Many small business owners in Canada may have overlooked the usefulness of valuating their business, despite its critical importance in effective planning and strategic decision-making.
Understanding the true value of a business is more than just a good-to-know financial exercise. It provides an essential, comprehensive picture that can help direct the best possible outcomes for the business and the people involved – whether that’s for succession planning, selling the business, litigation support such as in shareholder or matrimonial disputes, raising capital, strategic planning and decision making, and employee stock ownership plans (ESOPs), among other scenarios. These are often high-stakes situations that can lead to huge financial gains, or if not done correctly, financial losses.
Yet, business owners are often too deeply involved in revenue growth and operational challenges to be aware of the worth of their business, said Hao Zheng, Valuations Principal at Manning Elliott, a top CPA firm in British Columbia.
Even if there is not a pertinent situation that requires valuation, or a business exit is many years in the future, valuation is important for identifying the strengths and weaknesses of a company to help set the course for success. The question owners should ask themselves through all stages of their business is: “Am I doing the right stuff to create business value in the eye of an independent third party?” said Zheng.
Determining the actual value of a privately held business can be challenging without the know-how. Here are 5 valuation tips to help set your business up for success.
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1. Clarify your objectives
Get clear on the purpose of understanding the worth of your business. Are you hoping to expand and attract investors? Or to get insight into the strong and weak points of the business that may draw or deter prospective buyers? Formulating a clear picture of your goals and intended audience will help provide context for an analysis and point to the most appropriate valuation methods.
2. Start early
It’s generally recommended to start early in getting your company valued for strategic planning. For example, an entrepreneur who is hoping to get funding should have valuation top of mind. It will help in raising capital and determining the value in which they may be willing to give up some of their equity.
In transactional scenarios, such as succession planning or the sale of the business, Zheng recommends doing a business valuation three to five years in advance. Quite often, buyers expect five years of financials, said Zheng, so if you’re not prepared many years in advance, you may not be able to boost the company’s profitability in time for your exit or when ideal transactional opportunities arise.
3. Identify Key Value Drivers
By analyzing financial statements, market trends, and industry benchmarks, the factors that significantly impact the company’s value can be pinpointed. This could be anything from strong customer relationships and intellectual property to efficient operations or a talented workforce. Understanding these drivers helps the business owner prioritize strategic initiatives and maximize the company’s worth.
4. Set a Baseline and Monitor Value Growth
A starting baseline valuation serves as a benchmark to track your company’s value over time. As the saying goes, “If you can’t measure it, you can’t improve it.” By conducting regular valuations, you can monitor how your strategic decisions and market changes impact your company’s worth. This allows you to make informed decisions, identify areas for improvement, and demonstrate growth to potential investors or buyers.
5. Work with a qualified valuator and the advisory team
Business valuation is a complex process requiring in-depth knowledge of accounting, financial analysis, and industry trends. Partnering with a qualified valuator at a reputable mid-sized CPA firm ensures access to not only valuation expertise but also a multidisciplinary team that can address various needs throughout the process. This includes collaborating with tax professionals to optimize tax implications, engaging financial analysts to refine financial statements and projections, and leveraging other specialists for valuation and transaction-related needs. This integrated approach can streamline the process, mitigate risks, and ultimately enhance your business’s value while avoiding the higher fees often associated with larger firms.
While business owners are well-versed in managing the operational needs of their company, many do not have the experience to determine the worth of their business. Working with a qualified valuator and advisory team can help put you in the best position for success.
Learn more about business valuations at ManningElliott.com.