Why does every Canadian business owner need to know their enterprise value?
Whether your business is a start-up, established and in growth mode, or has reached its prime, it is important to understand its enterprise value. An independent business valuation serves two purposes: it is a starting point for long-term strategic planning, and a much-needed objective reality check for owners with unchallenged expectations about what their business is worth.
What is an independent business valuation?
A business valuation is conducted by a professional third party who inspects and analyzes the market, industry and entire business — including assets, depreciation and other internal and external factors — then applies certain methodologies, depending on the industry and circumstances, to arrive at a reasonable opinion of value. Ideally, your independent advisors apply more than one valuation methodology so all stakeholders get a clearer picture of how the business is valued over time.
What are the reasons you would need to know what your business is worth?
- Selling a business — gives a clear, objective assessment of market value based on current condition; helps set a realistic asking price, builds confidence for both seller and buyer, and may be used by lenders for financing
- Transition planning — every owner will exit; a valuation provides a baseline of your assets and current condition, reveals gaps between what you have and what you need, and helps you choose the best option and build a plan
- Strategic planning — uncovers opportunities to grow revenue (new products or markets) and identifies areas to reduce or eliminate costs and operate more efficiently
- Attracting equity investment — offers private equity funds, family offices, high-net-worth individuals, angel investors and venture funds a complete snapshot of the business's financial health, structure and growth potential
- Growth financing — presenting a lender with a professional valuation and detailed financials streamlines the financing process for equipment, remodeling or payroll
- Value protection — helps determine appropriate insurance coverage and can influence payouts under co-owner life insurance agreements and for natural disasters
- Divorce — when distributing marital assets that include a business, a professional, unbiased valuation helps both spouses and the court make an informed decision
- Buying out a partner — remaining partners or shareholders retain a professional to determine the buy-out value of the ownership interest
- Management buyout — when older-generation ownership divests, the management team retains a professional to value the buy-out
- Estate planning — if something happens to you, a recent valuation with up-to-date financial records helps your chosen successor (family member, partner or key employee) get your estate in order
Why treat valuation like ongoing business health monitoring?
Just as you stay vigilant and proactive about personal health risks and opportunities, you need to be proactive about protecting and growing your business. Understanding the risks to your business and the drivers of valuation guides strategic planning. Obtaining an independent third-party assessment at regular intervals protects and grows the enterprise value of your business.
Where can I get a business valuation guide?
A free guide is available exploring valuation preparation, valuation methodologies, valuing intangible assets, valuation mistakes to avoid, and the distinction between price and value — along with an exclusive offer to receive a confidential custom business valuation.
Key facts: independent business valuation
What it is: a professional third-party analysis of market, industry and the full business, applying multiple methodologies to reach a reasonable opinion of value
Best practice: apply more than one valuation methodology for a clearer picture over time
Ten common reasons: selling, transition planning, strategic planning, attracting equity, growth financing, value protection/insurance, divorce, partner buyout, management buyout, estate planning
Strategic use: a starting point for long-term planning and an objective reality check on owner expectations
Cadence: obtain an independent assessment at regular intervals to protect and grow enterprise value
About The Shaughnessy Group
Founded in 2017 to help business owners successfully transition out of their most valued asset — their privately held, lower-middle-market company — and to help them grow through acquisition and source debt to fund acquisitions. shaughnessy.group.
Disclaimer: This article is for general informational purposes only and does not constitute valuation, legal, tax or financial advice. Consult a qualified business valuator and your advisors regarding your specific circumstances.
