Many business owners do not know the current value of their business, which can represent a significant portion of their overall wealth. Worse yet, many business owners will grossly overestimate or underestimate the value of their business.
A Chartered Business Valuator (CBV) or Accredited Senior Appraiser (ASA) can provide you with this extremely valuable information. Some business owners are reluctant to undertake this exercise because of the cost. They do not appreciate that the benefits of obtaining an independent valuation can far outweigh the cost.
Obtaining an independent, professional business valuation for planning purposes does not have to be an expensive endeavor. The cost will depend on the size and complexity of the business and the type of report that is required. The cost to have a CBV prepare a Calculation Valuation Report, however, can be quite reasonable and this type of valuation report is generally sufficient for planning purposes.
Obtaining an independent business valuation and understanding the value of your business is one of the cornerstones of an effective exit planning process. There are many reasons to invest in a professional business valuation, including:
1. Manage value expectations – an independent valuation can increase your chances of getting a deal done since many business owners will overestimate or underestimate the value of their business
2. Wealth management / enhancement – a valuation helps to identify key value drivers and provides a benchmark for measuring value enhancement
3. Shareholder buy-out or dispute – provide a value for shareholder buy-out or, more importantly, help avoid potential future legal disputes over value (i.e. full disclosure to all shareholders)
4. Matrimonial separation or dispute – provides support for value of the business to be included in net family property (NFP) statement or, more importantly, help avoid potential disputes over value upon separation
5. Pre-sale planning – buyers will only pay top dollar for the most attractive businesses. A valuation can help document the increase in value over time and help the business become more liquid
6. External sale – use as a basis for negotiations with potential purchasers (e.g. determine asking price, assess unsolicited offer, etc.)
7. Internal sale – establishes a price for a management buy-out, employee share ownership plan or transfer to the next generation
8. Tax and estate planning – provides support for the value being transferred and acts as insurance for potential disputes with CRA (e.g. estate freezes, reorganizations, related party transactions, etc.)
9. Life insurance coverage – provides guidance for amount of life insurance coverage to obtain (e.g. key person, fund buy-sell agreement, fund taxes on death, etc.)
10. Trustee / executor protection – protection against possible estate administration tax (EAT) reassessments
The benefits of having a professional valuation far outweigh the costs. In our experience, a Calculation Valuation Report is suitable for planning purposes and can generally be prepared for less than $10,000. The valuation process can help uncover key value drivers to potentially double the value of your business within a few years. Two of our recent clients at VSP were able to double the value of their business in a two year period.
Obtaining a professional valuation can also help minimize the legal and other expert fees if you are ever faced with a shareholder dispute or matrimonial separation. The value of the business is often a very contentious issue in these matters and legal and expert fees (i.e. for a business valuator) well in excess of $10,000 are routinely incurred as a result of this issue alone.
Follow me over the coming weeks as I explore the above noted reasons in more detail. Contact us at jason@vspltd.ca or www.vspltd.ca if you would like to maximize the value of your business and minimize potential legal and expert fees in the event of a separation (shareholder or matrimonial).