Now more than ever, business valuations are critical!
According to the CBV Institute, the not-for-profit organization which governs, accredits and supports the Chartered Business Valuator (CBV) profession, an effective business valuation is the key to unlocking an organization’s value and making it a viable proposition and an attractive commodity that will be sold for profit.
Of course, the process gets much more complex.
“The critical factors about conducting valuations involve looking to get things on an even playing field of what anyone in the market that could buy into the business can expect,” explains Amanda Vella, managing director of Business Consulting with ATB Wealth and a director of the CBV Institute. “If we were to remove the current ownership tomorrow, how would that business operate? From that, we want to understand what cash flows a purchaser could expect after they buy the business in the future and what risk is there around being able to consistently achieve those cash flows.”
The process is detailed and complex but, from a quantitative lens, CBVs get a financial understanding of the company and understand the expected future cash flows and what return a potential buyer would expect to earn on those cash flows. To properly assess this, CBVs look to public companies, competitions or similar transactions to inform an accurate view on the buyers’ expected return.
Vella explains that a business valuation is meant to factor in the market value for all the assets in the business, particularly by looking at the balance sheet like capital assets, building and land and the value of the intangible assets often referred to as goodwill (but do not show up on the actual balance sheet).
“It is made up of all the hard-to-value pieces that make a business more valuable, such as customer relationships, brand, workforce, intellectual property, etc.”
According to Dany Le, partner in Valuation and Litigation Services with MNP Edmonton and a director of the CBV Institute, “Some common reasons and situations when a business needs a valuation can be broken down into traditional and trending. Traditional would include selling a business, tax reporting and litigation matters such as divorce proceedings, economic damages and shareholder disputes, while trending issues have been around employee buy-ins, succession plans and strategic planning.
“Also, companies offering Employee Stock Ownership Plans (ESOPs) need regular valuations to determine the share price at which employees can buy stock. Or, it can be for prudent and important strategic planning, when the business owners and management need a detailed valuation for internal decision-making, strategic planning and future growth assessments. It is a tremendous help in understanding the business’ actual worth and potential.”
Particularly in the past five years or so, valuations have become an increasingly popular fact of business life.
Le explains that Edmonton businesses have encountered numerous challenges, including volatile commodity prices, recovering from the impacts of COVID-19 and interest rate increases. It highlights the ongoing efforts needed to recover and stabilize results.
While Edmonton may not be unique, he emphasizes that business valuations in the Edmonton area require a multifaceted approach.
“It involves evaluating factors such as revenue growth potential, cost-saving opportunities and competitiveness, alongside analyzing economic health, interest rates, real estate trends, industry performance, GDP growth and market demand, among others,” Le says. “Each industry may respond differently to these variables, making it challenging to provide a definitive answer regarding valuation increases without focusing on specific sectors.”
Le cautions about the expertise and specialty of doing effective and reliable valuations.
“Getting a business valuation done by a CBV assures credibility because CBV valuations are recognized and respected by courts, tax authorities and regulatory bodies. The credibility is crucial when valuations are required for legal, tax and transactional purposes, such as litigation, tax assessments and mergers or acquisitions.”
There is a consensus among CVB professionals and business leaders who have benefited from valuations that thorough, in-depth and effective valuations are a specialty skill combining precision accounting and strategic planning.
Le points out that, when completing a valuation report in accordance to the Institute, there are minimum report disclosure standards such as descriptions of what is being valued, valuation date, purpose of the valuation, value definition, report disclosures, listing of scope of review and restrictions to name a few.
“Also, objectivity. CBV professionals are required to remain objective and independent. The impartiality is essential when fair and unbiased valuations are needed, particularly in situations involving disputes or negotiations. Also consider quality and reliability, since CBVs are required to adhere to high professional standards and ethics, ensuring that the valuation report is thorough, well-documented and based on substantiated and justifiable assumptions.”
While a business valuation is always a detailed and substantiated business plan, the actual presentation can sometimes get muddled and confusing, with internal sensitivities and shop talk technicalities.
Although the information is factual and relevant, some business leaders and management get overwhelmed with necessary valuation jargon like what EBITDA or a WACC is and the CBV’s use of rules of thumb, without clients understanding what they mean. During a presentation, an owner will say their friend sold for 4x but they do not really know what that means. Was it 4x EBITDA or net income?
“When presenting a valuation, no one has an ‘ugly baby,’” Vella smiles. “Most of the time business owners think the value of their business is higher than what is presented. Often, they don’t see or understand the risks that are in their business that would cause concern for a buyer and lower the multiple use in the valuation. Alternatively, they might have heard a story of a business that sold for a high multiple and they think that multiple should also apply to their business.”
Le adds that valuations are inherently subjective and rely heavily on assumptions about future performance, market conditions and economic factors and that different valuers might come to different conclusions based on the same set of data due to differences in assumptions.
Vella injects the significance of demographics in the surge of business valuations.
“We have a lot of business still owned by Baby Boomers. They are getting older and COVID put a pause on many of them getting out of their business. We are seeing a big increase in these Baby Boomers looking to understand the value of their business, plan their succession and sell quickly.”
The CFIB released a report showing 76 per cent of Canada’s business owners plan to exit their business within the next decade, with more than $2 trillion worth of business assets changing hands.
