Evaluating the net worth of a business can be difficult. How you evaluate a business depends entirely on the tangible and intangible assets of the company. There are many reasons to undergo a business valuation. Read our blog to learn more about why you may need a business valuation, how a business is evaluated, and why you should trust Gallo LLP to perform your business valuation.
Why Evaluate a Business’ Net Worth?
There are several reasons to evaluate a business’ net worth. Here are a few of the most common reasons to have a business evaluated.
- Buying a business
- Selling a business
- Succession or exit plan strategy planning
- Strategic planning
Business valuation is a critical form of financial analysis that should be done by a professional. Not involving a profession in the business valuation process may result in missing out on significant benefits.
Gallo LLP has the experience and technical knowledge to assist in the valuation of your current or future business.
What are the key factors to consider when evaluating a business?
When evaluating a business, there are several factors to consider in order to gain a full picture of a business and its value. The experts at Gallo LLP will take each of these factors and more into consideration when putting together a business valuation.
- Earnings History
- Staff and Management
- Growth Prospects
- Earnings before income taxes and depreciation (EBITDA)
- Competitive Advantages
Earnings history can play a role in the valuation process as trend analysis is used in arriving at the earnings multiplier used in the valuation process.
Staff and Management
Staff and management are important factors in valuations geared towards the purchase or sale of a business. Having management and staffing is critical to all business and potential purchasers should take this into consideration. A skilled staff and effective, reliable management team can have a strong impact on the value of the company.
The company’s prospects for future growth are of great interest to investors or potential purchasers. Growth potential is a consideration which can greatly impact assumptions used in the valuation process.
Earnings before income taxes and depreciation (EBITDA)
EBITDA eliminates the non-operating effects unique to each business and measures its financial performance. EBITDA values include common shares and equity, short-term and long-term debts, minority interest, and preferred equity. The company’s EBITDA is an important factor in cases involving the purchase or sale of the business , as well as bringing on potential investors, as it is a measure of company profitability. EBITDA is not useful in tax situations or cases where tangible or intangible assets are being sold or purchased.
The reputation of a business may have value to potential investors. This intangible factor should be considered in the valuation process as it has a large impact on the future success of a business.
All business owners strive to be better than their competitors. This is another intangible factor which may influence the value of the company.
The size of the company has an impact on value and is one factor in determining its EBITDA multiple. Company size matters in the purchase or sale of the company. The size of a company may dictate which assumptions used or comparative date available to the valuator.
Gathering the information pertaining to these factors can be incredibly time consuming. In order to receive a full understanding of a business’s net worth, it’s important to look at financial documents, contracts, customer and vendor agreements, trend data, leases, loans, current and future obligations, as well as garner information from external sources to ensure intangible factors are unbiased.
Tangible and Intangible Assets
Tangible assets are the physical assets owned by a business. Tangible assets are used in the business’ current operations to produce products and services. Examples of tangible assets include equipment, inventory, investments, buildings, vehicles, and cash.
Intangible assets are assets that do not exist in a physical form yet still have a potential monetary value. Intangible assets are not directly used by a business for operations; however, they still help a business continue to function. Examples of intangible assets include intellectual property (such as copyrights or Trademarks), customer lists, reputation and goodwill, public perception, experience, and more.
Tips for Selling a Business
Getting a business valuation is incredibly important if you are planning to sell your business. If you are getting ready to sell, it’s wise to prepare yourself (and your business) to be in the best possible shape before an evaluation. Here are some tips to prepare for selling your business.
- Know what buyers want. This should involve a fulsome understanding of the market and your business’s place in it.
- Analyze your business. Look beyond the day-to-day and try to avoid bias. This will likely involve creating and monitoring financial and non-financial key performance indicators. Identify strengths you can market and weaknesses that need to be addressed.
- Create a plan. The adage “if you fail to plan you plan to fail” fits here. Identify changes that need to be made to enhance the value of your business. Formalize your objective, assign responsibilities and set target dates.
- Get your paperwork in order. When a potential purchaser wants information, you want to have it readily available. Not doing so may appear disorganized which can signal potential issues to the purchaser. Some examples of documents to consider are:
- Corporate financial statements and tax returns.
- A business plan.
- A marketing plan.
- Employee contracts.
- Banking agreements.
- Prepare an information package or sales presentation. Make the decision easy for a potential purchaser by having a sales presentation ready for them soon after then express interest.
- Assemble the right team. Professional advice will help you identify opportunities or pitfalls you may have overlooked. Professionals will add value to the entire sales process. Your team should consist of:
- Chartered Professional Accountant
- Lawyer specialized in business
- Lawyer specialized in corporate tax or GST
- Chartered Business Valuator
- Insurance broker
- Investment professionals
Tips for Buying a Business
Just as in selling a business, individuals who plan to purchase a business should come prepared. Ensuring that you have a solid plan and understanding of the business valuation and purchase process will help you find a more positive outcome. Here are some of our top tips in preparing to buy a business.
- Perform due diligence. This step will help to ensure that what you think you’re buying is in fact what you are receiving.
- Get financial data evaluated. One of the most important steps in the purchase of the business is to review financial performance. Ensure that an impartial professional you trust is providing you with the financial evaluation.
- Look into legal liabilities. If shares of a corporation are targeted for purchase, then the new owner will inherit the historical liabilities of the business. This does not stop at being sued by third parties but also includes the Canada Revenue Agency for unpaid corporate tax, GST, or payroll.
- Understand the market that the company operates in. As the new owner do you have the knowledge and experience to recognize trends in your marketplace?
Do You Need a Business Valuation Expert?
If any of the situations mentioned in this blog apply to you, you need a business valuation expert. Whether you’re a business owner looking to sell, you’re seeking to purchase a business, you’re inheriting a business (or leaving one), going through litigation, applying for funding, or you are seeking to move forward on strategic planning for your business, a comprehensive business valuation is necessary.
Gallo LLP Chartered Professional Accountants will be with you every step of the way to perform your business valuation. Our team of highly qualified professionals will ensure that nothing is missed in your business valuation. Not only does our team have the technical expertise necessary for a business valuation, but we also have the tenacity to ensure the job is done to its fullest capability. If you need a business valuation, trust Gallo LLP.