Why does a Canadian business owner need an independent business valuation?
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 can serve as a starting point for long-term strategic planning — or a much-needed objective reality check for owners with unchallenged expectations about what their business is worth.
What is an independent business valuation and how is it conducted?
A business valuation is conducted by a professional third party who inspects and analyzes the market, industry and the entire business — including assets, depreciation and other internal and external factors. From there, the valuator applies certain methodologies, depending on the industry and circumstances, to arrive at a reasonable opinion of value. Ideally, more than one valuation methodology is applied, 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?
1. Growth financing — whether buying equipment, remodeling or meeting payroll, presenting a lender with a professional valuation and detailed financials streamlines the financing process
2. Selling a business — a professional valuation gives a clear, objective assessment of market value, helps set a realistic asking price, builds confidence for both seller and buyer, and may be used by lenders for financing
3. Transition planning — every owner will exit eventually; 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
4. Strategic planning — a valuation uncovers opportunities to grow revenue (new products or markets) and identifies areas to reduce or eliminate costs and operate more efficiently
5. Attracting equity investment — a recent valuation 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
6. Value protection — a detailed valuation helps determine appropriate insurance coverage and can influence payouts under co-owner life insurance agreements and for natural disasters
7. Divorce — when distributing marital assets and liabilities that include a business, a professional, unbiased valuation helps both spouses and the court make an informed decision
8. Buying out a partner — when one owner divests, the remaining partners or shareholders retain a professional to determine the buy-out value of the ownership interest
9. Management buyout — when older-generation ownership divests, the management team retains a professional to value the buy-out
10. 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 business health monitoring?
Just as you stay vigilant and proactive about personal health risks and opportunities, you need to be proactive about the protection and growth of 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.
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: growth financing, selling, transition planning, strategic planning, attracting equity, 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.
About the author
Karl Sigerist advises shareholders, board members, owners, entrepreneurs and executives on governance, strategic and corporate finance issues through the business life cycle. He is a founding member of 8 start-ups and has led growth through 3 mergers, 38 acquisitions, 34 strategic alliances and $965MM of capital raises.
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.
