Factors impacting business sale price

Chartered Business Valuators (CBVs) contribute a specific but important piece of a business owner’s estate and transition plan.

Specifically, they provide an outsider’s view of a company’s worth while working with the client’s other key advisors—professional accountants and corporate lawyers—who usually have a long-standing relationships with the client. It’s a good idea to hire a CBV if you’re looking to sell a company in the next five to 10 years to gain a reference point about the business’ worth right now and gain insights on key factors adding to (or detracting from) its value.

“The last thing I want is for my client, who has likely never sold their own business, to be insulted by the first offer that comes in. This can derail the deal because he or she doesn’t have a real sense of the company’s worth. The CBV’s valuation is ultimately a sobering influence and makes my job working with a novice seller that much easier,” says David Shlagbaum, chief corporate counsel at Toronto law firm Robins Appleby and Taub.

Building value

CBV’s have difficult conversations with business owners about how past actions may affect the company’s current value. “Use the valuator’s specific viewpoint to explain to your client that if they did this or that, the company would be worth more,” Markham, Ont. accountant Mike Arnold suggests.

Arnold tells his clients. “Let’s get the CBV in and use their feedback as an indication of what is weak in the operation from an objective, trained observer. Then we can talk about factors that are affecting value, like the age of key of employees, not only in terms of operations but in terms of seeing what a potential buyer is going to be looking at.”

Easing into the process

Sometimes the areas for improvement a CBV will identify aren’t significantly different from what incumbent accountants and lawyers have been telling the client for years. But, coming from a specialist in valuations can give those observations new weight.

The valuation process “eases the client into the sales process without offending potential purchasers. Most business owners are operators, not vendors. There are things they need to hear [and] it’s best to hear it from someone who is commissioned by them to give that feedback.

“Good operators are able to step back and appreciate someone coming in and telling them what their current selling price may be and what is affecting that selling price now and in the future,” says Arnold.

Succession planning

The valuation process can also challenge erroneous assumptions held by family members.

“When the debate surrounds whether to sell the business to a third party or keep it within the family, it is always interesting to see the reaction, particularly among children and cousins who are not involved in the business,” Shlagbaum says. “The succession planning conversation begins in earnest after the valuation comes in. I hear, ‘If that’s all the business is worth, what do we need to do now to enhance value before we can sell?’ There are many reality checks needed in the succession-planning dialogue.”

Estate planning

Even if a sale isn’t imminent, a CBV plays a strategic role in estate planning work. “If you are going to need to convince Revenue Canada of the fair market value of the business at the time of your estate freeze, there is no greater measure of credibility than a professionally prepared valuation,” says Shlagbaum.

“When we are forced to base our estate freeze on a thumbnail valuation, we are always concerned about our report to the client and the qualifications we are forced to make. There is no satisfaction in saying, ‘I told you so’ to the client when Revenue Canada challenges the numbers used in the freeze.”

Sondra Stewart is a chartered business valuator with Stewart Business Valuations in Woodbridge, Ont.