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Introduction

When we think about valuations, public companies often come to mind, with their stock prices flashing on financial tickers worldwide. But what about private businesses? While private companies aren’t required to publish their valuations, obtaining a professional valuation can unlock powerful insights and serve as a strategic compass for business growth. This blog will delve into why private business owners should prioritize professional valuations, even in the absence of legal requirements.

1. Public vs. Private: A World of Difference

Public Companies: Open Market Valuation

• Public companies are valued based on the market, where buyers and sellers trade shares on stock exchanges.
• Factors like market trends, investor sentiment, and public disclosures influence stock prices daily, offering an “instant valuation.”

Private Companies: Complexity Without a Market

• Private businesses lack an open market, making valuation a subjective yet critical process.
• Factors like financial performance, growth potential, industry trends, and management capability drive valuations.
• The absence of liquidity adds a layer of complexity, necessitating a professional touch to determine fair value. In simple terms, liquidity means the presence of many competitive potential buyers. (i.e. stock markets)

Case Study: A family-owned manufacturing business in Ontario sought to attract a private equity investor. Without a clear valuation, negotiations became chaotic, leading to undervaluation of the company’s niche capabilities. Post a professional valuation, they identified growth potential in custom solutions, doubling their offer price.

2. Valuation as a Strategic Goalpost

Setting Measurable Goals

• Business valuation offers a snapshot of where the business stands today.
• Owners can set quantifiable goals, such as increasing the Enterprise Value from 20 million to 40 million in 5 years. Enterprise Value captures the total performance of the enterprise.
• The valuation becomes a scoreboard, tracking progress over time.
• We have posted a separate blog on this topic.

Driving Decision-Making

• Knowing the business’s worth can guide reinvestment decisions and partnerships.
• For example, a professional valuation can reveal the ROI on a major CAPEX project, ensuring resources are allocated efficiently.

Case Study: A tech startup in Vancouver leveraged annual valuations to monitor their journey from seed stage to Series B funding. It helped them prioritize R&D spending and strategically expand into AI-driven products.

3. Strategic Insights into Value Drivers and Their Weights

Identifying Key Value Drivers

• Professional valuations highlight what adds the most value to the business: customer loyalty, proprietary technology, or efficient operations.
• Knowing these drivers enables targeted improvements.
• Valuation of the enterprise by valuing each business segment separately and then adjusting the value with redundant assets and liabilities. This involves analysing business segments and sometimes, product lines separately.

Assigning Weights to Drivers

• Valuations quantify the contribution of each driver to the total value.
• For example, in a retail business, customer retention might account for 40% of the value, while brand strength accounts for 30%.

Case Study: A healthcare service provider in Alberta used valuation insights to uncover that 60% of their business’s value came from long-term contracts with hospitals. This prompted them to secure multi-year renewals and add new clients to stabilize and grow value.

4. Beyond Numbers: Using Valuation for Strategic Planning

Business Resilience

• In volatile times, a valuation acts as a diagnostic tool, identifying areas of vulnerability and strength.
• For example, it might show over-reliance on a single product line or customer base.

Succession and Exit Planning

• Accurate valuations are essential for family-owned businesses planning to transfer ownership or prepare for a sale.
• Sec 86 of the Income Tax Act allows for tax free rollover of the shares if done according to the provisions of the Act and with a proper valuation.
• It ensures fair distribution among heirs or maximized sale value to potential buyers.
• “Estate freeze” is the term commonly used for this capital restructuring.
• We will post a separate blog on this topic with helpful hints.

Case Study: A family-run logistics company in Quebec prepared for succession by conducting a valuation. They discovered inefficiencies in their fleet management, implemented tech-driven solutions, and increased the business’s value by 20% before transferring ownership.

Ready to Act?

Getting a professional valuation isn’t just about numbers; it’s about empowering your business with clarity and direction. As a CBV and a CFO with 25 years experience, I specialize in uncovering the hidden potential within businesses. Let’s work together to transform your valuation into a growth strategy. Please reach out to us for 15-minute personal consultation. Email [email protected] or call 647 297 7025 Website: businessvaluegrowth.com Disclaimer: The information provided in this article is for general informational purposes only and does not constitute professional advice. While every effort has been made to ensure the accuracy of the information, it may not apply to specific situations. Readers are encouraged to seek personalized advice from a qualified professional regarding their unique circumstances. The author and publisher accept no responsibility for any decisions made based on this content.