What is your business worth?
Get a Free Business Valuation
Comparing apples with apples
Our free business valuation can give you a ballpark view of where this might be for your profitable business.
Any profitable firm is worth the known values expressed in the current balance less any other debt plus a multiple on the income it produces. The income multiple is a measure of a buyer’s comfort that the cash flow will survive a change in control.
Income can be expressed in a manner that answers a particular question.
We pay tax accountants to express income as net earnings in order to answer Revenue Canada’s questions to determine how much tax should be paid.
Bankers take the same internal numbers, manipulate them differently than a tax collector in order to assess the ‘capacity’ of the firm to service debt.
Think about the banker for a moment. There are many professionals who assess business accounts as part of their job. Accountants, business brokers, lawyers, tax collectors . . .
Only the banker sticks his neck out to arrive at his number. If his assessed value is wrong, he runs two risks.
Too low a valuation and the assessed firm looks for another source of funding. Too high and the banker risks lending more than the firm has the capacity to pay back. Both errors can affect his career or maybe even his job.
So knowledgeable buyers follow the lead of the banker and generate a cash flow statement from the P&L and then normalize it as a banker would to erase the artifacts of ownership.
Sometimes this is called banker’s cash flow. Banker’s call it normalized cash flow. (A very similar number is called seller’s discretionary cash flow on US websites.)
This Normalized Cash Flow allows buyers (or bankers) to compare the cash derived from the operations of any business regardless of if they are small proprietorships or major corporations.
Normalizing cash flow erases the artifacts of ownership so that the return from any business can be fairly compared to another.
This cannot be done with accountant’s earnings prepared for the tax man.
Expensed rewards such as owner’s salary or bonus would drop the firm’s income compared with taking the same amounts as dividends.
The accountant’s net earning have to be normalized to neutralize these anomalies before the firm’s value can be assessed.
Normalized cash flow erases these differences in the expression of ownership rewards. This is why we think of it as ‘turning oranges into apples’. When everything is expressed in ‘apples’, comparisons and decisions are a lot easier.
The NCF is a derived number that lets a banker evaluate the ability of a firm to service debt.
Buyers use it to compare the rewards flowing from companies being offered.
We are all using NCF to turn oranges into apples so we have the same numbers to compare.
(And somebody once told me that even Revenue Canada often uses NCF to catch anomalies in corporate tax returns when they do an audit.)
Normalizing the accountant’s income statement will give us a range for the market value of your cash flow (or what folks often call ‘the enterprise value’) as of the date of the last accountant’s statement.
Your guidance as to how the enterprise has fared since that date will give us a better feel for the current value and will influence our advice on pricing.
A few questions about the operations of your business can further refine the valuation.
When it is all done, you will take my valuation numbers to your accountant or banker and ask how they compare to completed deals they have seen pass over their desks.
If my ‘ball park’ valuation approximates the information you get from your banker or accountant, I will send you a questionnaire that will tell me more about the business and the ease or difficulty it will be to find a buyer for it.
This questionnaire will also be the basis for our marketing material to show potential buyers. All of the profiles on our ‘offerings page’ come from discussion with the sellers about their answers to these questions.
The business transaction price is what is negotiated between the buyer and the seller.
This is also the number that will be the basis of my fees. I do not get commission for selling inventory, money in the bank or other current assets (or lose money for adjustments for debt.)
The transaction price will be the sum of the business value and the closing current assets determined by the accountants less all debt. This separation is done so that ‘business can happen’ during the selling process without concern that the business is for sale.
Free Business Valuation
To get your free business valuation, simply scan us the last Income Statement and the Notes Page (that addresses depreciation) from your accountant.
This might be over a year old but numbers from the last accountant’s income statement gives the greatest comfort to buyers . Your guidance on how business has fared since the date on that year-end are my guidance for pricing.
(I will no doubt have some questions about the account’s income statement as I attempt to separate your rewards of ownership from the lines labelled ‘Payroll’ etc.)
You should black out the name of the firm to protect your privacy should your note go astray.
How can we improve this information to make it easier to understand? Write me with your ideas and suggestions.