Key Value Drivers – The Hierarchy of Recurring Revenue

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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that a business valuation is not useful to business owners for exit planning purposes because the valuation can become outdated quickly and it may not provide an accurate assessment of what a potential purchaser would be willing to pay for the company.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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Growth – What To Do When It Flat Lines

Growth is a key value driver for most businesses.  A good growth story with plans for future growth is very appealing to potential purchasers.  Many successful businesses, however, reach a point where their growth starts to slow as the company matures. Demonstrating how a business is likely to grow in the future is one of the keys to driving a premium price for the company when it comes time to sell.  Showing a potential purchaser that the business has achieved past growth plans will increase the credibility of a current growth plan. The Ansoff Matrix is one tool business owners can use to […]

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Exit Planning Step 6 – Action Plan

“A goal without an action plan is a daydream.”                Nathaniel Branden, practicing psychotherapist, corporate consultant, and author The final step in the exit planning process involves creating the action plan for the business owner and the business.  The action plan moves the business owner from the planning phase to the implementation phase and deals with the following basic questions: What tasks need to be done and when? Who will do it? Who will ensure it is done? Developing the action plan is a process that will take time but it is a critical step because this will determine what initiatives […]

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Exit Planning Step 5 – Net Proceeds Analysis

The exit plan is progressing.  We have identified the goals under Step 1, determined the financial needs upon exit under Step 2, assessed the current value of the business under Step 3 and selected the relevant exit option(s) under Step 4. The net proceeds analysis involves determining how much the business owner will “pocket” from the sale of the business after settling all liabilities, income taxes and other obligations such as sales commissions and professional fees.  Some business owners may not appreciate that the actual net cash received upon sale can be significantly lower than the agreed upon sale price.  This […]

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