Peter Weinstein Valuing a Business Presentation


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2012 Toronto Entrepreneurs Conference - Peter Weinstein

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Peter Weinstein Valuing a Business Presentation

  1. 1. PUTTING A VALUE ON YOUR BUSINESS Peter Weinstein, MBA, CA, CBVPartner, Business Valuation and Litigation Support Stern Cohen LLP T. 416-967-5100 F. 416-967-4372
  2. 2. Introduction
  3. 3. Introduction
  4. 4. Introduction Based on a recent survey up to 70% of business owners will be in a position to retire before 2020. 50% of leaders surveyed are not prepared for succession.
  5. 5. Introduction Putting a value on your business is one part of a succession plan. Consider who will own the company, who will manage the company and when management will be transitioned.
  6. 6. Introduction There are significant benefits to planning out a sale well in advance
  7. 7. Introduction The value of a business is a function of: 1) The anticipated income of the business 2) The risk of achieving the anticipated income 3) The assets used in the business
  8. 8. Who to sell to 1) Competitors/synergistic buyers 2) Financial buyers Price Paid For 3) Employees/management Business 4) Relatives/family members
  9. 9. Valuing Your Business Three generally accepted approaches to valuing a business: 1) Assets 2) Market 3) Earnings or cash flow
  10. 10. Valuing Your Business – Assets Approach Assets approach used when: 1) Value is directly related to the assets owned 2) Assets are not generating adequate income/returns 3) Can be considered a minimum value for an operating business
  11. 11. Valuing Your Business – Market Approach Using the market approach the company is valued based on: 1) The price paid in comparable transactions 2) Trading multiples for public companies
  12. 12. Valuing Your Business – Market Approach The market approach is used when: 1) There is reliable information regarding trading multiples and transactions 2) Can be difficult to use this approach for smaller private companies
  13. 13. Valuing Your Business – Earnings Approach Earnings approach used when: 1) The business is profitable and earning a fair return on its capital 2) The purchaser wants to acquire the future earnings or cash flows
  14. 14. Valuing Your Business – Earnings Approach Earnings or cash flow approaches include: 1) Multiple EBITDA 2) Multiple of net earnings (after income taxes) 3) Capitalized cash flows 4) Discounted cash flows (DCF)
  15. 15. Valuing Your Business – Earnings Approach 1) Identify maintainable earnings. 2) Select appropriate earnings multiple = Value of operations 3) Add: redundant or non-operating = Total value of company
  16. 16. Valuing Your Business – Earnings Approach Maintainable earnings: adjust for unusual or non-economic items such as: 1) Salaries expense 2) Rent to related parties 3) Non-recurring expenses 4) Discretionary personal expenses
  17. 17. Valuing Your Business – Earnings Approach Earnings Multiple / Capitalization Rate • Many studies and sources of data • Some information is market based • Studies regarding returns on equity available
  18. 18. Valuing Your Business – Earnings Approach • Multiple will differ depending on the valuation approach used (i.e. EBITDA vs. net income) • Adjustment for positive and negative factors specific to the company • Consider the industry in which it operates
  19. 19. Valuing Your Business – Earnings Approach Public Company Valuation Parameters: Price Earnings Ratios* Dow Jones Industrial Average 14.6 S&P 500 Index 16.3 S&P/TSX Composite Index 15.8 Google 21.3 Apple 18.1 Public Software Companies (generally) 11 to 14 times EBITDA * On or about March 31, 2012
  20. 20. Valuing Your Business – Earnings Approach INCREASE VALUE DECREASE VALUE 1) INDUSTRY Growing (or Shrinking (or stable). volatile). 2) SALES Increasing (or Decreasing. stable). 3) EARNINGS Positive income Losses. and cash flows.
  21. 21. Valuing Your Business – Earnings Approach INCREASE VALUE DECREASE VALUE 4) CAPITAL Well capitalized. Significant debt STRUCTURE and interest costs. 5) EMPLOYEES Stable and Frequent skilled. turnover, poor morale. 6) MANAGEMENT Diverse skills. Dependence on Limited personal one or a few goodwill. individuals.
  22. 22. Valuing Your Business – Earnings Approach INCREASE VALUE DECREASE VALUE 7) CUSTOMERS Long term stable Dependence on a customers. few customers. 8) SUPPLIERS Many potential Few potential suppliers. suppliers for key inputs. 9) PRODUCT Increasing The same or demand, similar products proprietary are widely protection. available.
  23. 23. Valuing Your Business – Earnings Approach INCREASE VALUE DECREASE VALUE 10) BRAND AND Recognized Limited name NAME brand. recognition, or RECOGNITION. negative association. 11) INTANGIBLE Some degree of Lack of ASSETS. protection. proprietary products. Many potential substitutes.
  24. 24. Valuing Your Business – Earnings Approach INCREASE VALUE DECREASE VALUE 12) BARRIERS TO Barriers to entry Few barriers to ENTRY assist to entry. maintain market position. 13) STRATEGIC Ability for a Few potential IMPORTANCE purchaser to synergies OF COMPANY generate synergies.
  25. 25. Valuing Your Business – Earnings Approach INCREASE VALUE DECREASE VALUE 14) LEVEL OF Company is able Highly COMPETITION to differentiate competitive, very itself. price sensitive customers. 15) DOCUMENTS Well organized Records not well AND RECORDS and current. maintained. May include non- operating expenses.
  26. 26. Valuing Your Business – Earnings Approach –Redundant Assets • Redundant assets are added or deducted separately • Beneficial to remove these from the operating company prior to the sale • The most common adjustment is real estate • Can also include positive or negative adjustment for cash in the business or excessive leverage
  27. 27. Valuing Your Business – Earnings Approach –Sample Calculations Low High Indicated maintainable earnings 1,070,000 Multiples of: 5.00 5.50 Resultant value of operations 5,350,000 5,885,000 Add: Redundant assets (marketable securities), rounded 1,420,000 1,420,000 Total 6,770,000 7,305,000 Midpoint, rounded 7,038,000
  28. 28. About Stern Cohen Valuations Inc. Peter Weinstein has assisted clients in numerous business valuation, litigation support and transfer pricing mandates. Valuations have been prepared to assist in planning for a potential sale, for estate and income tax planning, shareholder disputes and other litigation purposes. Stern Cohen Valuations Inc. encompasses the business valuation, economic analysis and litigation support practice of Stern Cohen LLP. Stern Cohen LLP was founded in 1963 and operates as a full service accounting firm. Clients include a diversified mix of owner managed businesses as well as subsidiaries of foreign companies. Contact Information: Peter Weinstein MBA, CAIFA, CBV Stern Cohen Valuations Inc. 45 St. Clair Avenue West Suite 1400 Toronto ON M4V 1L3 T. 416-967-5100 F. 416-967-4372