Friday, July 17, 2015

August 1, 2015 Book Release - The Undiscovered Planning Tool for Business Owners

Many business owners will admit that they do not know the current value of their business.  Worse yet, those who claim to know the value will grossly overestimate or underestimate the value of their business, with serious repercussions.

Understanding the value of one’s business is critical. 

I have worked with business owners and their professional advisors (e.g. accountants, lawyers, etc.) for many years on matters involving business valuation.  I am often called when there is an immediate need to determine the value of a business or security – which could be in the context of an actual transaction, a legal dispute, a corporate reorganization or a matrimonial separation.

It became apparent to me that a business valuation can be a very powerful planning tool for business owners.  Despite the tremendous benefits, I find that obtaining an independent business valuation is still a largely undiscovered planning tool among business owners.

I started this blog a few years ago with the intention of disseminating valuable information to the business and legal communities regarding various topics related to business valuation, including the use of a business valuation as a planning tool.

Getting an independent business valuation done now provides the shareholders with a valuation template for future updates.  It also provides the basis for shareholders to discuss major assumptions underlying the value conclusions and key drivers effecting value.

An independent business valuation is something that should be done before it needs to be done and is extremely useful for a number of reasons.

It helps manage value expectations.

It helps enhance business value.

It helps avoid legal disputes.

It is integral for exit planning.

It is required for tax and estate planning.

It is vital for contingency planning.

I elaborate on each of these throughout The Undiscovered Planning Tool for Business Owners.  I will also share some experiences involving business owners who have successfully incorporated an independent business valuation into their planning as well as actual situations illustrating the consequences of not including an independent business valuation into the planning process.  Finally, I address some of the common reasons why business owners avoid exit planning and how these barriers can be broken down. 

If any of this resonates with you, my hope is that you are motivated to be more proactive, positive and successful when it comes to setting and achieving your goals.

For more information or to pre-order your copy today 

Sunday, January 25, 2015

Want to Maximize Your Net Proceeds? Don’t Neglect Your Working Capital!

Cash flow measures the cash coming in and going out of your business whereas income is an accounting interpretation of your company’s net earnings or loss over a period of time.  For example, if you charge $10,000 upfront for a service that takes three months to deliver, you would recognize $3,333 of revenue per month on your profit and loss statement for each of the three months it takes you to perform the work.  But since you charged upfront, you receive all $10,000 in cash on the day your customer decides to buy. 

This positive cash flow cycle improves the value of your company because when it comes time to sell your business, the buyer will have to write two cheques: one to you, the owner, and a second to your company to fund its working capital (i.e. the cash your company needs to fund its immediate obligations like payroll, rent, etc.).  Both cheques, however, are drawn from the same bank account.  Therefore, the less the acquirer has to inject into your business to fund its working capital, the more money it has to pay you, the seller.   

The inverse is also true.  If your company is a cash drain, an acquirer will have to inject working capital into your business on closing day, which will reduce the purchase price for the business (i.e. reduce the amount paid to you as the seller).

If you want to maximize your net proceeds on sale it is important to manage your cash flow and ensure a positive working capital position on closing.  There is value associated with excess working capital by virtue of being able to either: i) liquidate current assets and extract cash from the business without affecting ongoing operations; or ii) borrow this amount from a lender (e.g. bank) using current assets as collateral and then extract the cash from the business without affecting ongoing operations.  

In an actual transaction the buyer and seller will negotiate a "normalized" working capital amount required for ongoing operations (e.g. based on actual historical balances, AR and AP collection policies, inventory turns, industry averages, anticipated growth, etc.).  Any amount over (under) this "normalized" working capital will be reflected as an increase (decrease) to the purchase price on closing.

One Thought For Improving Your Cash Flow

There are many ways to improve your company’s cash flow and, as a result, its value.  One often overlooked tactic is to spend less on the capital assets your company needs to operate. 

In the restaurant business, for example, it may take three bankruptcies at a single location before any restaurant can make money.  The first owner of a restaurant walks in and pays cash for a brand new commercial kitchen thus depleting his cash reserves before opening night.  Within a year, the restaurant owner runs out of cash and declares bankruptcy.

Along comes a second entrepreneur who decides to set up her restaurant at the same location and buys all of the new equipment from the first owner’s creditors for 70 cents on the dollar, figuring she has made a wonderful deal.  But the outlay of cash is still too great and she too is out of business within a year.

It’s not until the third owner comes along that the location actually survives.  He saves his cash by buying all of the equipment off the second owner for 10 cents on the dollar.  

The moral of the story - find a way to reduce the cash you spend on your capital assets.  Can you buy your equipment used at an auction or online?  Can you share a very expensive piece of machinery with another non-competitive business?  Can you rent instead of buying?

Profits are a very important factor in determining your company’s value but so is the cash your company generates.  Don’t neglect your company’s cash flow and working capital if you want to maximize business value and ultimately the net proceeds you receive on the sale of your business.