The pandemic has complicated bottom lines, but business owners can still get a clear picture of their company’s value whether selling, transitioning or just planning for a strong future.
William Tam, principal of Manning Elliott’s new valuations practice, has been working with owners in selling their business to an existing management team or transitioning it to the “next generation” — typically their own children — as well as owners selling to a market participant, competitor or another interested party.
But before owners transition or sell, they need to determine a fair market value, which has been made more tricky by the impact of drastic measures to prevent the spread of COVID-19.
To get a realistic sense of what their business is worth, an owner can engage chartered business valuators such as Tam and his experienced team.
He can help them determine whether they should hold on or “cut their losses,” or find ways to mitigate further losses and build value over time or before a sale, Tam says.
After the pandemic hit, some businesses saw sales vanish and profit margins wiped out, and after reopening or adjusting at a slow pace, are trying to determine what to do next.
Given that the pandemic has depreciated the value of many businesses, this is an ideal time for an owner to transition their business to the next generation and save on taxes, Tam says.
“Now would be a golden opportunity for that,” he says.
“When there’s a transfer of the business, the owner is deemed to have sold his or her shares at fair market value. The lower the fair market value, the less tax you have to pay.”
But if the owner’s strategy is to sell their business to the open market for top price, Tam advises taking a bit of time to boost up its value in order to demonstrate its resilience.
“We can assist in advising a client strategies to boost the financial strength of the company prior to selling to a potential acquirer,” Tam says.
“I would spend a bit of time to review the overall operations and would be happy to develop a great strategy with the business owner in order to get the highest price.”
To do an accurate valuation, Tam and his team look closely at business value drivers.
Those include net working capital such as accounts receivable, inventory and prepaid expenses; capital assets such as equipment, machinery and furniture; and intangible assets such as customer and vendor relationships, brand name and identity, and intellectual property.
Strategies for boosting value are company-specific and changing, given the pandemic, but tend to focus on earnings before interest, taxes, depreciation, and amortization (EBITDA), Tam says.
“Say your industry has a 10 per cent EBITDA margin, but your business is generating a 15 per cent EBITDA margin,” Tam says. “That is a competitive advantage that the right buyer would be willing to pay more for.”
Simply put, EBITDA is strengthened by growing sales or cutting costs, Tam says. If a growth in sales is improbable, the next step an owner often takes is reducing costs. Discretionary costs such as advertising, travelling and conference attendance, he adds, should be reviewed to determine the “need-to-haves” in a business versus the “nice-to-haves”.
“For business owners, we have to discuss the business needs in the operations and also areas in which business owners can cut down or focus in order to build that business value up,” he says.
Manning Elliott has been growing its valuations team to match the growing needs of clients, providing them with well-documented and credible reports at a reasonable cost.
The team also offers financial modelling to help owners raise capital, implement strategic plans and support management in scenario analyses.
And it provides advisory services to owner-managed businesses in a variety of industries, and help owners and shareholders determine what their company’s shares and business interests are worth.
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