It is a tumultuous time for shareholders when one partner, or shareholder, decides to exit the business. Business equity valuation in Toronto is of immense importance in such a scenario, as each partner has a vested interest in ensuring that a fair price is attached to the business.
Without a Shareholder Agreement or a pre-determined process for dispute resolution among shareholders, a costly and stressful litigation process could follow. At the outset of a new business formation, no one is eager to grapple with the possibility that, at some future point, the shareholder relationship may break down To that end, defining the terms of exit should be addressed up upfront, including how shares are to be valued.
Arriving at a Fair Value When a Shareholder Expresses Their Intent to Leave
There are certain steps that should be taken in order to prepare for a shareholder exit. These are as follows:
Assemble Your In-House Figures
It is essential to assemble all the financial data available to you such as your previous and current budgets, financial statements and tax returns. You could even create a performance report that indicates the business’s trajectory over the last five years. If you notice an inexplicable drop or spike in profits, analyze the cause. A decision needs to be made as to whether or not you want to consider these profits or losses in the valuation.
Calculate Recent Profits
Your business’s sale price will be based on profits primarily. If you can determine a pattern in recent profits, you could go on to analyze why these profits arose and the likelihood of them accruing to your business in the future. Besides annual profits, you could take a look back at the most recent six months and see if you detect any interesting trends.
Value Tangible/Intangible Assets
Quite naturally, a departing shareholder will want patents, trademarks, inventory, equipment, cash on hand, receivables, buildings, land, investments and the likes included in the valuation. It is important to list all hard and soft assets in order to measure overall value. While it may not be possible to assign a definitive cash value to soft assets like licenses, key employees or goodwill, it is crucial to consider them nonetheless, before the exiting shareholder takes them for a new venture.
Calculate Capital Needs
Even if all shareholders are in agreement about the value of the shares, there may not be an adequate sum of money left to run the business if the remaining shareholders transfer too much to the departing shareholder all at once. You will have to assess the forward operating capital required and whether you should pay the exiting shareholder in a lump sum or in installments over time.
Project Future Earnings
Taking into consideration your financial data, all shareholders should work together to project profits over the span of the next several years. This should be done on an annual basis in the normal course. It is crucial to talk about how your business will be impacted by the departing shareholder’s exit in terms of value and expertise.
Supposing the business doesn’t do as well as indicated by the projections, the departing shareholder may agree to settle on less based on those numbers. There is an inherent risk in this approach. Future profitability may be largely dependent on the remaining shareholders’ efforts and not necessarily on the business’s foundation.
Furthermore, the remaining shareholders may well drive the business into the ground and the exiting shareholder will be left with little to nothing if the payment is to be done over the next couple of years.
Regardless, a business valuation is very important, more so if there is animosity between shareholders. The last thing you need on your hands is one shareholder filing a lawsuit because they claim that they did not receive a fair share of business value.
Business Valuation should be an Integral Part of the Shareholder Agreement
A business valuation is critical as it helps partners arrive at the business’s actual worth taking into consideration key factors such as asset values, market competition, industry trends, and future cash flows. Certain figures derived from the valuation procedure will also give shareholders an idea of the adequate insurance coverage needed, how much to reinvest in the company and how to position the company for a future sale.
Business valuation procedures and methods should be an integral part of a shareholder agreement. Periodic valuations will ensure all shareholders are updated on the worth of their interests that will then allow them to prepare for an exit. This is very important to ensure the company’s continued viability.
Dealing With a Shareholder Exit and Require a Reliable Valuator?
Hire a professional valuator ahead of time to access several benefits that would ordinarily be closed off to you. Call us at 905-305-VSPL (8775) and we will perform a valuation that positions your business for future profitability and growth!