Key Value Drivers – Economic Dependence

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Key Value Drivers – Economic Dependence

Developing a business that is not economically dependent on a single customer, supplier or employee is a key value driver for many businesses.  Economic dependence increases business risk and decreases business value.    Potential purchasers of a business are interested in the extent to which: i) sales are derived from one customer; ii) raw materials are obtained from one supplier; and iii) a key aspect of operations is dependent on one employee.    Each of these is discussed briefly below:   1.   Customers   If a business is too dependent on any one customer, the loss of that customer can be […]

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Periodic Valuations Help Avoid Costly Legal Disputes

Relationships can break down over time.  Many of us have experienced this with a friend, spouse or business partner.  Shareholder disputes are among the most contentious and frequent types of business disputes.  In addition, over 40% of marriages will end in divorce before the 50th year of marriage. [1]   Conflicts between shareholders or spouses can become very emotional.  When shareholders decide to part ways, the value of the business becomes an extremely important issue.  A value is needed for purposes of a shareholder buyout.  In a marital separation, a value is needed for purposes of property division.  Assuming a third party sale of the business is […]

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Key Value Drivers – Over Reliance on the Owner

Developing a business that is less reliant on the owner is a key value driver for many businesses.  Purchasers are very interested in assessing the extent to which sales will continue and the business will carry on under new ownership.    If sales are generated by the owner’s personal skills, abilities, contacts and relationships with the customers, the ability to transfer those clients to new owners will be extremely uncertain.  Acquirers generally avoid businesses that are too heavily dependent on the owner for its success because the ability to generate future revenues is too risky.    Potential purchasers will assess the extent […]

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Key Value Drivers – The Hierarchy of Recurring Revenue

The customer base is a key value driver for most businesses.  In addition to a diversified client base and the potential for future revenue growth, purchasers are very interested in companies that have strong customer relationships that lead to repeat business.   The extent to which future sales can be predicted with some degree of confidence is a major factor in determining the value of a company.  Projections are inherently uncertain and a recurring revenue stream provides greater confidence in the ability to predict future revenues.  Creating a recurring revenue stream is one of the best ways to increase the value of a […]

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Exit Planning – The Difference Between Value and Price

Some would argue that a business valuation is not useful to business owners for exit planning purposes because the valuation can become outdated quickly and it may not provide an accurate assessment of what a potential purchaser would be willing to pay for the company.   Although I generally agree with this reasoning, I believe that a valuation can be very useful to business owners in exit planning.   Fair market value (FMV) is a common value term used by business valuators.  According to the International Glossary of Business Valuation Terms, FMV is defined as follows: “The highest price, expressed in terms […]

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Exit Planning – Consequences of Not Planning Can Be Severe

According to a 2008 White Horse Advisors’ survey of closely-held business owners, 96% percent of Baby Boomer business owners agreed that having an exit strategy was important, but 87% did not have a written exit plan. [1]  The consequences of not having an exit plan can include, among other things, lost opportunity, wasted time, effort & money as well as decreased business value.  These consequences were illustrated in a recent client matter involving the unplanned exit of a majority shareholder. The Scenario: A manufacturing business owned 80% by the majority shareholder, 12% by unrelated individuals and 8% by management.  The majority […]

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Exit Planning – Ingredients For An Effective Strategic Planning Session

Step 6 of the exit planning process (Action Plan) begins with assembling the key individuals for a strategic planning session.  These individuals could include the business owner(s), the family, management and professional advisor(s).   The objective of the initial strategic planning session is to identify at least 10 different strategies that will help accomplish the exit planning goals.  Subsequent meetings will be devoted to prioritizing and selecting the specific strategies to implement and to assign responsibilities. How do you ensure meeting objectives will be achieved when, according to a Microsoft office survey of 38,000 people, 69% of people feel that meetings are […]

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Not All Valuation Reports Are Created Equal

The quality of a business valuation report depends upon the reasonableness of the underlying assumptions made by the valuator.  The valuator’s judgment (or lack thereof) in assessing and supporting the reasonableness of the underlying assumptions can have a significant impact on the reasonableness of the overall valuation conclusions.  Differences in judgment among valuators will often result in different value conclusions for the same business entity as at the same valuation date.  In addition, various errors and omissions in a valuation report can lead to an erroneous value conclusion.  It is important for those relying on a business valuation report (e.g. business owners, management, […]

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An Exit Planning Tool – The Sellability Score

Are you thinking about selling your business, but you’re not really sure where to start?  Do you have an exit strategy in place? Selling a business is not as easy as selling a house.  With a house you know what you’re selling – 3 bedrooms, 2 bathrooms, a great view, in a popular location.  There are probably several similar homes in the local neighbourhood that you can look to for comparison and you can always call on the expertise of your local real estate agent when considering a potential sale price. When selling your business, it’s difficult to gauge exactly what you […]

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Verbal Valuations For Planning Purposes

“Knowing the value of your business is just good business. It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business.”  [1]    There is often an immediate need to retain an independent expert Chartered Business Valuator (CBV) to prepare a business valuation report.  Previously, I have discussed the different situations CBVs are retained to prepare an independent business valuation report. Valuation reports prepared by a CBV must adhere to the professional standards of the Canadian Institute of Chartered Business Valuators (CICBV).  For example, CICBV Practice Standard 110 – Report Disclosure Standards […]

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