Transferring a business can often be a complex, emotional process. That’s why it’s important to be prepared. A qualified expert will take an objective, analytical approach to assessing the fair market value of your company.
The value of a business is often used to fund the owner’s retirement. However, it’s important not to let our emotions affect how we perceive that value even as we seek to maximize it. “Often business owners will look at their company’s performance and figure their business is worth a lot, but emotion may be altering their perceptions if they’ve been running it for 20 to 30 years,” explains Richard Quinn, Director, Business Transfer Support Team, at Desjardins Group. Here are some of his tips on how to maximize and accurately assess the value of your business.
Consult a licensed expert
Doing business with an independent valuator helps you get the facts and be more objective. He recommends hiring an expert recognized by the Canadian Institute Of Chartered Business Valuators.
They will establish a 10% price range (5% below and 5% above the final amount). The valuation, which is normally valid for six months, will serve as a basis for negotiating the selling price.
Consider your entire worth
The valuator will identify your various tax options so you get the most out of your business transfer. Although it’s often hard to talk about money with family, an accurate valuation based on an outside analysis can reduce potential conflict among your heirs.
Focus on the business’s performance
In most cases, the value of a business is based on its financial performance. The market-based approach, which compares similarly sized businesses, is less common but can confirm the results of the first method. The asset-based approach is generally used if the business is no longer viable.
Plan several years in advance
The valuations will be based on your business’s results over the past three to five years. So it’s important to work on improving your company’s bottom line. You should sell surplus, unproductive assets and reduce the company’s nonessential operating expenses. It’s also a good strategy to diversify your client base and suppliers to reduce your business risks.
Grow your company’s value
Sound management is the key to increasing your company’s potential. It is highly recommended you review your business processes to minimize costs. For example, can you streamline operations and boost profits?
Watch your working capital: Keep an eye on how fast people are paying you, keep inventory at an optimal level and negotiate discounts with suppliers, if you can. Another important thing to remember is your physical plant. It’s important to invest in your capital assets because this will have a direct impact on your company’s value. Broken equipment can reduce its worth.
Below are some ways to increase the value of your company:
- Make strategic acquisitions
- Sell unprofitable assets
- Diversify your suppliers
- Diversify your client base
- Develop significant competitive advantages
- Hire competent people for key positions in the company
- Develop exclusive products, patents and technical skills
- Improve your processes to increase your profit margin
- Improve how you manage your cash inflows
- Evaluate and reposition existing alliances and partnerships
- Sell unprofitable assets
Bolster your team
A company’s value can be hurt if it is too dependent on you. It’s important to build a strong team to show that the company’s employees and management team are able to pursue the company’s mission without you. Prospective buyers will look at the quality of the company’s management and its employees’ commitment to the corporate vision. Mr. Quinn estimates that an ill-prepared company without a competent succession team can see its value drop 35%.
Know your business environment
When estimating the worth of a company, the valuator will look at the state of the market, the company’s business environment and the competition. “The better its position in the market, the more valuable a company will be,” explains the director of Desjardins Group’s Business Transfer Support Team. He recommends that business owners know their markets and maximize their competitive advantages and investments. The company’s worth can increase after the valuation if it acquires strategic customers and suppliers or signs a number of important contracts. The ability to innovate also plays a big role. Developing services and being willing to continuously improve is a big plus, as is reinvesting profits in growth rather than redistributing dividends.