When to Value a Company – Part 7: Planning Your Exit as You Near Retirement
There are many stages throughout a company’s lifecycle where a business valuation might be helpful, or even required by law. These include the following situations, among others:
- Raising capital to fund your new venture
- Expanding the business with equity capital
- Attracting and retaining talent by issuing shares or options to key employees
- Buying out a shareholder to settle a dispute about how the company ought to be run
- Reorganizing share capital to achieve tax planning objectives
- Determining the value of family assets in a divorce proceeding
- To assist with planning your exit strategy for retirement
- To evaluate an unsolicited offer to purchase your business
- Purchasing a business at its true value
This article is the seventh part in our ongoing series that describes common circumstances that give rise to the need for some sort of valuation. In these articles, we convey some of the key valuation issues that should be considered in each situation.
In this installment, we discuss how a valuation of your business can be an important part of planning your exit strategy when you begin to approach retirement.
For many owners, selling their business will be the most important decision they ever make. It is important to keep in mind, however, that the actual sale is only the final step in a much longer process of succession planning.
Early planning is important
Succession planning really ought to start a couple of years before retirement. Some critical issues that business owners need to consider are:
- What am I going to do after the sale and how much capital will I need once I retire? This is often a matter of visualizing how you will live and then estimating and plotting out what you’ll actually spend.
- How close am I to reaching that target level of wealth? Consider, for example, what the current value of all your assets, including your business, is. Is there a gap between your current wealth and the target level?
- How can I increase the value of my business to close this gap before a sale?
Business owners will frequently retain a Chartered Business Valuator (CBV) to help them determine an answer to the second question.
As part of the business valuation process, however, business owners will often develop a keener sense of what the valuation drivers are. This can be very helpful in identifying changes that can be made to improve a business’ value over time so that the desired level of wealth will be achieved upon exit.
Improving future value
Getting an official business valuation can also serve to enhance its future value. Some of the more common value-improvement opportunities that have resulted from our valuation exercises include, for example:
- Reducing the investment in working capital: Valuators will often review the amount of working capital held in the business and consider whether there might be any excess amount that could be removed without impairing the company’s ability to generate cash flow. For example, comparisons with other businesses or industry averages might reveal that the company is holding excess inventory that could be liquidated or that payments to suppliers could be delayed, thereby reducing the net investment in working capital. Of course, reducing working capital requirements means that even more value will be transferred to the seller at closing.
- Reducing a company’s dependence on the owner: A risk assessment is frequently performed as part of the valuation process. One of the key risk factors that purchasers often consider is the level of owner involvement in the business. A company whose operations are highly dependent on the owner is considered far riskier (i.e., less valuable) than one with a professional team in place that can seamlessly continue to run the business after the sale. In addition, other risks might be identified during the valuation, which provides an opportunity to ensure they are addressed and controlled before going to market.
- Revenue growth: Valuators will often compare a business against industry benchmarks. If your company is lagging in any areas, consider steps that you can take prior to selling it. For example, investors love to see revenue growth. They want their investment to not only provide a decent return at the current earnings level, but – more importantly – they want to see that the value of the business will grow over time. If your revenue growth is lagging, it makes sense to review your sales and marketing strategies to see if there are opportunities to sell more to existing customers or to bring in new customers. This might include more focused advertising, targeted social media ads, improving SEO rankings, etc.
- Controlling costs: A valuator’s analysis of annual operating expenses may reveal a variety of personal or discretionary expenditures that have negatively impacted reported earnings over the years. A valuator would add these non-business expenses back to earnings through a so-called “normalization adjustment.” However, we recommend eliminating any non-essential expenses (especially personal expenses) for a couple of years prior to the sale. Any extraordinary or non-recurring expenses should be pulled and documented so a buyer can understand the true earnings potential of the business.
A professional valuation of your business will help you assess your readiness for retirement. It can also surface value-creation opportunities that can help close a wealth gap, should one be identified at the planning stage.
If you are considering an exit, please contact us below and ask one of our valuators how we can assist you in the process.