Friday, March 28, 2014

Business Valuation – Critical for Managing Value Expectations

Are you trying to build a business to one day sell for top dollar?  If so, it is critical for you to manage your value expectations and to be aware of how your business will be perceived and valued by potential purchasers.
Many business owners have unreasonable expectations regarding the value of their business.  According to RBC Business Succession Planning: Your Essential Roadmap, "It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business."
Some business owners overestimate the value of their business and others actually underestimate the value of their business.  I have seen both situations before and there are serious implications to erring on one side or the other.  
Implications of Overestimating Value
Business owners that overestimate the value of their business may do so because they place too much emphasis on sweat equity or they ascribe value to the personal goodwill associated with the business.  Sweat equity refers to the effort and time put into the business and personal goodwill refers to the value associated with the personal skills and abilities of the business owner which are not commercially transferable.  A potential purchaser will not be willing to pay for the business owner’s value expectations if the company financials do not support them.
A potential purchaser is interested in future cash flows.  When the target’s cash flows (current or future) do not support the business owner’s value expectations, this creates a (potentially significant) gap between what a potential purchaser is willing to pay and what the business owner expects to receive.  The larger this value gap the greater the risk of not getting a deal done.

Implications of Underestimating Value
Business owners that underestimate the value of their business may do so for many reasons.  They may not understand how a potential purchaser values a target company.  They may not appreciate the value associated with various intangible assets they have created (e.g. customer relationships/contracts, intellectual property, proprietary technology, goodwill, etc.).  They may have based their value expectations on outdated or inappropriate industry rules of thumb.
A potential purchaser may see value that you were not aware existed, especially if you are dealing with a strategic purchaser. [1]  The price paid in an actual transaction is the result of a negotiation and a potential purchaser will rarely put forth their best offer initially.  If you are not armed with the ability to understand and justify the value of your business to a potential purchaser you run the risk of leaving significant money on the table.  You may be inclined to accept an initial unsolicited offer without attempting to negotiate a higher price based upon valuation principles and valid assumptions.
The consequences of overestimating or underestimating the value of your business can be severe.  An independent business valuation conducted 3 to 5 years prior to sale allows you to manage your value expectations and enter meaningful negotiations with a potential purchaser, provide reasonable justification for your value, increase your chances of getting a deal done and not leave money on the table in the process.
Contact us at or if you want to manage your value expectations and minimize your risks with an independent business valuation.
1.  A strategic purchaser is one who believes it can enjoy post-acquisition economies of scale, synergies, or strategic advantages by combining the acquired business interest with its own.

Thursday, March 20, 2014

5 Ways to Position Your Company to a Strategic Purchaser

Facebook’s recent acquisition of WhatsApp for $19 billion represented the largest-ever acquisition of an Internet messaging service company in history.
WhatsApp allows users to avoid text-messaging charges by moving texts across the Internet instead of the mobile phone carrier networks.  This can save people who travel, or live in emerging markets, hundreds of dollars a year.  As a result, WhatsApp is adding about one million new users per day.
At the time of the acquisition in February 2014, WhatsApp had some 450 million users and, after the first year, charges users a subscription of $1 per year.  Even if all 450 million WhatsApp users were already paying, that is still less than half a billion in revenue.  Why would Facebook acquire WhatsApp for a number that is somewhere north of 40 times revenue?
It is possible that Facebook sees the opportunity to sell more Facebook ads because of the information they gather from WhatsApp users.  Global advertising giant Publicis estimates 2013 online advertising spending in the US alone to be around $500 billion.  Presumably Facebook believes they can get a larger chunk of the global online ad buy because they know more about its users by owning WhatsApp.
Therein lies the definition of a strategic acquisition.  Most acquisitions run a predictable pattern of industry norms, but a strategic purchaser can pay a significant premium for your business because they are looking at your business for what it is worth in their hands.  Rather than forecasting out your future profits and estimating what that cash is worth in today’s dollars, a strategic buyer is calculating the economic benefit of combining your business with theirs.
There can be many "strategic" reasons why a larger company might want to buy yours. Here are 5 to consider:

1. To control their supply chain (i.e. you are a key supplier)
In 2011, Starbucks announced it had acquired Evolution Fresh, one of their providers of juice drinks, for $30 million.  This allowed Starbucks to be less dependent on one of its suppliers.

2. To enhance sales (i.e. you provide an opportunity for the purchaser to increase its sales)
In 2011, AOL announced the acquisition of The Huffington Post for $315 million, even though HuffPo had just turned its first modest profit on paper.  AOL wanted to give its advertising sales people more inventory to sell and HuffPo had 26 million unique visitors a month.

3. To make their products look sexier (i.e. your product enhances the purchaser’s products)
In 2011, Microsoft bought Skype for $8.5 billion even though Skype was losing money.  It is possible that Microsoft expected to sell more Windows, Office and Xbox products by integrating Skype into everything they already sell.

4. To enter a new geographic market (i.e. you offer an expansion port for the purchaser)
In 2012, Herman Miller paid $50 million to acquire POSH Office Systems (a Hong Kong based designer, manufacture and distributor of office furniture) in order to get a foothold into the world’s fastest growing market for office furniture.

5. To get a hold of your employees (i.e. your employees are valuable to the purchaser)
Facebook reportedly acquired Internet start-up Hot Potato for $10 million, largely to get hold of the talented developers working at the company.

Most acquisitions are done for rational reasons where an acquirer agrees to pay today for the rights to your future stream of cash.  You may, however, be able to get a significant premium for your company if you can figure out how much it is worth in a specific purchaser’s hands.
Curious to see what your business is worth and how you might improve its value to both strategic and financial acquirers? Contact us at or  You can also complete the Sellability Score questionnaire and we’ll send you a custom report complete with your score on the eight key drivers of Sellability.  Take the test now:

Monday, March 03, 2014

10 Reasons to Invest in a Business Valuation

Many business owners do not know the current value of their business, which can represent a significant portion of their overall wealth.  Worse yet, many business owners will grossly overestimate or underestimate the value of their business.
A Chartered Business Valuator (CBV) or Accredited Senior Appraiser (ASA) can provide you with this extremely valuable information.  Some business owners are reluctant to undertake this exercise because of the cost.  They do not appreciate that the benefits of obtaining an independent valuation can far outweigh the cost.
Obtaining an independent, professional business valuation for planning purposes does not have to be an expensive endeavor.  The cost will depend on the size and complexity of the business and the type of report that is required.  The cost to have a CBV prepare a Calculation Valuation Report, however, can be quite reasonable and this type of valuation report is generally sufficient for planning purposes.
Obtaining an independent business valuation and understanding the value of your business is one of the cornerstones of an effective exit planning process.  There are many reasons to invest in a professional business valuation, including:
  1. Manage value expectations – an independent valuation can increase your chances of getting a deal done since many business owners will overestimate or underestimate the value of their business
  3. Wealth management / enhancement – a valuation helps to identify key value drivers and provides a benchmark for measuring value enhancement
  5. Shareholder buy-out or dispute – provide a value for shareholder buy-out or, more importantly, help avoid potential future legal disputes over value (i.e. full disclosure to all shareholders)
  7. Matrimonial separation or dispute - provides support for value of the business to be included in net family property (NFP) statement or, more importantly, help avoid potential disputes over value upon separation
  9. Pre-sale planning - buyers will only pay top dollar for the most attractive businesses.  A valuation can help document the increase in value over time and help the business become more liquid
  11. External sale - use as a basis for negotiations with potential purchasers (e.g. determine asking price, assess unsolicited offer, etc.)
  13. Internal sale - establishes a price for a management buy-out, employee share ownership plan or transfer to the next generation
  15. 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.)
  17. Life insurance coverage - provides guidance for amount of life insurance coverage to obtain (e.g. key person, fund buy-sell agreement, fund taxes on death, etc.)
  19. Trustee / executor protection - protection against possible estate administration tax (EAT) reassessments
The benefits of having a professional valuation far outweigh the costs.  In our experience, a Calculation Valuation Report is suitable for planning purposes and can generally be prepared for less than $10,000.  The valuation process can help uncover key value drivers to potentially double the value of your business within a few years.  Two of our recent clients at VSP were able to double the value of their business in a two year period.
Obtaining a professional valuation can also help minimize the legal and other expert fees if you are ever faced with a shareholder dispute or matrimonial separation.  The value of the business is often a very contentious issue in these matters and legal and expert fees (i.e. for a business valuator) well in excess of $10,000 are routinely incurred as a result of this issue alone.

Follow me over the coming weeks as I explore the above noted reasons in more detail.  Contact us at or if you would like to maximize the value of your business and minimize potential legal and expert fees in the event of a separation (shareholder or matrimonial).