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Know your worth: How to value a business


Finding the answer to how much your business is worth can seem overwhelming and complex for many business owners, but addressing the issue is vital. It's not enough to rely on anecdotal deal information or gut instinct. To truly understand the worth of your business and thrive in today's changing market, obtaining a formal valuation is key.

Why do business owners need a valuation?

The most common reason for obtaining a valuation is selling the business. A valuation can help you during the negotiation phase, to set a price that is neither too high nor too low. Even prior to the transaction process, it can help identify value enhancement opportunities to increase the worth of the business.

A valuation can also help with raising capital for strategic acquisitions or expansion. It presents banks and potential investors with an accurate illustration of your company's performance, ability to take on debt, and capacity for growth.

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What are the key factors in a business valuation?

A number of factors — internal and external, tangible and intangible, quantitative and qualitative—can determine the value of your business. While these may vary according to the industry and type of company, the following are common examples.

Average multiples and valuations can fluctuate across different industries. Consider your company’s degree of sensitivity to the market and economic factors, such as new legislation, foreign exchange rates and tariffs, interest rates, energy costs, GDP growth, workforce changes and skill shortages, customer trends, and more.

Historical net income and revenue quality are measurements of profitability and business strength. Outlook is equally important. Projections for growth and future earnings should be realistic and align with the company narrative. Associated costs and capital expenditures should be factored in as well. 

Are the products and/or services your company provides in demand? What are the current and expected market and customer trends? Do you fill a niche that differentiates you from your competitors?  Are there opportunities for diversification through new products or specialized services? Can the products and/or services be delivered at a lower cost as compared to competitors?  All of these considerations can impact the worth of your company. Understanding the business model and strategy is key. 

Brand position is an intangible valuation factor, but an important one, nonetheless. Your company’s reputation in the market, quality of offerings, and ability to provide a good customer experience all support higher net operating cash flow—and therefore, the value of the company. 

A workforce that is skilled, agile, and experienced can contribute to your company’s value. Your leadership team in particular can affect a valuation. Managers with strong industry experience and a track record of driving growth can mean less risk for a buyer—not to mention, offer greater potential for future profitability. 

Where does your company sit on the digital maturity scale? A business that is digitally advanced can be worth more than one that requires investment in modernization. Consider aspects such as cybersecurity, customer relationship management (CRM) programs, mobile or e-commerce capabilities, back-office systems, physical equipment, etc. Any proprietary technology your company holds can also be a value driver.

Being technologically advanced isn’t limited to hardware and software. Having a workforce and a company culture that embraces the digital mindset and adapts quickly to change is key. 

For B2B and service-based companies especially, the strength of your client relationships and customer loyalty is important. A valuation will examine customer contracts, demographics, retention rates, market size, and more. 
Consider the size and diversity of your customer or client base as well. A business that is highly dependent on just a few customers can present risk, which in turn can lower the implied valuation multiple. 

The buyer perspective

Part of understanding your company's worth means looking at the business through the eyes of a potential buyer or investor. Some of the questions they may ask themselves include:

  • What is the financial health of the business? How has it performed over the last 3-5 years?
  • How does the business align with current and projected market trends?
  • Is there a strong team in place that can lead the business?
  • Does the company offer opportunities for greater efficiency?
  • Are there areas that need investment or upgrades?

What should business owners do next?

Knowing the worth of your business can help you get a big-picture view of your company's strengths, weaknesses, threats, and opportunities. Consider these next steps:

Staying aware of the trends, disruptions, and market fluctuations in your sector is crucial, especially for industries where the pace of change is more rapid. Political, social, and economic factors can all affect the value of your business.

What is your next step in the business life cycle? Is it selling the business or transitioning ownership to a successor? Is it expanding to new markets or making an acquisition? Or is it reinvesting for digital transformation or other growth initiatives? Identifying your objectives from the start can help guide the valuation process. 

Waiting to get a valuation until there’s an offer on the table puts you and your business in a reactive position—and heightens the risk of accepting an unfavourable deal. Starting the process early can put you in a better position to reach your goals. In addition, getting an assessment done early by an independent third party allows an owner to understand the strengths and weaknesses of the business. While the strengths can be highlighted in the sales pitch, the weaknesses can be addressed before. These often take time to fix, so remedying these issues a few years in advance of the sales process is important.

An experienced chartered business valuator (CBV) can assess your business’s unique attributes and market position, find potential buyers or investors, and guide you through the transaction process. 

You need to sell or transition your business, we're here

If you need to sell or transition your business, we’re here to help.

The BDO Valuations team provides accurate, credible valuations to Canadian companies across a broad range of industries. We work closely with you to understand your business and leverage real-time market data and industry benchmarks in our reports. Whether your goals include selling the business or expanding to new markets, we can help you identify opportunities and build a strategy. 

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