Business and Operations
Valuing your business
By J Lynn Fraser
By J Lynn Fraser
Selling a bakery business is a major decision that some might be
considering as the economy transitions from recession to recovery.
| A business valuation can be done informally with your accountant, or you can bring in an outside valuator.|
Selling a bakery business is a major decision that some might be considering as the economy transitions from recession to recovery.
It’s a choice that involves valuing your business’s tangible and intangible assets, your employees, possible liabilities and tax issues. And it’s important that the sale price you set for your business matches the expectations of the marketplace.
“Reasons for selling a bakery usually centre around retirement, the long hours, loss of skilled employees and very high capital expenditures,” says Mark Borkowski, president of Mercantile Mergers and Acquisitions Corporation.
Your next step, according to Steven Hacker of the accounting firm Meyers Norris Penny, is to “prioritize objectives and consider exit alternatives” from your business.
You can choose to work with your accountant and then bring in an additional professional, Borkowski suggests. “A business valuation can be done informally,” which will help keep down costs, he says.
If you choose to work with a business valuator, ask for references from their clients who sold businesses similar to yours in terms of size, assets, customers and number of employees.
“It may take a year to put best practices in place,” says Hacker, explaining that this involves ensuring tax planning has been done, to reduce liabilities. “First you have to understand your objectives for making the sale and allow market exposure time in the hopes of exiting at the highest price.”
If the business is sold to a family member to ensure family harmony and to minimize tax liability for all parties involved, an accountant should be consulted prior to the sale. A plan should be in place if the seller remains involved financially with the business, such as through a retiring allowance.
Planning for a retirement savings plan (RSP) and to find out if the seller qualifies for a $750,000 capital gains tax exemption is also important.
The typical buyer, according to Borkowski, is a strategic buyer who “knows their business and knows what they are buying, such as the process, the equipment, and the supplies. They are the logical choice [for a seller].”
The second most common is the private equity buyer, and the “least preferred” is the individual buyer.
There are many methods to value a business. Your business valuator should discuss the pros and cons of each one with you and answer all your questions.
The “valuation by financial statement” method will base value on your company’s financial statements, examining the cash on hand, equipment, real estate, debts and investments, and obligations. The liabilities will be subtracted from the total assets to establish the business’s theoretical value.
This method may not take into consideration the current values of assets and instead assign them their costs at the time they were acquired. These are the “historic costs,” says Hacker. Another disadvantage is that intangible assets such as your brand, trademarks, copyright, trade secrets such as recipes, customer lists, employees and their contracts, and lease agreements are not considered. They are only considered if they were purchased from another business and thus appear on the business’s financial statement at their historic cost.
A second method called valuation using multiples or comparable company analysis looks at what public companies similar to your own are being traded for. This method for valuing businesses is best applied to larger businesses, such as George Weston Ltd., rather than smaller owner-manager businesses.
The disadvantage here is that no two companies are completely alike in terms of products, size and growth potential. If your business produces a specialized product or service this can also make comparisons difficult.
This method is an approximation of the similarities between businesses and affects the business valuation’s accuracy; thus, two sub-methods can be used.
The first is the price-to-earnings ratio (P/E). This sub-method requires that the price of a share of the business’s stock be divided by the business’s earnings for a share.
The second sub-method uses the enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA). Enterprise value (EV), Hacker says, “refers to the business operations, and does not include debt, excess cash and redundant assets.”
EBITDA represents the business’s cash flow (before required capital expenditures) that would be paid out to shareholders. Hacker notes that when applying an EV/EBITDA multiple, “the art of it is in choosing the right variables, earnings level and multiple.”
Another available method is the comparable transaction method, which looks at recent sales and purchases of similar but privately owned businesses. The business valuator will determine which businesses are appropriate to use as a comparison to yours and will apply valuation methods such as P/E or EV/EBITDA to determine your company’s value. Due to the differences between your business’s characteristics and those of the business to which it is compared, the valuation might be affected.
Creating a projection of what cash the business can produce at a future date is another possible valuation method. The business valuator, Hacker says, will create this projection with the “assistance of the business owner.”
Discounted cash flow analysis is a fourth method that can be applied. As the value of the cash received in the present is not the same as cash received at that future date, the cash flow must be discounted to assess the cash’s current value. This is a complicated process and is best applied by an experienced valuator. It involves estimates such as how much your company will grow and what are the costs and profits that can be expected over the next few years, and related risks.
The sale of your business will also affect your employees and possibly your legal obligation to them. According to Paul Boniferro of law firm McCarthy Trétrault, “When a purchaser is simply buying the assets of a business there are not necessarily any obligations to the employees unless the purchaser offers employment to those employees.”
He says that if employees are offered employment, they can accept or decline. If they accept, “You, as the purchaser, assume their years of service.” If there is a share deal, Boniferro says, the purchaser “steps into the shoes of the vendor” and this means buying the corporation with all of its “warts and obligations.” A seller of a business is obligated to disclose employee contracts to a potential buyer in most transactions.
“In an asset sale, the seller will be liable for the severance costs associated with employees who decline, or are not offered, employment with the purchaser,” says Donna Gallant, an employment lawyer with Fasken Martineau DuMoulin. She says these costs will depend on many factors, such as “whether or not the employees have written employment agreements which specify their entitlements on termination.”
Employees might be entitled to claim more than the minimum notice and severance pay provided for under employment standards legislation. “There may be costs,” Gallant points out, “associated with providing incentives to retain key employees pending a sale.” Purchasers, she advises, should “keep in mind that any collective agreement associated with the business may become binding on the purchaser following the sale.”
Selling your business is more than just a sale of machinery. It also means a change in lifestyle, identity and relationships with employees and customers. Working with your accountant, business valuator or corporate lawyer will bring a needed element of objectivity into what can be an emotional process.