assets, including your business. A valuation also prepares you for an unsolicited offer or necessary tax and estate planning (e.g. estate freeze, share reorganization, family trust, etc.);
- Prevent Costly Legal Disputes – Shareholder and matrimonial disputes can be costly, time consuming and emotionally draining. The value of the business is often a key issue in these disputes. An independent valuation allows shareholders and spouses to discuss and agree on the value of the business before any potential disputes arise; and
- Manage Value Expectations – An experienced, professional business valuator can help you manage your expectations regarding the value of your business. This is critical for getting a deal done regardless of whether the sale is to an external third party, another shareholder, a management/employee group or a family member.
Not involving a business valuator early in the exit planning process can have serious consequences. I was jointly retained in a shareholder buyout that quickly developed into a legal dispute over the value of the business. Significant professional fees were incurred as each side retained legal counsel and three other professional valuators became involved. The shareholders could have benefited from an independent valuation earlier in the process to ensure they were on the same page regarding value. By the time I was retained the buyer and seller value expectations were widely divergent - a dispute was almost inevitable.
Don’t let this happen to you. Start your exit planning early and get a professional business valuation to help manage your wealth and value expectations, enhance the value of your business and avoid costly legal disputes.
Your accountant may or may not be qualified to provide a professional business valuation. It may be worthwhile to find a valuator with exit planning credentials. When you interview prospective business valuators, here are some questions to ask before making your selection:
- History - how long have you been valuing businesses?
- Experience - how many businesses have you valued and in which industries?
- Testimonials - do you have any testimonials or references?
- Process – what is your process for valuing a business and assisting with the exit planning?
- Reporting – what are the reporting options?
For more information about working with a business valuator or to learn more about our VSP Exit Starter Program, contact us at www.vspltd.ca.