Want to be More Valuable Than Your Industry Peers?

The value of your company is dependent upon many things, including your industry.  When we look at businesses within the same industry, there are major variations in valuation.  Here are 10 things that will make your company more valuable than its industry peer group. 

1. Recurring Revenue

The more revenue you have from automatically recurring contracts or subscriptions, the more valuable your business will be to a buyer.  Even if subscriptions are not the norm in your industry, if you can find some form of recurring revenue it will make your company much more valuable than those of your competitors.

2. Satisfied Customers

Being able to objectively demonstrate that your customers are happy and intend to re-purchase in the future will make your business more valuable than an industry peer that does not have a means of tracking customer satisfaction.

3. Diversification

Acquirers will pay a premium for companies that naturally hedge the loss of a single customer.  Ensure no customer amounts for more than 10 percent of your revenue and your company will be more valuable than an industry peer with just a few big customers.

4. Growth

Acquirers looking to fuel their top line revenue growth through acquisition will pay a premium for your business if it is growing much faster than your overall industry. 

5. Predictability

If you have mastered a way to win customers and documented your sales funnel with a predictable set of conversion rates, your secret customer-acquiring formula will make your business more valuable to an acquirer than an industry peer who does not have a clue where their next customer will come from.

6. A Management Team

Companies with a management team or second-in-command who has agreed to stay on post sale are more valuable than businesses where all the power and knowledge are in the hands of the owner.

7. Something Unique

Buyers buy what they cannot easily replicate on their own, which means companies with a unique product or service that is difficult for a competitor to knock off are more valuable than a company that sells the same commodity as everyone else in their industry.

8. Location

If you have a great location with natural physical characteristics that are difficult to replicate (imagine an oceanfront restaurant on a strip of beach where the city has stopped granting new licenses to operate), you will have buyers willing to pay a premium for you business in its location.

9. Media Hype

Tired old companies often try to buy sex appeal through the acquisition of a trendy young company in their industry.  If you are the darling of your industry trade media, expect to get a premium acquisition offer.   

10. Clean Books

Companies that invest in audited statements have financials that are generally viewed by acquirers as more trustworthy and therefore worth more.  You may want to get your books reviewed professionally each year even if audited statements are not the norm in your industry.

Like a rising tide that lifts all boats, your industry typically defines a range of multiples within which your business is likely to sell for; but whether you fall at the bottom or the top of the range comes down to factors that have nothing to do with what you do, but instead, how you do it.

5 Ways to Increase Your Odds of Receiving an Unsolicited Offer

In any negotiation, being the person who makes the first move usually puts you at a slight disadvantage.  The first-mover tips their hand and reveals just how much he/she wants the asset being negotiated.

Likewise, when considering the sale of your business, it is always nice to be courted, rather than being the one doing the courting.  The good news is, the chances of getting an unsolicited offer from someone wanting to buy your business are actually increasing. 

According to the Q2, 2014 Sellability Tracker analysis released in July 2014, 16% of business owners have received an offer in the last year, which is up 37% over Q1.  Said another way, you’re 37% more likely to get an offer to buy your business today than you were at the beginning of the year.

Big companies are buying little ones for a lot of reasons and the current market conditions are accelerating their appetite: interest rates are low and stock markets are high, which provide the ideal platform for acquirers to realize a return on their investment from buying a business like yours. 

So how do you ensure you are on their shopping list?  Here are five ways to get noticed by an acquirer:

1. Win an award

Getting recognized as the “Widget Maker of the Year” by the Widget Makers Association is a great way to get the attention of acquirers in your industry.

2. Hire a PR person

Engaging a public relations professional to tell your story to the media can get you on the radar of buyers in your industry.  A lot of media relations professionals focus on the big mainstream publications, and while these are important, ensure that your PR firm also targets trade publication and industry-specific websites that are read by acquirers in your industry.

3. Host an event

Consider hosting an event (e.g., conference, tradeshow, summit) for your industry and invite representatives from potential acquirers to attend.  Being invited to an industry event can be flattering for acquirers and it is a good way to get them to notice you as an industry leader.

4. Join a board

If an executive from a company you think would make a natural buyer for your business is serving on a board of directors, consider joining the board.  Serving on a board together can be a great way for an acquirer to notice you and your company without you having to say you’re for sale.

5. Grab lunch

Consider inviting a senior executive from a potential acquirer to share a meal under the guise of discussing trends in your industry.  At the very least, you may glean some useful information about how big companies are seeing your industry evolve.  At best, your lunch mate may realize that your company could play a key role in helping them grow.

The sale of your business is a delicate dance where it is usually better to be the courted, rather than the courter.  Acquirers are on the hunt for new businesses, and having them notice you will put you in a position of strength when you get to sit down at the negotiation table.

Breaking Down Barriers

Are you passing your business on to the next generation?  Will you be selling to management or an employee group over time?  Would you like to maximize your net proceeds on a sale to an independent third party buyer?

Whether you plan on selling your business to an internal party over time or to an external third party for maximum proceeds, your success depends on how much effort you put into your planning and preparation.

Getting started is often the hardest part.  We learned from Newton that, “An object at rest stays at rest and an object in motion stays in motion….”  Excuses are your biggest roadblock to getting started.  It’s too early for me…  I’m too busy...  It’s too complicated…  It’s too expensive... and so on.

What’s really behind these excuses?  Understanding this may be just what you need to set in motion something that will “stay in motion” until your goals are achieved.  

Here are some tips for overcoming the most common excuses that are preventing you from getting started:

1. Your mind - Your mind can be your main ally when it comes to achieving your goals.  If, however, your mind is not programmed for success, it will do more to derail your efforts than to help you.  Visualize where you want to be after you exit your business and how it will feel when you get there.  This will give you the motivation to act.
2. Your fear - Change makes most of us nervous – even if it is a change in the right direction.  You may not be consciously aware of the fear you have over leaving your business.  Until you conquer this fear, your exit planning efforts will be blocked by self sabotage and procrastination.  Tackle your fears by believing that something must change, that you must change it and that you can change it.
3. Your commitment - We live in a commitment-phobic world, so it's no wonder that people routinely abandon their goals.  If you truly want to achieve your goals when you exit your business then your commitment to the process is critical.  The margin between success and failure is bridged by your commitment.  Don't give up until your goals have been achieved.  If you don't give up, then you'll never fail.  There are two options in life, excuses or results.  Which do you want?  
4. Your patience – Exit planning takes time and there are a number of issues to address.  It took time to build your business and it will take time to exit the business – that is if you want to exit on your terms.  When you find your patience wavering, review your goals - are they specific, measurable, realistic and attainable?  Remember, slow and steady wins the race.  You will be surprised with how much can be accomplished within a three year period after 12 quarterly meetings!
5. Your support network – Taking on this task alone will leave you less challenged, less accountable and more likely to fail.  There are many helpful resources out there.  Reach out to experts to assist you through the process.  Do some research and speak with colleagues and/or other business owners that have been through the process successfully.  Surround yourself with positive and supportive people.  Look for a professional advisor with exit planning credentials and experience to guide you through the process and involve the specialists where and when needed.

Contact us at jason@vspltd.ca or www.vspltd.ca to help you kick-start the exit planning process.  We can help you set your exit plan in motion and assist you with the implementation to ensure you exit on your terms at a time of your choosing.

1.  Inspired by Daryl Devonish, Co-Owner, Body Pump Inc. (www.bodypumpinc.com). 

Will Your Goals Be Thwarted by These Excuses?

All business owners exit their business eventually.  Planning is critical if you want to ensure a successful transfer of your business - whether that transfer be internal (i.e. to another shareholder, a management group or the next generation) or external (i.e. to an independent third party).

According to a recent CFIB study, less than 10% of business owners have a formal written plan, 40% have an informal plan and over 50% have no plan whatsoever. [1]  Why have so many business owners avoided planning their exit?  

Does this include you and, if so, what is holding you back?  Here are the top 5 excuses that prevent business owners from beginning their exit planning:

Excuse #1: It’s too early for me to plan for succession

Fact: It is never too early.  Planning should begin at least 3 to 5 years prior to exit because there are many issues that require time to adequately address.  Identifying your exit option early (e.g. internal or external) is extremely important.  Identifying how much you will need financially when you exit is critical.  Allowing sufficient time to enhance the value of your business and ensure proper tax plans and structures are in place to minimize tax on the transfer before exit is also vital.  Beginning your planning early could mean the difference between success and failure.  

Excuse #2: I’m too busy 

Fact: You are never too busy to do that which is important - it’s a matter of prioritization.  If ensuring a successful transition to the next generation or maximizing your net proceeds on the sale to a third party is important to you then you will make time for the planning that is necessary to ensure these goals are achieved.  If you are truly serious about meeting your transition goals and understand the importance of planning then you will make it a priority.   

Excuse #3: It’s too complicated and I don’t know where to begin 

Fact: It can be complicated but that has not stopped others from starting their exit planning.  There are many helpful resources out there.  Reach out to experts to assist you through the process.  Do some research and speak with colleagues and/or other business owners that have been through the process successfully.  Surround yourself with positive and supportive people.  Look for a professional advisor with exit planning credentials and experience to guide you through the process and involve the specialists where and when needed. 

Excuse #4:  It’s too expensive

Fact: Exit planning is an investment that should form part of your “wealth management” budget.  You pay professionals to “manage” your portfolio of publicly traded securities.  According to The One Percent Solution, privately held business owners should invest 1% to 2% of the value of their business each year on exit planning initiatives (e.g. business valuation, value enhancement initiatives, life insurance, tax and estate planning, etc.) [2]  This investment will pay off in the form of a higher business value (or price received) and less taxes paid, resulting in more money in your pocket - not to mention the decrease in stress knowing that your affairs are in order.  

Excuse #5 – I don’t want to think about leaving my business

Fact: You may not want to think about leaving your business but you will leave your business one day.  The departure from your business will be voluntary at at time of your choosing or it will be involuntary as a result of your death, disability, disaster, divorce or disagreement.  Would you rather exit your business on your terms or have your family deal with your unexpected forced exit?  Who will run the business?  Will it be salable?  Will it be dissolved?  Will there be taxes to pay?  Start planning now so you can choose while you still have the control to make a choice.     

If you would like to sell your business within the next 5 years, you have a tremendous opportunity to sell for a significant premium - provided you conduct the proper planning!  Those business owners that ignore planning could end up selling for a significant discount or face liquidation altogether.

Are you part of the 50% of business owners that have no plan whatsoever?  If so, what is holding you back?  Join me next time when we address how to overcome what is holding you back.

1. Source: CFIB Research Report November 2012 “Passing on the Business to the Next Generation”

2. Source: The One Percent Solution, Z. Christopher Mercer, 2007.

6 Ways to Profit From Your Vacation

Summer may be the perfect time to increase the value of your company.  The most valuable businesses are the ones that can survive without their owner.  A buyer will pay a premium for a company that can operate effectively without the owner’s presence and likely require a steep discount for a business that is dependent on its owner. 

This summer, consider taking an extended break from your business to see how things will run when you are not around.  It is likely that some things will go wrong, but use those errors as feedback for making your business operate more independently of you, and therefore more valuable.  

Here is a six-step plan for profiting from your vacation time this summer:

Step 1: Schedule your vacation plus one day

Whatever day you plan to start working again after your holiday, tell your staff you’ll be back one day later.  That way, you’ll have a full day of uninterrupted time to dedicate to understanding what went wrong in your absence.

Step 2: Log the mistakes

When you return, make a summary of the things that went wrong and categorize them into one of three buckets:

• Mistakes: errors where there is a right and wrong answer;
• Bottlenecks: projects that had difficulties because you weren’t there to provide your feedback;
• Stalled projects: initiatives that went nowhere while you were gone because you’re the person leading them.

Step 3: Correct the mistakes

The first and easiest place to start is to simply correct the mistakes that were made.  Usually mistakes are due to a lack of training rather than outright negligence.  The right answer may be crystal clear in your head but not immediately obvious to your staff.  Write up some instructions for next time the employees face the same situation.  Make sure your instructions are clear, and share them with your team so everyone has them.

Step 4: Unblock your bottlenecks

If you are being asked for your personal input on projects, there’s probably going to be a bottleneck if you are not around.  Make sure your staff is clear on the projects where you need to have a say and the projects where you don’t.  Some employees may wrongly think that you need to approve all decisions.  Make it clear when you want them to act alone and when you still need to be involved.

Step 5:  Re-assign stalled projects

The hardest part of making your business less dependent on you is dealing with projects that get stalled when you are away.  Start by asking yourself if you are the right person to lead the project in the first place.  As the owner of your business, projects often fall in your lap by default, rather than because you are the best person to lead them.  Categorize your stalled projects into two groups: a) strategic projects that you need to lead; and b) non-strategic projects you are leading by default.  Hang on to the strategic projects, but delegate the non-strategic projects to someone on your team who is better suited to drive them forward. 

Step 6: Give your employees authorization

At Ritz Carlton Hotels, every employee has discretion to spend up to $2,000 on a guest, without approval from their general manager.  The $2,000 figure is a large enough number to make the message clear: front line employees should act first, make the customer happy, and ask questions later.  Many employees know how to make a customer happy but lack the confidence to act.  Giving employees some spending authority will speed up the resolution of customer issues and empower your team to do the right thing when you’re not there. 

The sunshine is beckoning, so go ahead and take a vacation – if you follow the six steps here, you may end up with a tan and a more valuable company. 

Estate Executors – How to Increase Your Protection and Minimize Your Risk

The executor of an estate with business interests should obtain an independent professional business valuation as support for the values used in the estate administration tax (“EAT”) filing, particularly in light of recent changes to EAT legislation and the potential for personal executor liability.

At the time of probating the will, EAT (previously known as “probate fees”) of 0.5% must be paid on the first $50,000 of estate assets and 1.5% on the value of the remaining assets. [1]  The estate representative (i.e. executor or trustee) has many responsibilities, including:

1. Filing an affidavit as to the estimated value of the estate; 
2. Remitting the EAT on the estimated value; and 
3. Providing an undertaking to file, within six months, a sworn statement of the total value of the estate, and to pay the balance of any additional tax owing (if any).

In 2011, the Ontario government amended the legislation to enhance the EAT compliance regime.  Beginning January 1, 2013, the Ontario Minister of Revenue will be afforded significant audit and verification functions including the right to conduct a review of the estate inventory and valuation provided by the executor.  If a greater estate value is determined, additional taxes can be assessed.  As a result, there will be much more pressure to verify the value of the assets disclosed in the EAT filing.

Penalties have been added to encourage compliance.  It will be an offence for an estate trustee to fail to make the required filing with the Minister of Revenue.  It will also be an offence for any person who makes, or assists in making, a false or misleading statement in connection with the estate trustee’s filing.  Offences are punishable by fine, by imprisonment or both.  The minimum fine will be $1,000.  The maximum fine will be twice the EAT payable.

An estate representative may be exposed to personal liability if the estate assets have been distributed before the Minister of Revenue issues a notice of assessment.  There is no ability to obtain a “clearance certificate” to protect the estate representative from personal liability.

In light of the responsibilities of the estate representative, the new audit measures, and the potential for personal liability, it will be critical for executors to be diligent in obtaining and documenting proper and accurate valuations of the deceased’s property for purposes of calculating the EAT.  Where the estate holds shares in privately held businesses, the benefits of obtaining an independent business valuation will far outweigh the costs to the estate and the risk to the executor of not having one prepared.

Contact us at jason@vspltd.ca or www.vspltd.ca for an independent business valuation if you want to minimize your risk and increase your protection as an estate executor.

[1]  source: www.attorneygeneral.jus.gov.on.ca

Business Valuations to Support Life Insurance Coverage

We were recently contacted by the Inspection Department of an independent service provider to the Canadian life and health insurance industry with respect to one of our clients.  They were gathering information to assist in the underwriting process and wanted independent evidence supporting the client’s claim as to the value of the business as part of their inspection process.  Our client asked us to provide a copy of the independent business valuation we had prepared for purposes of their estate planning and life insurance.  

We have been providing independent business valuations to help business owners determine an appropriate amount of coverage for many years.  This was the first time, however, that we were contacted by a representative of the insurance company.  It may be that independent business valuations are becoming a more formal part of the underwriting process.

Life insurance is often used for income replacement or to alleviate the burden of estate and probate taxes upon death.  However, when business owners use life insurance to fund a buyout or redemption of the shares of a deceased shareholder it is important to ensure that the death benefit will be adequate to:

1. Fund the buyout or redemption of the deceased shareholder’s shares (Buy/Sell Insurance); and
2. Ensure the continued survival of the business upon the loss of what may be a key person in the business (Key Person Insurance).

As a result, the life insurance coverage should at least cover the current value of the business and many business owners grossly overestimate or underestimate the value of their business.  An independent business valuation provides business owners with third party evidence for ensuring adequate life insurance coverage.  This in turn provides the shareholders with peace of mind that their families and their businesses are sufficiently protected.  

An independent business valuation is also helpful to the insurance advisor as it will help:

1. Manage and control the process in creating the application file - insurance companies and their risk advisors are increasingly requiring support for the amount of coverage requested; and
2. Solidify trust and cultivate the relationship with the client - providing the insured with third party evidence regarding the value of their business eliminates any pre-conceived notions the client may have with respect to being over sold or under estimated as far as coverage.  

The business valuation should also be updated periodically as the adequacy of the life insurance coverage should be reviewed in light of any growth or other changes to the business over the prior years.  Ideally, this process should be agreed to and formalized in the company’s shareholders agreement, which for many business owners, may not exist or may not have been updated for many years.

Life insurance is an integral part of estate and contingency planning for business owners.  If you are in the process of obtaining life insurance or reviewing your current coverage, contact us at jason@vspltd.ca or www.vspltd.ca to assist with your business valuation needs.