Run your business as if it’s always for saleBy Kate McCaffery | April 21 2015 09:00AM
Learning to work with your business’ value drivers on an ongoing basis will help you get the highest price for your efforts when you’re finally approached or ready to sell. “You’re 45 and you’re planning to work until you’re 65, but you know what? Plans change. Things come up,” says Sue Loomer, director with the Canadian Institute of Chartered Business Valuators, and managing director with Froese Forensic Partners. “You may change your mind, and decide to switch gears, or do something else. If you’re running your business like it’s always for sale, the business is ready when you are.”
Those doing everything right, even in a bad market, they’re going to attract the highest multiples.
– Sue Loomer
Death and disability are two obvious situations where a premature sale may be necessary, but Loomer points to other, more attractive scenarios, as well: “If, say, you’re approached by a big investment advisory firm and they want to acquire you. Chances are, if you’re running like it’s for sale, all the good things are going to be in place and you’re going to be able to get the highest possible value. You’ve opened up another choice for yourself,” she says.
“A lot of buyers really want the cream of the crop, but there are only so many of those (businesses) out there,” she adds.
Although the way a financial advisory business generates profit and cash flow may be different compared to other businesses, the process for valuing them is the same.
Business value drivers
Three aspects looked at in any business valuation include future cash flow potential, any risks and uncertainties that come with the operation, working capital and the business’ capital structure.
The ‘art and science’ of business valuation, meanwhile, includes the homework a valuator must do to understand the business, and its prospects, before applying generally-accepted valuation methods. Following that, the valuator’s judgement and experience – their ability to ask the right questions, their knowledge of market conditions, and rates of return – also plays a big hand in efficiently coming up with proper assessments.
For financial advisory practices specifically, Loomer says looking at client relationships is a big part of the valuation process. How much debt the business is carrying will play a role, and market conditions are directly tied, as well.
“In the past few years, multiples have come down quite a bit. Sellers may have an inflated view of what their business is worth.” To decouple from the market’s effects, she points back to her advice about running the business as if it’s always for sale.
“Those doing everything right, even in a bad market, they’re going to attract the highest multiples.”
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Other elements influencing business purchase prices include:
- Practice size. “Certainly a small practice will be of interest to a certain demographic or certain market, potential buyers. Larger practices will have more potential buyers interested. That has a bearing on value.”
- Strong, historical profitability – a good track record of maintaining good margins.
- Revenue stability.
- Recurring revenue.
- Customer demographics – is your book aging or on the decline?
- Portfolio growth – how have you done for your clients over time? “I would look at that,” Loomer says. “Customers and relationships are key.”
- Employees – who are your revenue generators? Are they approaching 60, as well? Or, would your business suffer if one of your key employees left?
- Proper documentation, and systems. “The good things,” she says, “that make it easy for a buyer to say, ‘I’m comfortable’.”
Future growth, being an intangible but significant contributor to business value, also requires some careful consideration.
Simply having a lot of potential in the book you’ve built over time may not be sufficient if high business value is your number one objective. To make the most of this potential, it pays to find some way of putting your business on that growth trajectory – perhaps by hiring a junior advisor or employee, for example – to show the business is on track for continued future growth.
When business owners begin working with her, Loomer says financial advisors tend to fall into two camps: those with no preconceived notions, and those with a fairly firm grasp of what their business is worth.
Still, she says even those who aren’t surprised by her findings, do still appreciate the perspective she can provide. “Having the mindset that you can learn something from the process,” is a good place to work from, she says. “This particularly applies to those who are perhaps forced into getting a valuation they think they don’t want or need,” she adds. “You can take the necessary evil in those cases, and turn it into something you can actually learn from; learn about your business, and use it in a productive way going forward.”
“My best clients are the ones who appreciate advice. They understand the limits of their own knowledge, and know when to pull in an expert.”
On the flipside, meanwhile, she says some do inevitably come to her with preconceived notions, based on experiences they’ve heard about from other people. “Sellers will want the highest multiple they’ve heard about during cocktail parties. They’ll expect cash or a single check on closing.” Expectations, she says, that aren’t always realistic.
“What you hear over cocktails is not necessarily the full story. Second, your business may not be all that comparable.”
For those in acrimonious situations, meanwhile – those involved in divorce or shareholder disputes, for example – she recommends being forthright in dealing with the valuator you’ve hired.
Hiding facts will cost you
“The ones who are less enjoyable (to deal with) are the business owners who are, perhaps trying to hide things,” she says. The process of piecing together disparate information when something is unclear, not only makes the process more difficult, it will also end up being more costly.
“Chartered business valuators look at financial statements and financial documents every day. The numbers tell us the story. When the story is not lining up with the words a client is telling us, it sends up red flags,” and the additional time needed to piece together the story is usually reflected on the client’s final bill.
Once a valuation is complete, she says some clients do keep in touch – it costs very little to have a coffee with your valuator from time to time – while others may never need to work with that valuator again.
“An ongoing relationship with a chartered business valuator can help you better inform your strategic decisions,” she agrees. “In a lot of cases, though, I think people will have the valuation done, and move on. You may not speak to that valuator again – you just don’t need it.”
Either way, much like financial planning, she recommends finding a business valuator you have a rapport with. “Not everyone will have the same style,” she says. “Talk to a few, and find someone you have a good connection with. It will make the process that much more enjoyable and enlightening.”