October 07, 2019
A business is one of the greatest assets someone a business owner can have, but unfortunately, it can also be one of the greatest liabilities if the value of the business is not obtained and sustainable. For an entrepreneur, their business can represent 60% to 85% of their personal net worth and many wealth planning services focus on ‘investible assets’ which means the residual cash you can forward to the planner in order to buy into stocks, bonds, or mutual funds; the chances are; they do not deal with maximizing the value of your largest asset. A BDC report “the Coming Wave of Business Transitions in Canada” stated: “any entrepreneur planning to sell a business, typically his or her biggest asset, … shows that many business owners are not making the best moves to ensure they realize the highest possible return”.
Too many times we have seen a business owner eager to purchase an existing business and not do the appropriate homework to make sure that the business is worth what the seller is asking. On the other hand, we have seen a business owner who is ready to retire and sell their business and start the next phase of their life to find out that their business is not worth what they thought.
Whether you are looking to purchase a business or sell your own business, a business coach or consultant can help you de-risk your purchase and help you get the value for your business that is a lot closer to the number you expected.
Whether consulting or coaching is chosen will depend on the individual business owner. Coaching is for those who want to learn how to do what they need to do on their own with
guidance from their coach, whereas consulting is for the business owner who wants the work done by someone else completely.
“The Aspen Institute’s FIELD program found that when business owners receive training and coaching help, 80% are in business after five years, compared to 50% of those that did not get such help”; (Claudia Viek, Contributor “Business Ownership Will Close the Wealth Gap”, HuffPost May 2017).
How A Business is Valued
When buying a business, it is good to think about it as an investment option. Investment options can include, 1) you can safely invest your money in a low-risk mortgage that yields you 3-5% per year. 2) If you are willing to take some additional risk, you can invest in the stock market which could earn you 20+% per year, but could also lose you money, or 3) you could invest in a business that seems to have piqued your interest. The question remains, is where does the ‘subject small business’ lie between your other two options? In attempting to answer that question, you might want to know how risky it is relative to similar businesses or relative to mortgages and the stock market. Even though the stock market can be riskier, information about companies that are trading is plentiful enough to make an informed decision; not always so clear with smaller businesses.
The driving force that minimizes the risk, and therefore can yield you more reliable returns often lies with how the company is being managed. To compare two similar businesses, a well-run business with lower risk factors will yield a higher price whereas a business with declining sales and margins, poor reputation, and high staff turn-over will usually yield a lower price.
A business is worth what a buyer is willing to pay for it, and for simplicity sake, there are usually 3 levels of risk being assessed, 1) low risk purchases (money in the bank), 2) medium risk purchases (trust, monitor, and verify), and 3) high risk purchases (not with my money you don’t!). Where a company valuation lies, rests with the purchaser bases on their risk appetite (I’ll bet the farm on this new technology) and tolerance to risk (results are all over the map; do you really know what you’re doing?).
The good news is; that most of the risk that a business possess is often under the control of the business owner.
Buying a Business
When buying a business, there are several aspects of the business that should be investigated before the purchase. You need to understand first what you are looking for in a purchase. Are you looking to purchase a business that is viable that you plan to step into and continue running, or are you looking to purchase the assets of a business to get you a step ahead and set-up the business and run it possibly in a completely different way. In any case, whether it is the assets of the business or the business in entirety, you want to make sure what you are buying has the value that is outlined in the price.
If you are only purchasing the assets, you want to see that the business has a valuation on the assets that are outlined. If they cannot provide an adequate valuation of the
assets, then we would suggest you get a valuation before proceeding. An example of this might be a restaurant. Let’s say you want to start a restaurant but starting from scratch can be very expensive. It sometimes is worth finding a restaurant that has all the assets you require along with building or lease that has all the necessary permits and approvals in place to have a restaurant in that location. In many instances, the new restaurant might be able to open earlier and have fewer start-up costs by going this route.
If you are purchasing a business in full, you want to make sure that the business depending on the size has a valuation by a Chartered Business Valuator or can produce 3-5 years of financial statements prepared by a Chartered Professional Accountant and a business plan. In many cases, you might want reviewed or audited financial statements. Past results can point to a trend of increase sales and margins or decreasing sales and margins. Reviewing the net value of the assets can indicate the age and potentially the condition of equipment; fully depreciated assets can send up warning flags of assets in need of replacement.
Too many times, we have found clients coming to us eager to buy a business, and we work with them to obtain many of the documents outlined, and the selling business doesn’t even have proper financial statements. This is clearly a red flag. Though, one might be eager to start a business and buying one can help get a leg up, but if the business was not viable prior, you could be throwing good money away and would have been better off starting from scratch.
Selling a Business
Every business owner thinks their business is worth more than it is and do not think about what has gone on in the business over the years they owned it. If they have pulled all the money out of their business along the way, they will find the business is worth nothing and is not the asset that they hoped. If all their employees are near retirement, or they require an investment of new equipment, this could lower the value of the business.
You should never decide to sell your business haphazardly or decide to sell because you must, as you will never receive the value you could if you planned. It is better to plan your way out of your business and make sure it has the value in the business before you approach a Business Broker to sell your business. Sure they can help you sell the business, but you may be very surprised when you expected $5M for the business (because you think your business is without risk), and they tell you it is only really worth $2M (because your business does have risk).
If you plan 3-5 years in advance or even further than that, you have the time to increase the value of your business, so you are not surprised at the end. We work with business owners to determine the estimated value at the time and determine what their long- term goals are for their business when they sell. We then build a plan to help increase the value and improve the value of their business over a longer period either through coaching or consulting, to help them get to where they want to be when the time comes to sell.
How Coaching and Consulting Can Help
When we work with a client who is looking to buy or sell their business, we first start works to understand what their ultimate goals are in the purchase or sale. We then find out if they are best suited for coaching so they can learn through the process and do the work for themselves or are they someone that wants the work to be completed for them without their involvement. We have worked with both type of clients, and there is no right or wrong way. It is very dependent on the individual and their comfort level.
We also make sure that we involve the right professionals for either type of transaction. We will work with their CPA firm to help them get the documents they need. For those that who do not have CPA, we will help them find one and can make introductions to firms we have worked with in the past. Depending on the size of the business, you might suggest you require a valuation performed by a Chartered Business Valuator. If it is a very small business, we will work with the financials provided to help you make an informed decision. We can also introduce to a lawyer at the point that you move forward with the decision if you do not already have one.
For those selling their business, it is important to engage a coach/consultant before you decide to sell your business if you want to be
able to ensure you get the expected value. You may think your business is worth an amount, only to find out it isn’t and based on other decisions, you are not able to spend 3-5 years to get it to where it needed to be to obtain that value. If you engage early enough, a plan can be put in place to improve the performance and value that you can work on before you are at a point you want or need to sell. Planning and ‘making the best moves’ could improve your valuation from 2.5-times earnings to 4.5-times earnings (an
increase of 2-times earnings), and if you are making $100,000/year, that adds $200,000 to your business value.
Coaching and consulting are all about giving you the tools, process, or information to assess and reduce risk based on “how much you’re willing to risk” and how much “tolerance you have to variability of performance”. Reducing risk increases business value.
Karen Fischer is business consultant and coach at RK Fischer & Associates, a firm that has been supporting Canadian businesses since 2010. Their mission is to help Canadian business owners achieve their business goals by developing and implementing the right strategies, plans, and processes based on business best practices. By doing so, this will help them in improving their overall business performance while increasing the value of one of their largest personal lifetime assets.
From The BizON Blog Team!
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