The Value of a Valuation

March 12, 2015

WHETHER YOU ARE LAUNCHING, GROWING OR SELLING A BUSINESS, AT KEY POINTS IN THE LIFE CYCLE OF YOUR ENTERPRISE YOU WILL NEED TO KNOW ITS WORTH. VALUATIONS CAN PLAY AN INTEGRAL ROLE IN DECISION MAKING RELATED TO FINANCINGS, SALES, MERGERS, ACQUISITIONS, REORGANIZATIONS, DISPUTES AND EXIT PLANNING, AND ARE OFTEN CONDUCTED AS THESE ISSUES ARISE.

You’re healthy today. Why bother with a checkup?

Similar to your annual physical, a valuation offers a complete assessment of your business’ health. By determining its worth — or wellbeing — ahead of sudden events or milestones, you can evaluate performance and mitigate risk. This will allow you to implement the necessary processes that will ensure a strong value increase in the years ahead.

When it comes to the long-term health of your business, a financial checkup should be a fixed part of your strategic plan with the following added benefits:

Reporting: Entrepreneurs generally overstate their company’s value, impacting financial reporting and ability to assess risk.

Measurability: Valuations provide a benchmark on which to set growth targets. Knowing your value also helps determine the optimum time to sell or enter the stock market.

Exit Planning: Without the value there is no plan. Having a comprehensive estate and succession plan in place will enable you to minimize your income taxes, probate fees and other costs, and ensure that your business will retain its value through the transition.

Asset Protection: Adequately insuring your business relies entirely on accurate valuations. These assessments also enable owner managers to make informed decisions on profit, reducing risk with balanced sales distribution. 

Case Study

A client had built a successful retail franchise and approached BDO to help plan for their retirement. Their children weren’t interested in taking over the family business, but a key employee had been prepped to take over and was ready for a buy-in. At the start of the engagement, BDO conducted a full valuation of the business. The assessment revealed that there was too much cash in the company to qualify for the capital gains exception, and there was over $1.5 million in estate tax that wasn’t protected from creditors. We recommended that they move the cash out of the business and, fortunately, they heeded our advice soon after. The client passed away unexpectedly before the transition took place, but had protected their estate through the valuation and tax planning. The estate tax had been lowered by $230,000, the value of the company was maintained, and a succession plan was in place. The business was transitioned smoothly in accordance with the succession plan and has continued to thrive.

The outcome would have been very different without the valuation and tax planning. With no formal succession plan in place, the owner’s sudden passing would have caused the value of the business to decline substantially, and its continuation would have been in jeopardy. Instead, a viable and valuable business was successfully transitioned — preserving the wealth the owner worked so hard to create.

About BDO

BDO can help you and your management team effectively assess, develop and manage strategic initiatives — through every part of the valuation process. As one of Canada’s leading financial advisory firms, BDO specialists are focused on growing organizations and can provide in-depth knowledge of valuation methodologies, broad business experience and a meticulous approach. The result is a clear, meaningful and well-supported valuation. Our team of professionals has extensive practical experience working with owners and entrepreneurs across every industry sector, as well as deep technical knowledge of financial regulations and legal statutes.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

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