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How to Optimize the Value of Your Business

Written By :

  • Éric Dufour | Expert RCGT
    Éric Dufour

    Vice-president, partner FCPA Management consulting

How can you maximize the value of your business to make it more attractive for future partners or buyers?

According to recent data from the Centre de transfert d’entreprise du Québec (CTEQ), more than 34,000 businesses in all sectors will be up for sale by 2025, and 6 out of 10 SME owners will not be prepared to transfer their business.

Business valuation is a corporate value optimization practice that usually takes five to ten years to complete all stages of the process. It is therefore a good idea to initiate the process as soon as the entrepreneur starts considering a sale or a transfer that will occur in the next few years.

What are the different valuation methods?

Since the pandemic, markets have fluctuated. Depending on the sector, profits have risen or fallen, with rapid changes that are difficult to predict. Presently, even if the economy stabilizes somewhat, the evaluator will have to take into account a company’s strategic plan, the actions it plans on taking to adapt to its market and the skills of its teams to do so.

Generally speaking, the more profits a company generates, the higher its market value. This market value is determined by EBITDA (earnings before interest, tax, depreciation and amortization), a theoretical measure that helps determine a company’s financial health. This value is then multiplied by a factor, which usually varies between 3 and 5, to give a theoretical value for a company.

To calculate the fair value of a business, we base our calculations on the value of the assets, the profitability or the market.

The valuation approach and method to be used will be determined by your type of business and the information obtained during the analysis.

For more information, consult our article on valuation reports and methods.

How can you enhance the value of your business?

1. Carry out a diagnosis of the business

First, you have to fix objectives and the time at your disposal. Then you need to produce a diagnosis of your business.

  • What are its internal strengths and weaknesses in terms of finance, management practices, operations and human resources?
  • What are its external strengths and weaknesses, particularly in relation to its market positioning?
  • Is the business growing, stagnant or in decline?

Thirdly, you should establish a list of actions to make up for the company’s deficiencies and assess the relevance of each.

Let’s take the example of a company that has to make up for a technological lag regarding its equipment. Will the purchase of new technologies increase the company’s value sufficiently so that the invested cost is worth the trouble? The time required to perform each action is also evaluated.

You could benefit to be supported by experts from outside your company during this process.

2. Conduct a profitability analysis

It is a common misconception that, based on Pareto’s Principle, 20% of clients generate 80% of profits and that, conversely, 80% of clients generate 20% of profits. In fact, our studies show that, in the manufacturing sector, 40% of clients generate 320% of profits, 34% of clients generate 0% of profits and 26% of clients generate 220% of losses.

When you conduct a profitability analysis, it must be precise. You need to assess your cost per product or service, using data from the last year, in order to assess your profits on the basis of product per client. The purpose of such an exercise is not necessarily to eliminate unprofitable clients or products, but to shift them where possible.

3. Develop a concrete action plan

The entrepreneur and the experts then choose the actions to be performed and produce a concrete action plan, including the people responsible and the deadlines.

You may decide to invest in projects to remain competitive in your market (e.g., to optimize your processes or digitize your operations).

Here are some examples of possible actions

  • install an accounting system to manage inventory;
  • look for new distributors to increase sales;
  • improve the organizational structure by giving more responsibilities to certain employees;
  • documenting the processes and instituting policies and procedures in order to leave traces of the seller shareholder’s knowledge.

One thing is for sure: you’ll be able to make informed business decisions that will increase your profitability and the value of your organization (whether this means focusing on one product rather than another, or negotiating with certain customers and suppliers).

In addition to increasing the company’s market value, the optimization process reduces the risks related to the contractor’s rushed departure, due to health problems, for example, and the risks related to “latent defects”, because there won’t be any more.

It is also very reassuring for the seller to know that he is handing over a healthy business that has every chance of survival (whether to his children, employees or a third party).

While the optimization process may sometimes seem long, it is worth it. Often the transaction will happen faster because of the process. A healthy business attracts more potential buyers and the buyers’ requests for financing are accepted more easily.

Business owners who will have done their homework properly will have a better chance of selling their business for more than the valuation price or obtaining the financing they need.

The company’s valuation is therefore a genuine “beauty check” carried out for the greatest benefit of the seller or transferor… and of the buyer.

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