leveraging your life’s workharoldduffett.ca/.../improving-your-business-value.pdf · all business...

Leveraging your life’s work

Harold B. Duffett, MBA, CA, CBV

‘Vision Behind the Numbers’

� Discuss several key issues to improve your business value

� Discuss some of the soft issues of the business valuation process

� Provide the business owner with introductory guidance to develop their own Business Improvement Planning Strategy

� Discussion on business succession matters

2‘Vision Behind the Numbers’

� Be certain, not sorry� Measuring a company’s value, called

“valuation”, is a complex but critical process in certain succession transactions

� Business value is about the future, not the past

� A business valuation is an important piece of data underpinning the overall succession plan and strategy

� Business should be valued by certified professionals before succession takes place


� Only one professional body recognized by the Courts in Canada and the Canada Revenue Agency to perform a business valuation

� The Canadian Institute of Chartered Business Valuators (CICBV) are financial professionals who have the designation CBV (Chartered Business Valuator)


� After spending a lifetime building a business, some business owners, due to a lack of planning, don’t have a business that can be sold. Sadly, this is the sort of fact that is likely to be discovered after it is too late. Once the business owner has finally decided to sell the business, he or she does not want to wait another three to five years to prepare the business for sale.

� Thus, the owner is forced to either work several years longer than desired or to get rid of the business for an amount that is much less than expected.


� Truths for buyers and sellers to keep in mind◦ All business valuations are merely opinions, not fact

– ultimate value is determined by the marketplace◦ Terms and conditions can dramatically influence

price◦ Value is almost always in the eyes of a beholder –

same business will have a different value based on the needs and requirements of the potential buyer◦ Supply and demand changes constantly influence

value and price◦ Value can depend on the experience, education and

thoroughness of the appraiser◦ Buyers are buying a future income stream


� Many experts say “no”

� These experts believe that only half of the business valuation should be based on the numbers, with the other half of the business valuation based on non-financial information

� Those “subjective” factors are generally discussed via SWOT analysis (strengths, weaknesses, opportunities and threats)

� I am one of those experts agreeing with this position


� The SWOT analysis is an extremely useful tool for understanding and decision-making and for all sorts of situations in business and organizations.

� The SWOT analysis headings provide a good framework for reviewing strategy, position and direction of a company or business proposition, or any other idea.


� Assessing the qualitative factors of a company� Framework for identifying the internal and

external factors that affect a company’s ability to do business.

� 1.Product (what are we selling?)� 2.Process (how are we selling it?)� 3.Customer (to whom are we selling it?)� 4.Distribution (how does it reach them?)� 5.Finance (what are the prices, costs and

investments?)� 6.Administration (and how do we manage all

this?)


� strengths (maintain, build and leverage),

� opportunities (prioritise and optimise),

� weaknesses (remedy or exit),

� threats (counter)


� A company’s value increases when its associated industry is expanding, and its value decreases in any of the following situations: its industry is constantly fighting technical obsolescence; its industry involves a commodity subject to ongoing price wars; its industry is severely impacted by foreign competition; or its industry is negatively impacted by governmental policies, controls, or pricing.


� A company is worth more if it is located in provinces or countries that have a favorable infrastructure, advantageous tax rates, or higher reimbursement rates. A company with access to an ample educated and competitive work force will also enjoy increased value.

� Consider Nova Scotia v. Alberta?


� A company with low turnover in management and a solid second-tier management team comprised of different age levels is also worth more.

� Next to the “numbers” might be the most important valuation attribute considered


� A company operating profitably at 70 percent capacity is worth more than a company currently near capacity. Equipment should be up to date and any leases – either equipment or real estate – renewable at reasonable rates.


� A company is worth more if its products or services are proprietary, are diversified with some pricing power, and have, preferably, a recognizable brand name. In addition, new products or services should be introduced on a regular basis.


� A company is worth more if there is not heavy customer concentration, but rather recurring revenue from long-time, loyal customers, as well as from new customers created through a regular and systematic sales process.


� A company not contending head to head with powerful competitors such as Microsoft or Wal-Mart will rate a higher value.

� Porter five forces analysis is a framework for industry analysis and business strategy development that determine the competitive intensity and therefore attractiveness of a market.


� Finally, a company is worth more if it is not dependent on single sourced key items or items available from only a limited number of suppliers.


� Tangible asset value

� Proven track record of profitability

� Proprietary technology

� Niche markets

� Barrier to entry

� Strength and depth of management


� Reliance on a few customers

� Reliance on a key employee

� Outstanding litigation

� Business risks

� Economy and industry risks


� Cash flow or earnings stream

� Growth

� Life cycle

� Risk analysis


� Most common methods� Earnings approach

� Capitalization of cash flow� Discounted cash flow

� Asset approach � Adjusted net book value� Liquidation

� Rules of thumb

� Less common◦ Public company guideline (market based)


� EBITDA normalized (determining the real income)◦ Cleansing the earnings

◦ Removing the perks

◦ Removing personal expenses

◦ Identifying all non cash, non market and non reoccurring items

◦ Identify related party transactions

◦ Market rent paid?

◦ Pick up bonuses?

� Predicting EBITDA levels


� Redundant assets (assets that are not essential to running the business, non operating assets (investments, excess land)

� Buyers become nervous when there are numerous adjustments to revenue

� Capital asset surprises

� To take on additional business risk


� A system that starts with strategic planning and incorporates forecasts of future events culminates in the budget

� Provides a financial interpretation of the company’s direction

� It becomes a fundamental road map for achieving growth, profitability, and success

==� Manage RISK


� Why prepare forward looking data?◦ Guiding operations

◦ Establishing spending minimums and limits

◦ Planning for resource needs

◦ Communicating expectations

◦ Warning of situations that may be out of control

◦ Obtaining financial aid

◦ Setting quotas for incentive compensation

◦ Comparing results of corporate operations

◦ Comparing alternative uses of resources

◦ Plan for capital expansion


� Leading organizations widely acknowledge that forecasting is at the heart of the performance management process, and is potentially a significant driver of business value…

� Identifies which factors you can control and which factors can control your business!

� Provides some insight into what your competition is up to?

� Do you know what market changes are taking place?


� Provides valuable insight for maximizing the value of the firm

� Approximately 70% of corporate acquirers use the discounted cash methodology which requires some form of forward looking data to carry out the valuation


� The process evaluates your financial statements and summarizes key findings

� It provides a clear picture of your business’s financial health

� Provides clarification◦ Financial statement analysis

◦ Contingency planning

◦ Cash flow analysis

◦ Resource allocation

◦ Succession planning


� Financial ratios – firms with better margins sought after

� Strengthen financials – financial statements that don’t need adjustments convey reliability

� Sell transaction – avoid unnecessary questions from potential buyers

� Shares – approximately one half to two thirds of all deals all share transactions


� Shares or assets being sold

� Marketing business for sale

� Negotiating the deal

� Cost of sale in open market – say 5% to 10% of selling price

� TIP– stay at arms length during the sale process, let the people with the training, experience and wisdom lead to a successful sale


� Tax is a critical component of any succession plan

� It should not drive the process� Asset or share purchase� Buyer prefers an asset purchase because the

buyer is able to limit liabilities assumed and from a taxation perspective able to depreciate the value acquired

� Vendor prefers share sell because of taxation advantage capital gains exemption ($800,000) in 2014


� A process of exploring your options, protecting your hard earned business investment, and choosing the correct exit strategy for you and your family

� It encompasses estate planning

� It encompasses retirement planning

� Not a one time exercise

� Should be an ongoing exercise


� A succession plan is similar to drawing up a Will

� Accepting and preparing for a major life change

� Identify personal and family goals

� Communicate (avoid family conflicts) –family, employees, successor

� Transfer of your business ownership

� Myth – it is too early to plan!


� Start planning sale

� Not 4 to 6 months before you intend to exit your business

� Generally minimum 2 years before, not unusual 3 years before exit

� Biggest soft issue barrier is the business owner avoids dealing with succession due to a strong sense of attachment to the business


� Keep business in the family

� Select and groom a successor

� Management buy out

� Sell the business

� Finance the sale?


� According to the CFIB, fewer than half of small and medium-sized enterprises (SME’s) currently have a succession plan

� 2008-2009 recession had a profound impact on succession planning

� Almost a quarter of business owners said they delayed the timing of their exit date between one and four years

� Unlike government, very few business owners have a pension and must rely on the value of their business to help fund their retirement


� According to the Federal Government, small businesses are responsible for 42% of the country’s private sector gross domestic product

� According to the Federal Government, small businesses employ more than 5 million people – 50% of Canada’s private sector labour force

� Retirement is the number one reason for business owners planning to exit their business


� One-third of SME owners intend to exit ownership within 5 years

� That figure jumps to two-thirds in next ten years

� Only 10 percent of SME owners have a formal plan to sell, while 38 percent have an informal plan

� Over 1,000 Nova Scotian’s turn age 65 every month


� Buyer benefits from vendor “sticking around”

� Provides for an orderly transition

� Previous owners often know how to grow the business best

� How long? Not so long that the value of the involvement of the old owner becomes a drag on the new owner

� Per PWC study, first 3 years after a company is acquired, see about 30% drop in sales and revenue


� A key issue for the business owner is financing the change of ownership

� Consider what is being sold – more than likely a vendor take back note on a share transaction

� Consider whether the owner is staying on in the business

� Financing can be risky, depends on future success of the business in the new owner’s hands

� Consider what remedies you have if debtor defaults

� Stats indicate approximately 25% of VTB are not repaid


� Implementing business improvement strategies now will improve your firm value later

� Not everything can be found in a textbook, every business has unique circumstances and characteristics – and these differences make business valuation challenging

� Succession planning is a process that should be undertaken 2 – 3 years before wanting to exit the business


� Be prepared – a business sale is fraught with complex considerations

� Adjust expectation to economic reality–business owner’s often think their businesses are worth a lot more than what other people may think

� It doesn’t matter what you think the business is worth – it’s what the market says its worth

� Improve the value of your business� Understand the risk factors from a buyer’s

point of view


� Thank you

� Harold B Duffett MBA, CA, CBV◦ 678-1125

◦ [email protected]


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