We completely understand.
You have a sentimental attachment to your business having built it from the ground up. But have you ever considered what potential purchasers see when they look at your business?
So let’s get down to brass tacks. What is the purpose of business valuation? Business valuation is at the top of the agenda for any entrepreneur planning their exit or wanting to enhance the value of the business. It is a process that determines the economic worth of a business. Once the fair market value has been established, it serves as a focal point for important buy-sell agreements and various other relevant initiatives.
This leads us to another question we often get asked; How do I calculate the value of my business? There is not one universal way to determine the value of your business. A combination of several factors are considered when crunching the numbers such as – valuation approach, mix of tangible and intangible assets, historical financial statements, projected cash flow models, market trends, economic conditions, competition, etc.
This process will generate an expected market value or sale price for your business – however, the actual price could always vary for various reasons including buyer/seller motivations, access to information, potential synergies or cost savings, etc.
Potential Buyers Trust Objective Numbers
Procuring a business valuation from an independent professional is absolutely crucial for your GTA business. It’s not uncommon for a business owner to have an inflated view of how much their company is really worth.
However, it’s important to bear in mind that suppliers, investors, shareholders, tax assessors, and potential buyers will not necessarily agree with a value that you, as the shareholder, calculate for your business (whether it is overestimated or underestimated) as it wasn’t generated from an unbiased source.
When there is a dispute or conflict over the value of your business, your retirement plans may be affected.
Remember that “value” is relative, and is likely to differ based on different standards of value and different buyers. It cannot be denied, however, that arriving at fair market value is a great starting point for your value enhancement or exit planning initiatives. It provides you, as the business owner, an insight into what a potential buyer is thinking.
Why throw caution to the winds? In this article, we explore the biggest benefits of having your business professionally valued.
Enhances Business Value
A business valuation identifies key value drivers and establishes a benchmark to enhance value. For instance, after examining the valuation report, you will be in a better position to find innovative ways to improve value by increasing annual cash flows or de-risking the business. You may even be able to tap new markets and diversify your business model.
When any increase or decrease in value is well documented over time, the business becomes automatically more attractive to a buyer and, in turn, they will be open to making a more lucrative offer.
Helps Manage Family Wealth
It’s likely that your business is the largest asset in your portfolio and represents a sizeable percentage of the family wealth.
In fact, research has shown that about 75% of all private equity is owned by households and it constitutes at least half of their net worth. It will be impossible to protect that wealth without being aware of the worth of all your family assets. By procuring a valuation ahead of time, you will have the tools to act quickly when an unexpected offer happens to come your way.
Prevents Costly Shareholder, Partner or Marital Disputes
Valuation professionals can help business owners and their attorneys obtain information necessary to draft provisions in buy-sell agreements. These provisions can turn out to be very valuable in resolving disputes that may arise between business partners or shareholders, and will help avoid potential costly legal battles.
This is why periodic valuations are critical. The reports can be examined by key players whereupon they agree on the current business value before any disagreements occur. Moreover, independent valuations are also useful in the event of a marital dispute as valuations are needed to support the net family property statement used to consider equalization payment scenarios.
Aids in Tax and Estate Planning
A little-known benefit of procuring a business valuation is that it helps reduce your tax burdens. How so? Valuations can achieve corporate and personal tax-planning objectives. They provide huge opportunities for companies and shareholders to increase their cash flow by minimizing or deferring taxes on future sales or transfers.
A valuation report acts as insurance for potential disagreements with the Canada Revenue Agency when it comes to estate freezes, reorganizations etc. The CRA can disregard price adjustment clauses if it is of the opinion that a reasonable attempt at determining value was not conducted at the time of transfer.
Shareholder Life Insurance
A valuation report provides peace of mind to the business owner. It acts as third-party evidence to ensure that sufficient life insurance has been put in place. This also affords shareholders the confidence of knowing that their families and businesses are properly protected.
It’s Never Too Early to Get a Valuation Done!
Granted. You may not be in the midst of a buy-sell agreement right this very minute, nor do you see yourself selling your business any time soon. Don’t take a gamble. An unforeseen dispute or unexpected offer could crop up when you least expect it!
Contact VSP to learn how we can set your business up for future growth.