If there is one question we are asked more than any other it is, “How much is my business worth?” The answer is often surprising.
Many business owners never perform a valuation exercise with their business, but it is one of the most important exercises an owner-manager can do.
Valuations are used in the following situations:
Non-arms length share transfers
Disputes with business partners
Buying and/or selling your business
Each one of the above situations can lead to a different valuation based on the assumptions employed. Business valuation is not an exact science but rather an art, and therefore the result is usually a range rather than a specific amount.
Business valuations look at a number of alternatives in arriving at the final range. Things like free cash flow from operations, net asset values, fair values of fixed assets, fair values of current assets, contingent liabilities, warranties etc., are used to measure the likely return on investment.
In addition, certain adjustments are made to reported operating results to arrive at sustainable normalized income from operations. The most common are bonuses paid to owners over and above salary levels dictated to manage the business.
In order to arrive at a realistic value of your parts business, it is important to recognize that a number of issues can affect the value at any given point in time. Each of these will certainly have some subjectivity applied depending on the motivation. These should be analyzed as it relates to the transaction. That is, should the status of each of these have a positive or negative impact on the value of the parts business? Be prepared to support your position. Some of the broad categories to take into consideration are:
PERFORMANCE OF THE PARTS BUSINESS
Try using your experience with the stock market. If a specific company’s performance has had a consistent earnings experience for a long term, say five to 10 years, or even a consistent earnings growth rate for a similar period, the value of the shares of that company typically will be high due to the likelihood of a higher return. Consequently, the management strategies used by your business will inevitably affect its value either positively or negatively depending on the impact they have had on growth and earnings. For example, strong long-term earnings growth is a better value driver than dramatic but inconsistent spikes in sales resulting in inconsistent earnings.
The profile of your business’ management personnel can affect the value of the business. Their age, tenure and performance while with your business can force future owners into making additional staff changes, which can delay the recognition of perceived benefits of the purchase. Consequently, this would likely impact the business value negatively. Conversely, the quality of your business’ key managers could prove helpful to the future owners and expedite the transition of the purchase of your business. This could mean a higher valuation for your life long hard work.
TYPE OF FRANCHISE
A store’s type of franchise or associate agreement can affect its desirability in the marketplace, and can vary with time. Some business brands are simply more desirable than others at any given time.
PERCENTAGE OF THE BUSINESS BEING PURCHASED
A purchaser out to buy a majority shareholding in a parts business may be willing to pay more for that than if he was purchasing a minority shareholding. Consideration should be given to whether control of the parts business is being purchased or not.
MOTIVATION OF THE PARTIES
Finding the right combination of buyer and seller can be the most rewarding of experiences when involved in buying or selling a parts business. When a seller can find a buyer who can see the benefits from buying his parts business, he will have a better opportunity to achieve the maximum value for the parts business. Conversely, a buyer who can find a parts business who must sell due to extenuating circumstances is more likely to obtain a lower price for the parts business. However, parts businesses are usually sold because the owners have to or the owner is tired and wants to exit the business and has not done proper planning for this event. Nevertheless, the less motivated you are to buy or sell, the more objective you become in the decision-making and valuation process.
The current location of the parts business will have a direct impact on the value of the parts business, as well as whether current location will be considered as part of the purchase of the parts business. At times, the current location is unappealing but alternative locations can be found to relocate the parts business. An analysis of business can often ensue as to alternative purchase arrangements such as purchasing selected assets of the parts business relocated to another location. In any case, the location of the parts business will play a large role in the value paid for the parts business.
Many businesses carry assets that do not add value to the business but are simply owned by the business. Their impact must be eliminated before determining the final value. Often redundant assets are sold in an unrelated transaction, yielding more cash for the business owner.
Valuation is often misunderstood and its importance is often understated. Each and every day managers manage the business with a net impact on business valuation. Knowing what that impact is becomes critical if you are planning a transaction or business transfer.
Many business owners do not know the value of their business and as such fail to capitalize on actions to increase value. Ask the question now and get a professional answer. You’ll be surprised how your management focus will change.
Charles Seguin, CA, is partner-in-charge of the PricewaterhouseCoopersLLP Automotive Retail Practice. The cross-Canada practice focuses on retailer growth and development, operations improvements, succession planning, acquisitions and divestiture, accounting, tax and finance-related issues. He can be reached via e-mail at email@example.com
Luanna McGowan, LLB, is partner-in-charge of the PricewaterhouseCoopersLLP Centre for Entrepreneurs and Family Business. The centre provides facilitation, strategic planning, retirement planning and wealth management services to entrepreneurs and organisations. She can be reached via e-mail at luanna.mcgowan@ca. pwcglobal.com.