A Surprising Thing About Business Valuations
Information on how Canadian business owners and managers can understand business valuation methods when they are buying or selling a company
Business valuation methods in Canada. This should NOT be a shocker to you, but whether you're buying or selling a company in Canada the ways in which you look at the business are basically the same whether you're ' buyer ' or ' seller'.. , or even in a merger scenario. Let's dig in.
When we sit down with clients looking to buy or sell a business, or perhaps even acquire a franchise the proverbial question arises pretty quickly. That question? ‘HOW MUCH IS THIS BUSINESS WORTH'!
It's somewhat of an old saying, but the reality is that the best transactions when consummated revolve around a fair price for both parties. We love the old saying that the best deals are done when both buyer and seller feel like they didn’t get the best deal! Think about it.
So how does that whole valuation process work? And lest we forget, the tax man tends to sometimes, if not always have a vote in your deal.
The simple way to look at a valuation in the small to medium size private company business sector in Canada is to look at it in two ways:
Going Concern/Cash Flows
When it comes down to the assets in a business the value of those assets is key of course. And since assets are financed by banks, asset based lenders, leasing companies, commercial finance companies, etc your ability to pin down ' true values ' is critical to an asset based deal.
In some cases appraisals might be required. They are needed for both financing and valuation purposes. Appraisals come in three forms -
Fair market value
Orderly liquidation value
Salvage value
Naturally some assets are much more liquid than others. We can make the case the receivables and inventories are of course much more liquid than physical plant assets or rolling stock, aka ' trucks'.
While the business seller tends to focus more on fair market value because they know and believe in their business assets the seller, if prudent should establish the minimum price by focusing on liquidation value of the assets.
Accountants tend to focus on the net book value based on the seller’s presentation of financial statements. It gets a bit tricky though when you try and blend in the fact that recently profits might be down and future prospects, for a variety of reasons, might be at risk.
The whole area of GOING CONCERN VALUATION is the other method that presents opportunities and challenges. It focuses on a lot of time being spent on future earning power. The challenge here, as most business owners know, is that the past doesn't always represent the future! Here methods such as average earnings over a number of years are used to help in the overall bottom line valuation.
What are some of the factors that affect your decision process in a going concern valuation financing?
They might include:
Growth potential under new owners, management, additional financing
Current management positive attributes
Companies that aren't as subject to the economy
Service businesses that require smarts, not capital
Use a common sense approach to business valuation methods whether you're buying or selling a company. Also, assess which factors might affect your ability to finance the company. Financing a purchase might include solutions such as:
GOVT BUSINESS LOANS
ASSET BASED LENDERS
CASH FLOW LINES OF CREDIT
COMMERCIAL BANK TERM LOANS
MEZZANINE FINANCING
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor when it comes to business valuation and financing that makes sense for your deal.
Stan Prokop - founder of 7 Park Avenue Financial
http://www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years - has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details :
7 Park Avenue Financial = Business Valuation And Financing Expertise
CONTACT:
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Phone = 905 829 2653
Fax = 905 829 2653
Email = sprokop@7parkavenuefinancial.com
Stan Prokop
