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Reasons for a Business Valuation:

Example 1: Three partners have been working together for 7 years and now someone has to leave. This is a huge responsibility to find that correct measurement of value as it affects a lot of people’s lives. This allows me to really get into it and use all my knowledge and years of experience to find the right answer. Yes it sometimes keeps me up at night, but the end result is very satisfying for me.

 

Example 2: You are in a divorce situation and feel you are getting beat up. If my experience and knowledge are going to be able to make a big difference in your life, then this is something I could be interested in doing.

Example 3: You are considering buying a business. This is very often a huge challenge and my 30 plus years of experience in dealing with small business owners helps me to determine who is being honest, who’s information we might choose not to trust, and why. Again this work gives me the feeling of satisfaction when completed.

 

Video explaining my approach to Business Valuation is available on Youtube.

If no sound click here 

There seems to be a lot of ongoing discussion on the valuation of Saudi Aramco.
My position stays the same. I believe what will happen is the Saudi leaders will be able to strongarm the price only moderately and only for a short period of time. I predict it will take less than 4 months for the Saudi Aramco value to fall to reflect a valuation in the range of Apple, Amazon, and Google. In the long game the Saudi Aramco plan may be similar to that of the Tobacco companies who diversified into many other things. As I have stated before there is a psychological value to freedom and there may well be some "politically correct" factors at play here. For the Saudi regime this is going to be a complicated effort not so dissimilar to herding cats or pushing string uphill.

Eric Jordan business valuator is an accredited CPPA giving you a  business valuation certified by an experienced industry specialist, making this one of the best business valuation firms in Toronto  with CPPA certification. If you are considering a small business valuation due to an acquisition in Toronto you may wish to compare CBV designation as compared to CPPA. Chartered Business Valuators are unlikely to have the vast experience possessed by Eric Jordan. CBV program shows you how to become a certified business appraiser in Toronto . You may pass the Chartered Business Valuators CBV Canada exam but the resulting business valuations can generally be shredded by the experience of someone like Eric Jordan using the “25 Factors Affecting Business Valuation. Watch the YouTube on the page and pay attention to the Experience section. You will surely agree Eric Jordan distinguishes himself as the best qualified valuator to give you an affordable and professional business valuation in Toronto for 2019.

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25 Factors Affecting Business Valuation

By Eric Jordan (CPPA)

Copyright 2017; 2018 Eric Jordan Publisher by Eric Jordan 209 – 1027 Pandora Avenue

Victoria, B.C. Canada ISBN 978-1-7750074 Printed in China`

 

The author is the proprietor of www.pin.ca website established for over 20 years (January 1998) promoting business opportunities and businesses for sale.

 

Eric Jordan is the host www.BusinessforSaleRadio.com heard on many radio channels across the USA, Canada and around the world.

Please visit the website for local times and stations.

 

25 Factors Affecting Business Valuation

Contents

Acknowledgments.......................................................................... iv

Preface............................................................................................. v

Introduction..................................................................................... 7

Factors Affecting Business Value

Factor 1: History ........................................................................... 14

Factor 2: Purpose .......................................................................... 15

Factor 3: Financials....................................................................... 16

Factor 4: Research & Development (R&D).................................. 19

Factor 5: Shareholder Agreement ................................................. 23

Factor 6: Value of Employees....................................................... 25

Factor 7: Valuing Distribution and Client Base............................ 27

Factor 8: Value of Supply Chain .................................................. 28

Factor 9: Social Network - Internet Footprint............................... 29

Factor 10: Dominance in the Marketplace.................................... 30

Factor 11: Processes and Procedures ............................................ 31

Factor 12: Company Documentation............................................ 32

Factor 13: Industry Averages........................................................ 34

Factor 14: Lease Terms................................................................. 35

Factor 15: Leasehold Improvements............................................. 37

Factor 16: Equipment.................................................................... 38

ii

 

25 Factors Affecting Business Valuation

Factor 17: Inventory...................................................................... 39

Factor 18: Business Risk including Liquidity............................... 40

Factor 19: Currency Fluctuations and Geopolitical

Considerations.......................................................... 41

Factor 20: Opportunity.................................................................. 42

Factor 21: Leverage - Terms and Cost of Money......................... 43

Factor 22: Minority Interest .......................................................... 44

Factor 23: Special Interest Purchaser............................................ 45

Factor 24: Redundancy in Management ....................................... 46

Factor 25: Return on Investment................................................... 47

Operations Manual Template........................................................ 43

Conclusion .................................................................................... 54

iii

 

Acknowledgments

I want to dedicate this book to the teachers and mentors in my

life who made me who I am. I am grateful for my mother and

father, Fred and Edith Jordan who taught by example. I would

like to thank Roy and Earle Hamilton; John Koelle; Reid Nunn;

Debby Schlutter; Bill Massey, my cousin; Ange, my daughter; and

all the family members who helped me along the way. A special

tribute to Charlie Salfries who was my first real mentor and who

made me realize I could be whoever I wanted to be. Thanks

Charlie.

.

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Preface

 

This book offers 3 things:

1. Intangible Assets and Intellectual Property

This book will prove that the average business today consists of 70% to 80% Intangible Assets.

2. 25 Factors Affecting Value

I will show the 25 main factors affecting business valuation that must be measured in order to evaluate a business. Most of these factors are intangibles. I will explain how and why these factors affect the value of a company. The methodology becomes clear and is proven in the current marketplace snapshot.

3. Operations Manual Template - INCLUDED FREE - Processes, procedures, systems, and the

documentation of those factors are generally contained in what is commonly called an

Operations Manual. Having an up to date functional operations manual could add up to 25%

more value to your company. It is imperative that everyone have one of these. I have enclosed a free template. This template will help you build your own company specific operations manual that, when filled out, will be the best insurance you could have for your business, your employees, your clients and your family. It will also add tens of thousands to your value; some larger businesses could gain hundreds of thousands.

 

25 Factors Affecting Business Valuation

Links from real and accredited people and reputable sources, easily verified on the internet, will be provided throughout the book to prove my points with logic and irrefutable evidence. In the electronic versions, you can just click the links.

Your time will be respected. There should be no empty words, just useful information that is actionable.

 

Introduction

Procter and Gamble paid 60 million dollars for “The Art of

Barber” a small chain of 36 barber shops in 2009. Imagine a

barber shop being worth 1.66 million dollars. I did a

valuation within this same industry using the 25 factors affecting

business valuation. My methodology and conclusions were

validated when I came across the Procter and Gamble information.

This made my client feel very confident about my report.

 

http://adage.com/article/news/cpg-marketing-p-g-buys-art-shaving-retail-

stores/137065/

 

Price confirmation for the “Art of Barber” sale:

 

http://wwd.com/beauty-industry-news/beauty-features/gallery/procter-gamble-

acquisition-timeline/

 

Intangible Assets and Intellectual Property are the elephants in the

room when it comes to small business valuation. Few valuators are

willing to come out of the old-fashioned comfort zone provided by

their associations to address the measurement of Intangible Assets.

Our methodology is not new. Venture Capitalists and industry

specialists understand and use this kind of methodology in daily

business. What our proprietary system has done is to bring these

currently used processes down to the small business level. This

way, the value of a business can be measured using 2018

methodology and processes instead of the 1970’s model that is

now most commonly used in business valuation.

Wisdom and experience cannot be taught in an accounting class.

 

Section 1:

 

Intangible Assets and Intellectual Property: Intangible Assets make up the majority of the value in most businesses. My objective in this section is to help you understand and accept that it is true. 70% to 80% of the value of your business is intangibles. If this is not true you should be concerned.

Intangibles rule the way we live:

Google maps get you where you are going. Amazon is the largest store in the world and the

owner is now purported to be one of the world’s richest men. eBay. Who has not used eBay? Facebook and Twitter are two of the most popular and commonly used social networking apps. Airbnb, Uber, and GrabTaxi are all “disruptor” business models that changed how things are done. Netflix has changed the way most people watch television and movies. Smartphones are streaming data to the masses, including business people.

Intangibles in business I want to refer you to an internet site that you may not be familiar with unless like me, you have a reason to follow up such information. Crunchbase.com - Crunchbase reports on funding, mergers and sales on a more global scale than most information sources ON A DAILY BASIS, tracking hundreds of millions of dollars in business. Most of these hundreds of millions of dollars that trade daily are intangible assets. Prove it to yourself and look at the website. The following

is an example of a daily report.

www.Crunchbase.com- Daily Newsletter - July 21, 2017

Klarna raises $225M for payments. Private equity firm Permira will pay $225 million for a stake

of at least 10 percent in Klarna, the Stockholm-based online payments unicorn (Unicorn Pay is an online Payment Gateway Services Provider). Permira will buy shares from existing

shareholders General Atlantic, DST and co- founder Niklas Adalberth.

Insurance is a hot space for Venture Capitalists Funding for insurance-focused startups has shot up dramatically in recent quarters, with a big chunk of investment coming from major insurers, a Crunchbase News analysis finds.

In other news, we look at the massive growth spurt that preceded the latest Series A for loan startup “Self-Lender.”

Shyp curtails service, cuts staff. On-demand shipping service Shyp announced in a blog post that it is withdrawing from all but one market, the San Francisco Bay Area, and cutting staff at headquarters in what it described as an effort to prove its business model for long-term success. Up till now, Shyp had also been operating in Los Angeles, Chicago and New York.

Betterment closes on $70M. Online financial adviser Betterment has raised $70 million in a new Series E-funding led by Kinnevik. The New York-based company has raised a total of $275 million to date.

Recent Activity on Crunchbase 181 Funding Rounds Added 130 Acquisitions Recorded $2.5B

Fundings Captured 12,087 Entities Updated

Make a list of the non-tangible things in your business. It will surprise, if not shock you.

http://www.kmworld.com/Articles/Column/The-Future-of-the-Future/The-world- of-intangible-asset-valuation-

110580.aspx

Another link - same conclusion. https://www.strategy-business.com/article/08302?gko=47f49 60% to 80% back in 2008.

Employees and client lists are not tangible assets - but try to run a business without one or the other. What value does a business with a storefront have without a valid, renewable lease? You might have a partner; without a solid, up-to-date shareholder agreement in place how secure is your investment? Did you know that some franchises are for a specific time period, perhaps twenty years? After that you may have only the salvage value of used equipment and leasehold improvements. Your old location might be given to a new franchisee or the franchisor may tell you that in order to continue, you need to move five blocks away into a new building and completely rebuild the store in order to have a new twenty-year franchise agreement. What do you think this sort of franchise is worth in the last four or five years of the franchise agreement?

10

 

25 Factors Affecting Business Valuation

What is a long-term lease in an airport worth to a high profit food franchise? Add to this some exclusivity and see how that affects things. What about Research and Development (R&D)? The R&D you keep investing in might be written off in the year it was done, but is it gone? Investors in Google and Amazon say NO. Many learned people share the same opinion I do; I hope to prove my points by showing you the profiles of accredited people who have written articles that I believe strongly support and prove my position. If you don’t have a detailed, well written, and up to date operations manual you are probably missing 25 percent of the value of your business. Without a detailed map of what to do, your business cannot run for any length of time without you. Who would want to buy a business without a good operation manual? Who would want to lend money to a company without an operations manual that would allow the company to survive even if the founder was gone? This is one of the reasons why financial institutions prefer

financing franchises over independent business startups.

I believe I have proven the point that seventy to eighty percent of the value of businesses

today is intangible.

 

Section 2

These are the 25 main factors affecting business valuation that must be measured in order to evaluate a business. Most of these factors are intangibles. I will explain how and why these factors affect the value of a company. My focus is companies valued at under 10 million dollars.

Factor 1: History

Factor 2: Purpose

Factor 3: Financials

Factor 4: Research and Development

Factor 5: Shareholder Agreement

Factor 6: Value of Employees

Factor 7: Value of Distribution

and Client Base Factor

8: Value of Supply Chain

Factor 9: Internet Footprint – Social Network

Factor 10: Dominance in the Marketplace

Factor 11: Processes and Procedures

Factor 12: Company Documentation

Factor 13: Industry Averages

Factor 14: Lease Terms

Factor 15:Leasehold Improvements

Factor 16: Equipment

Factor 17: Inventory

Factor 18: Business Risk including Liquidity

Factor 19: Currency Fluctuations and Geopolitical Considerations

Factor 20:Opportunity

Factor 21: Leverage - Terms and Cost of money.

Factor 22: Minority Interest

Factor 23: Special Interest Purchaser

Factor 24: Redundancy in Management

Factor 25: Return on Investment

 

Factor 1:

 

History

 

The value of a business starts with the unwritten knowledge

of the business founders when they started the business. By

digging into their past, we get a glimpse of what unique

knowledge they had and what they were attempting to develop.

What special talents did the founders have? This can be a big help

as we go through the rest of the factors, as we can understand the

“purpose” the founders had in mind when they started. In many

cases, one will find that there was an unfilled need and a plan to

fill the need. History gives us a solid starting point.

Here is a real-world example of history to the rescue:

Kraft Cadbury - History to the rescue.

When Kraft took over Cadbury in 2010 it was not looking pleasant

as many Cadbury people were thinking Kraft would dilute the

quality. Kraft management went back into the founder’s history

and showed how the two founders were very similar. They were

able to pacify the Cadbury people with the similar beginning

information and it was one of the smoothest mergers Kraft ever

undertook. (Read the whole story)



 

Factor 2:

 

Purpose

 

We need to know the purpose of the valuation to

determine what factors are relevant. If the purpose of

the valuation is to determine value for the firm and

establish a share price to facilitate a new partner coming in, it is

different than establishing a price for the purpose of a divorce

proceeding.

The divorce proceeding requires we establish a “fair market value”

on the legally defined “Effective Date of Valuation.” “Terms and

Cost of Money” would not be a relevant factor because no

seller terms would be considered.

A valuation for the purpose of establishing value of shares for a

partner coming in, would certainly look at “Terms and Cost of

Money” as a relevant factor affecting value. If the “buy in” is

100% financed by the existing partner or partners and the “risk”

minimized for the buyer, a higher valuation is likely because of

lack of risk.

If I am hired by a prospective buyer of a restaurant, the purpose of

the valuation changes. I would look at the value of the business to

the current owner, but additionally I would be looking at how the

subject business would fit on the new proposed purchaser. In this

way, the prospective buyer can make an informed decision about

making an offer to purchase. When we look at purpose, this system

requires that we ask the question, “value to whom?”

 

Factor 3: Financials

 

When analyzing financial statements one must adjust the

statements to reflect only purchases and expenses at

prevailing fair market price that are related directly to the business.

We want to find out if the operation of the business is making

money or losing money. We need to know if there are redundant

assets that need to be stripped out of the balance sheet. For the

purpose of a business valuation we want to look at the balance

sheet and income statements. (Income statements are sometimes

called profit and loss statements).

We will need to normalize the information. Any underpayments,

perks or advantages to anyone including owners, friends, and

family must be accounted for at fair market value. Once

everything is adjusted to “fair market” we have what

would be called “Normalized Net Income.”

Depending upon the situation and purpose we may want to look at

2 to 10 years of financial statements. If auditing is required I

suggest an outside accounting firm for that process. The delicate

part for small business valuation is “discretionary income.”

What to count, how to measure, and what is the purpose.

Determining the “Normalized Net Income” is a real skill set and

the first and most important step in determining the value of your

small business, any other term implying the same thing is suspect.

(Small business being less than ten million dollars in sales.)

If you are reading financial information about a small company

and you see the terms, owner's discretionary income, seller's

discretionary income, seller's discretionary earnings, free cash

flow, seller's discretionary cash flow or owner's cash flow. BE

CAUTIOUS! These are terms that people feel they can trust, but

in fact they are often very misleading. You may also see the

term EBITDA (Earnings before Interest, Taxes, Depreciation

and Amortization) this is a legitimate term, but only when

used in the right context.

If these terms are used in relation to the sale of a small business,

someone (usually the buyer) can be easily misled. The managers of

banks and other financial institutions have been misled by these

terms so often that their head offices are often very skeptical about

financing the purchase of any small business.

OWNER'S DISCRETIONARY INCOME: This term will

often be used by those trying to sell a franchise. They will show

you a number like $75,000 per year, or perhaps even $90,000 for

owning and operating something like a plumbing franchise. What

they do not make clear is that the $90,000 per year is

BEFORE the owner/manager/PLUMBER is paid. Depending on

where you live a plumber will probably make $65,000 to

$85,000 a year just by going to work every day.

If the people selling the franchise were being truthful they would

use the term “Normalized Net Income” that would show the profit

after everything, including the owner’s wages, were paid out at fair

market value. If the fair market value of the plumber's/owner's

wages were $70,000 the true profit figure would be $20,000 not

$90,000. The perpetrators are generally white shirt and tie, and go

to great lengths to convince buyers they are professionals, and in a

dark way, that is true.

“Free Cash Flow, Owner’s Cash Flow and Owner’s Discretionary

Income” are all 'weasel' words used in the process of separating

buyers from their hard-earned money.

EBITDA (Earnings before Interest, Taxes, Depreciation and

Amortization)

Some industry groups think it is okay to include one

owner/manager wage in EBITDA, which results in the same

misleading situation. You therefore must be very careful in the

context that EBITDA is used, most especially if dealing with small

business and the numbers are being explained by a deceitful sales

person or owner.

EBITDA is generally used as a measure of a company’s operating

cash flow based on stated earning from financial statements

BEFORE interest, taxes, depreciation and amortization.

https://www.entrepreneur.com/encyclopedia/owners-salary

Here are some searches you may want to do to confirm the

conclusions above.

normalization of financials in a business valuation

net income after normalization

owner’s income included as company earnings.

 

Factor 4: Research & Development (R&D)

 

Your R&D was written off on your taxes. Is the R&D

really gone? Generally, NOT.

Research and Development in most western nations is written off

for tax purposes in the income statement/profit and loss. For tax

purposes this is reasonable and lawful.

For the purpose of valuation this is not so true. The value of the

R&D did not disappear in the year it was written off. Most often it

is added to an existing base of R&D and will be added to again in

the next year. It is my opinion that the useful lifespan of

R&D is somewhere between 5 and 12 years in some

industries; in others, the R&D is accumulative, meaning that it

keeps on growing. For the purpose of valuation R&D

could be accounted for in the balance sheet as an

intangible asset. This means that depending upon the individual

business, the valuator will need to make a judgement regarding

lifespan of the R&D and possibly adjust the balance sheet to

correspond.

I am not the only one to come to this conclusion. Millions of

shareholders of public companies and investors in private

companies believe this is true. This is why companies like Uber

and Airbnb have such high valuations. People are investing, not

because these companies are making a lot of profit, but because the

investors believe in the R&D. For public companies, Amazon

for example; not yet returning a lot of profit but certainly a

company with lots of R&D that people believe in by the

 

billions of dollars. I’m not sure how many billions of dollars of

proof I would be expected to produce, but one could compose a

very large list of both public and private companies where the

share price or valuation is based upon the perceived value of the

R&D.

Unless purchased, Brand is the result of R&D and marketing

within. When R&D is part and parcel of a brand, the R&D often

has an accumulative value. Uber would be worth much more

than the accumulated value of their R&D, as would most

companies who have developed things and are successful.

Stability and growing sales are key to the measure.

Certainly, with any kind of software company, the R&D is of

immense value but it may not be shown in the balance sheet. There

is a reasonably simple way of looking at this. Many small business

owners have both an operating company and a holding company

with identical ownership. The holding company generally holds

the real estate and possibly other hard assets. The operating

company runs the business and pays the holding company fair

market value rent on the real estate or other hard assets. The key is,

it must be done at fair market value.

For purpose of valuation consider that there is a development

company and an operating company. The development company

does the R&D and then sells the R&D to the operating company.

Now you have a measured and identifiable intangible asset with a

receipt that can be placed into the balance sheet as an asset and

depreciated over time, instead of being a direct cost this year in the

income statement.

There are some tax rules in different jurisdictions for all of this

according to the Association of Chartered Certified Accountants in

the UK.

 

http://www.accaglobal.com/gb/en/student/exam-support-

resources/fundamentals-exams-study-resources/f7/technical-articles/rd.html

 

Under International Accounting Standards (ISA) 38, regarding

R&D an intangible asset arising from development can be

capitalized if an entity can demonstrate all of the following criteria:

the technical feasibility of completing the intangible asset

(so that it will be available for use or sale),

intention to complete and use or sell the asset,

ability to use or sell the asset,

existence of a market or, if to be used internally, the

usefulness of the asset,

availability of adequate technical, financial, and other

resources to complete the asset, and

the cost of the asset can be measured reliably.

UK has slightly different interpretations. (See link above)

NOTE THAT WE VALUE R&D FOR VALUATION

PURPOSES NOT TAX PURPOSES. SOME OF THE ABOVE

WOULD BE OF INTEREST TO THOSE WISHING TO

RAISE MONEY AND WANTING TO LEGITIMATELY

SHOW VALUE IN THE COMPANY.

Some very bright people have done a lot of research on this

subject:

Read the background on them first:

http://www.valens-research.com/about/background/

Now, read what they have to say about capitalization on the

balance sheet:

 

https://www.valens-research.com/rd-investment-not-expense-capitalizing-rd-

impacts-understanding-corporate-profitability/

 

https://www.theguardian.com/business/2017/apr/15/tesla-electric-cars-sparks-

fly-wall-street-valuation

 

Factor 5: Shareholder Agreement

 

Shareholder agreements are the legal basis for dealing with

all matters in a business. Without a legally binding

shareholder agreement any dispute can become a seriously

costly matter. Minority shareholders are probably the most at risk

in a situation where there is no legal shareholder agreement. Just

ask any minority shareholder who has been involved in a dispute.

There have been situations where minority shareholders thought

their 10% interest in a million-dollar company would be worth

$100,000 this is not necessarily true.

When, how, and how much you might recover as a minority

shareholder could be half, unless there is a strong legal shareholder

document to support your claims. Inversely, majority shares have

the possibility of being worth more. Potential for protracted legal

wrangling could cause a valuator to come with a lower value than

would otherwise result if a proper legal shareholder agreement was

in place. There are different sorts of “shotgun” clauses that can be

included in these shareholder agreements. Payouts can be over a

number of years, so the company can afford to pay someone

out.

 

A shareholder agreement that was detrimental to the remaining

shareholders could result in a much lower value as well. Have a

lawyer you trust review any shareholder agreement before you

sign. Google “shareholder agreements”to find anything you are in doubt about.

 

Factor 6: Value of Employees

Crunchbase data shows firms working with Artificial

Intelligence (AI) that are being funded and

trading hands at valuation numbers representing ten

million dollars per employee (USD).

Crunchbase.com is not an academic journal but they are the

world’s only relevant source of data on large tech buyouts and

funding is updated on a daily basis. Tens if not hundreds of

millions of dollars in new deals are posted daily.

www.crunchbase.com is free to view.

QHR - Canadian Company, Kelowna, British Columbia,

Canada sold in fall of 2016.

QHR sale ($170,000,000 sale with 200 employees) = $850,000

CDN per employee and rather strongly makes the case that skilled

employees are worth something.

Established Web Design and Digital Ad Agency For Sale

South Florida, Florida UNDER OFFER (recent 2017)

Asking Price: $1,245,000 (USD)

Furniture / Fixtures included

Sales Revenue: $780,000 (USD)

Cash Flow: $303,000 (USD)

Asking: $155,000 per employee

This is not to say that every company is worth millions per

employee, but it is important data to reference. The push for high

wages in the restaurant industry is causing the restaurant industry

to automate. The employees that are valuable are those who are

working on the automation and artificial intelligence robots that

will replace the restaurant employees.

Most businesses will fall somewhere in between. Doing the

research and understanding the proper measurement for each

individual business is a critical exercise in any accurate business

valuation. There is a lot of room between zero and ten million

dollars for employee value. Employees and contract workers are

generally both considered when doing business valuation.

 

Factor 7: Value of Distribution and Client Base

 

Did you ever wonder why products appear on the

supermarket shelf at eye level? There is a whole industry

built around product placement. Planogram defines the

what, where, and how much in retail merchandising.

Manufacturers, wholesalers and distributors invest a lot in getting

proper visibility on the retail level. The end buyer can also be

considered as part of the client base. It can take many years to

build a client base that will go looking for the product you want to

sell. For the purpose of valuation, one must be able to measure the

retail purchaser, the retailer, the wholesaler and distributor. How

much time and money would be spent to replace what has been

achieved? This is why companies buy other companies

instead building from scratch.

We should point out that not every factor affecting value is

relevant in each individual valuation. One must know what factors

are important to measure and what factors are irrelevant for each

subject business.

 

Factor 8: Value of Supply Chain

 

First: Imagine yourself as the owner of a company importing

old Russian military rifles, ammunition, and related items

into Canada. Your company is a supplier to retailers and

also has an online store. Your supply chain is from the Ukraine.

This is about as unstable as it can possibly be with the current

geopolitical situation, and you are unable to get product.

This leaves a very big dent in your business and it is not going

to be hard to measure the value.

Second: Imagine yourself as the exclusive Canadian importer of

several well know Asian food brands. Sales are strong, and

everyone is happy. The ties are strong and go back 35 years. This

will take a lot more work to measure than scenario one.

Most valuations will be somewhere between these two extremes.

 

Factor 9: Internet Footprint – Social Network

 

Look at your website. How well does it place on Google for

relevant searches? How many views does it get? Is it an e-

commerce website? What are the details?

 

Additionally, there are all of the social networking sites. Facebook,

Twitter, LinkedIn, Google+, YouTube, Pinterest, Instagram,

Flickr, Reddit, Snapchat, WhatsApp, Quora, Vine, StumbleUpon,

and Digg are some of the more popular social media sites.

What percentage of your sales are e-commerce on your own

website?

Do you sell e-commerce on other platforms such as Amazon or

AliExpress?

If you are a service company what percentage of your business

comes from the internet? If you run a retail store, how much of a

role does your website and/or social media play in your customer's

decision to come to your store?

Even if this is not a relevant factor it may still be worth

considering because you, or someone else, can change this to make

it better. This is where the measurement comes in.

 

Factor 10: Dominance in the Marketplace

 

Dominance in the Marketplace.

Mention ketchup and most people will think of Heinz.

That is product domination in the marketplace. Mention

search engine and most people will think of Google.

 

That is domination of a service in the marketplace.

Most businesses will not be in such a fortunate situation. Some

companies will have 25% or perhaps 75% of the market within a

certain geographic area. If so, this will certainly increase

the valuation.

A fishing license or a dairy quota would have some dominance

effect.

There have been issues with cities who issue taxi licenses

promising in effect dominance, then the licensees have

been “interrupted” by a technology called Uber. The hotel industry

is similarly concerned with Airbnb and similar services.

A dominance situation that a valuator will commonly come across

is an exclusive lease for a service or retail category in a specific

geographical area, something like an airport, university, or

shopping centre. Profits are almost locked in for such situations so

of course the value is higher as long as the lease is long-term. In

some cases, the long-term lease might be the most valuable part of

the business.

Dominance is not always a relevant factor affecting value.

 

Factor 11: Processes and Procedures Agreements, Licenses and Other Intangible Assets

 

Unless it is a franchise, every company has their own

proprietary processes and procedures or something that is

patented with a long expiry date. A registered brand or

other intangible assets must be measured.

For example, a successful retail bakery in an urban centre with its

own proprietary processes and procedures that result in a product

that retail clients choose to purchase on an ongoing basis. This is a

huge consideration for value. The measurement of some of this is

often a ratio depending upon market share or penetration, and

the means to deliver via employee base. Most franchises today are

not doing something so unique, but have simply put very

tight processes and procedures into what would often be

considered a simple service. Think lawn services, hair salons,

tanning salons, pet grooming, sewer pipe cleaning, fencing,

car cleaning, car maintenance, and computer repair for just a

starter list. Keep in mind some franchises have a defined end

date and the franchisor may have no obligation to renew a

franchise.

Processes and procedures do not stand alone. There must also be

documentation which we refer to next. There is a whole section of

this book where we show you a template that can be used to

document the processes, procedures, and systems of a company.

 

Factor 12: Company Documentation

 

Imagine that you have a fully completed operations manual that

documents all aspects of your business. All the processes,

procedures, and systems are documented. It is done so well

that your business runs as smoothly when you are away as when

you are home.

Imagine that you run the same business that is just as profitable;

but where nothing is documented. As long as everyone is healthy,

all is well. You can’t be gone for weeks, perhaps not even for days

without the need to be in constant communication.

The first option offers security of income not only for the owner,

family and employees but also security of continued service for the

clients. The owner could protect his family from his/her untimely

death by having life insurance that is readily available for most

business owners. Adequate disability insurance for small business

owners is generally too costly and usually not even available.

That leaves the owner, family, employees, and clients all at a lot of

risk. The more of the operations manual you have completed, the

better you have protected the future for yourself and all of those

around you.

Not all of this would be on a computer, but rather printed out

with spaces for computer passwords, banking information.

Where are the spare keys? Important client and supplier

information. The list is comprehensive.

All of the information on each employee's job needs to be

documented and regularly updated. This is especially important for

the founder of a small business to leave a paper trail for the family

to follow. This insures the business will continue if something

happens to key players.

A buyer will pay a lot more for a well-documented company than

one where the owner says; “I will train you.” Sure, and what

happens if the owner has a heart attack the day after the sale?

Documentation is so important; a template for making your own

small business operations manual is included at the end of this

book to give our readers added value.



 

Factor 13: Industry Averages

 

Industry averages are not a relevant factor for all business

valuations. One must make sure the comparable data is truly

comparable. Air conditioning companies in Miami, Florida are

not comparable with air conditioning companies in Seattle

Washington.

Many valuators use comparable sales as a major consideration, but

this can be very inaccurate as the sales figures don’t tell you if

terms were given, how much net profit was recorded for the

preceding years or if owner’s wages were included in the profit.

Costs can vary significantly.

Unless you are talking about franchises, no two businesses are

totally comparable, in fact most are very different. Being careful

to measure data that is truly apples to apples is most important.

Industry averages can provide a guideline. It must be understood

that industry averages include both winners and losers and are too

broad to provide any sort of accurate measurement for a specific

business. In some cases, industry averages will be important but in

cases where the business is more unique, the industry averages will

mean much less.

 

Factor 14: Lease Terms

 

A business with no lease, or a lease ending soon, has

limitations on its value. Costs of relocating could include

leasehold improvements, reopening, transferring utilities

and associated fees, new equipment and fixtures, to name a few. A

strong renewable lease is going to enhance the value of a profitable

business. However, a strong long-term lease can choke an

unprofitable company. If you sign such a long-term lease and if

something else happens (your supply or client base evaporates),

you are in a lot of trouble and the lease obligations might offset a

lot of inventory that is paid for, your company could be rendered

almost worthless due to lease obligations. Also, remember that

your landlord is not obligated to renew your lease or let you out

of a lease you have signed.

Reading the lease carefully is an important factor in business

valuation. When you are considering purchasing a business you

better know the terms and conditions of the lease you will be

taking over. You might want to be renegotiating the lease prior to

purchase to make sure you have enough time to make the purchase

worthwhile. The reputation of the landlord matters a lot.

A long-term lease negotiated in Calgary just prior to an oil price

downturn can have the effect of making the company

worthless to a prospective buyer. In other cases, a long-term

lease at a locked in rate can be more valuable than anything

else in the company. Lease terms need to be measured carefully

in a business valuation.



 

Factor 15: Leasehold Improvements

 

Leasehold improvements have three distinct value

classifications and are often valued along with equipment.

 

Value within an “operating business”

Value as “equipment in place” even if the business is not

in operation, but a reasonable new lease can be negotiated

Leasehold improvements and equipment may only be

worth “liquidation value” if the business is not operating

and you can’t negotiate or renegotiate a lease. Note

that in “liquidation value” it is important to calculate the

cost of liquidation which could run from 20% to 45% of

the total received

If you are opening an upscale spa or upscale restaurant you can

expect leasehold improvements sometimes called your “buildout”

to be between $300,000 to $1,000,000. In a business valuation,

one must consider the time left before renovations are necessary

again. If for some reason the franchise is lost, or the lease does not

renew, your leasehold improvements may be of little value. In

most cases used equipment is worth very little without a lease.

For accurate valuation one must measure by the correct

classification.




 

Factor 16: Equipment Tools, Vehicles and Other Hard Assets.

 

Equipment will generally be listed in the balance sheet along

with original cost and depreciated value. Fair market value

of the equipment is most often neither of these numbers.

Equipment generally has two classifications:

equipment value within an operating business

liquidation value

Equipment, in some cases, would be part of the leasehold

improvements and could have extra value as “equipment in place”

provided a lease could be negotiated.

Equipment may only be worth liquidation value if the business is

not operating. If this is the case it is important to calculate the cost

of liquidation, which could run from 20% to 45% of the total

received. It is important to know what measurement best suits the

purpose of the valuation.

 

Factor 17: Inventory

Inventory will generally be valued at cost, however there are

many mitigating factors. How marketable is the remaining

inventory? What would be the cost of selling the inventory at

retail, wholesale, and liquidation?

Inventory within an operating business is going to have more value

than “inventory that is in place” or value of inventory net of

liquidation. Net liquidation might be 40% less than

the gross liquidation figure, to take into account the costs

associated with the liquidation of the inventory. Inventory value

within an operating business may be very close to

wholesale depending upon marketability factors. One must

understand what they are measuring and for what purpose to

make an accurate estimate of value.

 

Factor 18: Business Risk including Liquidity

 

Asking all of the right questions and measuring each

situation is difficult and challenging.

Are you in an industry that is being disrupted or about to be

disrupted? An example would be the taxi business disrupted by

Uber. Is your business niche heavy into manual labour that will be

replaced by robots and artificial intelligence? Are there new

innovative processes and procedures being developed that could

replace what your company does? Could your industry niche

be outsourced to another country? Competition is of course

always a concern unless you have market domination through

some kind of exclusivity arrangement. If you lost a big contract

could a lender call a loan and put you into a liquidity crisis? If

a large contract could not or would not pay, could your

business find itself in a liquidity crisis? One must also look

at liquid investments as compared to investment in small

business that is not liquid. This is a huge consideration for most

investors. Who wants to wait two years or a lifetime trying to get

back money that was invested? This is why ratios are so

different between “liquid shares” that can be easily sold in

public companies and shares that might be hard to sell in a

private business.

 

Factor 19: Currency Fluctuations and Geopolitical Considerations

 

Currency Fluctuations and Geopolitical Considerations

 

Consider a Canadian company importing construction

materials from China with pricing in US dollars. Worse

yet, you are in Western Canada, perhaps Edmonton.

You just signed a long-term lease on a much bigger space. The

next month OPEC decides to try and take out the North

American oil producers and the oil price tanks. The Canadian

dollar tanks along with oil. There is a government in place in

Ottawa that is not Alberta or oil company friendly. How do

you think this would affect the value of your construction

material wholesale/retail operation?

When doing business valuation, it is best to be well-read on

business and politics both at home and abroad over a number of

years. Understanding the right questions to ask and knowing what

is important to whatever niche business you are dealing with is

essential.

Experience and wisdom cannot be taught.

 

Factor 20: Opportunity

Now we can go back to research and development,

processes, procedures, systems and employees. How well

is all of this is documented, and how well does it all work

together? Risk may of course temper some of the

opportunity enthusiasm in the final measurement. Do you know

the market trends and where your market niche is going and

where you are positioned within that market? When we

measure the R&D, processes, procedures, systems,

documentation, employees, contractors, and how well all of these

factors work together we get an idea of the potential for the

company.

Let us suggest you are an internet media company helping people

to brand and market their products and services. You have a young

and talented team that has been building for six years and are now

starting to show significant profit after taking the redundancy out

of the system.

The story could of course be exactly the opposite, the profit is in

the past, older workforce, losing market share and no R&D to

support growth.

Asking the relevant questions and finding out what is going on

within the company is the task of the valuator. One does not know

until they start the measuring process.

 

Factor 21: Leverage - Terms and Cost of Money

 

Depending on the situation, this factor may not be

applicable.

 

The cost of money is not uniform. A large company may have cash

on hand that they are receiving almost zero return on. This makes

their cost of capital much different than a small business or

individual who might have to pay market rates which could be 5%

to 25% depending upon each individual situation.

If your father-in-law has excess retirement money and is willing to

support you in your new business venture by loaning you $500,000

to $2,000,000 at 3% you have a huge market advantage going in.

Another thing that can happen is a retiring business owner may

decide you are a good manager and he will finance the business at

a very reasonable interest rate with almost no down payment. The

seller trusts the business is good and that you are a good manager.

The seller might feel more comfortable with some of his retirement

money still left in the successful business he built.

Compare this to the situation where a buyer must find his or her

own money for down payment and borrow the rest at market rates

that may be inflated to reflect perceived risk.

 

Factor 22: Minority Interest

 

Minority Interest

Most people think that if you own 40% of the shares in a

private company valued at a million dollars that the

value of the 40% block is $400,000. Not necessarily.

It depends upon your shareholder agreement and your ability to

finance any litigation necessary to enforce that shareholder’s

agreement. There are judges that might consider your minority

shares as only being worth half.

Having a solid shareholder agreement and understanding who you

are in business with can save you a lot of pain in the future. As a

minority shareholder, how are your dividends going to be paid?

Who governs that process? It is a lot easier to buy in than get paid

out. There are companies that actively seek to purchase minority

shareholder positions at a low price with the intent of negotiating

better terms from the majority shareholders who may not want to

face protracted litigation against an experienced and well financed

minority partner group.

 

Factor 23: Special Interest Purchaser

 

A special interest purchaser is a purchaser who already has

assets in place that with this purchase can take further

advantage of the efficiencies and economies of scale. If

there are significant advantages such as elimination of competition,

technology advantages, purchasing power advantages, and a

reduction in costs by sharing overhead, then the premium paid will

be or could be higher. The price could be much higher if there is

more than one potential purchaser.

A purchaser who has insider knowledge and information that

significantly reduces risk in the marketplace could definitely be

considered a special interest purchaser, in comparison to an arm’s

length, third-party buyer. In this definition, the working partners in

a small business would all be special interest purchasers. The

owner/ partners understand the risks and relationships at stake.

Because nothing really changes, there should be high client

retention and little risk to cash flow and profit.

An arm's length third- party must always be concerned about

relationships with both the supply chain and client list.

 

Factor 24: Redundancy in Management

 

W

 

Factor 24:

 

Redundancy in Management

 

What is the backup plan for management and how well is

it documented? This should all be part of an existing

operations manual and part of the company

documentation. However, because this point is so important it must

be covered again on its own. The higher up the food chain in the

company the more extensive we want the backup plan for each

management person.

What is the plan for everyone in management and how good does

the valuator find it to be? Is the operations manual remotely up

to date with computer related passwords?

The valuator must measure what is available and compare it to

what should be available.

 

Factor 25: Return on Investment

 

Return on investment is the most important factor and must

be considered first and last. From our financial review, we

should have found the “Normalized Net Income” if

everyone and everything was paid at market value.

We have measured the processes, procedures, systems,

documentation, and employees. We have looked at all of the other

factors affecting value and we have weighed them up, balancing

the risk and opportunity factors. Now we make a determination of

what is a reasonable return on investment with all of the relevant

factors measured and taken into consideration. Some very large

companies such as Amazon, have a very high stock price

without earnings to justify. On the other end of the scale would

be service businesses in an industry that is being trashed.

The valuator must understand and measure accordingly.

 

Section 3: Operations: Manual

Template

1.

Company Structure

2.

Products and Services

3.

Direct Employees, Contract Workers and Outside Contractors

4.

Licenses, Permits, Accreditation and Certification

5.

Business Suppliers

6.

Clients

7.

Office Procedures

8.

Business Procedures

9.

Business Equipment

10.

Office Equipment

11.

Emergency Equipment

1. Company Structure What is the legal structure of the company?

Proprietorship Partnership Incorporation Public

Names Percentages Shareholder agreement Where is the legal jurisdiction of the company?

Where are these documents stored?

Is this a franchise? If yes:

Where is the franchise agreement? What does it say about? o Length of time o Selling o Renewal rights

2. Products and Services

Provide an overview of the products and/or services produced by the business

3. Direct Employees, Contract Workers and Outside Contractors

Who does the work? Where is the production of goods and/or services done? What control do you have?

Direct Employees

Name, and other information Date of hire Salary, bonuses, and dividends Any extra perks? What

do they represent in the company? What roles do they play? What are their responsibilities?

Who do they answer to? Which people would be best able to replace them (often more than just

one person) In their own words, what exactly do they do? What confidential information does

this person have? Have they signed a confidentiality non-disclosure agreement - if no - why not?

Computer passwords and other such tech information. This needs to be handwritten on a page

with the persons name at the top and kept in a safe place “locked” with an additional copy at

your accountant’s and/or lawyer’s office. UPDATE REGULARLY.

Contract Workers and Outside Contractors

Name, and other information What is their job description? Include all responsibilities. What are

the terms of their contract? What special knowledge and information about the company do they

have? This includes relationships, proprietary information they maintain, and of course computer

passwords and other access codes

Professional Services Lawyer Accountant and/or Bookkeeper (taxes, payroll, etc.) Financial

Institutions Insurance Investment Advisors Credit Card Processing Collections Human

Resources Media Specialists

Consultants (including Business Valuator) IT Computer Hardware and Software Repair IT for Internet presence including social media, domain registration and hosting

Daily, Monthly and Yearly Tasks

Regarding payments and other financial issues Full details required Details

Never store sensitive information into software programs that could get hacked. Have printed copies that you have control of at your lawyer or accountant’s office. An inexpensive computer and backup drive in your safe might be prudent.

Blue Collar Services

Provide complete details Security Plumber Electrician Janitorial Landscaping Delivery Other

4. Licenses to Operate

City business license Other geographic licenses Association and industry certifications and

licensing

5.Business Suppliers

Full list and documentation 6. Clients

Full list in order of importance and/or most profitable

7. Office Procedures

Opening and closing procedures Alarm system passwords and/or codes (need to be handwritten

and locked somewhere secure)

8. Business Procedures

Staffing Training Order processing and sales procedures Call comes in, document what happens

after that Customer service procedures Shipping and receiving

9. Equipment

List each piece Where are the keys? Who knows how to operate it? Who repairs it? Any quirks?

Insurance? Registration? Permits? Lease information

10. Office Equipment

List each piece Computers Passwords (handwritten and stored in a secure location)

 

Maintenance Where you purchase the consumables Lease information

11. Emergency Procedures

Full details including muster stations In case of fire In case of an earthquake

 

Conclusion

 

This book should have helped you to understand that it is

mostly the intangibles in a business that determine the

value. Depending upon the reason or purpose that caused

you to read this book, you will determine how you utilize the

information. If you are a business owner, this book will have given

you some clarity on what is valuable in your own business. Just by

understanding this you will know where you should invest your

time.

If you put some time into developing an operation manual from the

free template in Section 3, you are likely to be gaining tens

of thousands of dollars (or more) in value from documenting all

these things.

Lawyers, lenders, and accountants will know which clients will

benefit the most from reading this book and point them in the right

direction.

Divorce litigants and others in dispute will better understand their

own situation and be better able to make decisions going forward.

I cannot teach wisdom.

I cannot teach experience.

If, however, you are stable, motivated and feel you have enough

wisdom and experience to qualify, I am open to Selling a License and training associates

anywhere in the world.

 


ARTICLES

Reports say SoftBank is taking control of WeWork at an ~$8B valuation ... WeWork, once valued at $47 billion, will be worth as little as $7.5 billion on ... SoftBank takes control of the struggling co-working business, CNBC reports.
WeWork Co-founder Adam Neumann Pushed Aside in $5 ...
One has to conclude that WeWork was never worth $47Billion. So where did the Valuation go wrong?

I always want to see a pathway.

I once did valuation for a software platform, I had a huge range of value from $50M to $200M
The software was proven in the marketplace and had clients that proved the price point. I felt the company proving the model lacked financing and management skills to take the product where it needed to go. The huge discrepancy in value was because in my opinion as a valuator, the platform needed to be sold to a larger company with the ability to run a sales team and development team who would have $10M to fund operations. If the purchaser was a much larger company who already has hundreds of tech workers (or thousands) and perhaps $50M to fund operations; the value can change by a multiple of 4 provided there are multiple buyers in the marketplace who would be interested.

Value like "beauty" is in the eye of the beholder.

I read a very interesting article recently.
"Small business manufacturing software showing a strong position (search for the article)

Global Small Business Manufacturing Software market size is a large and growing market. The key word here is "global". This is where this sort of "SasS" Software as a Service platforms have such potential value. Everyone wants and edge and if your platform can deliver the rewards are large. Knowing how to value something like this is an artform few understand.

To most small business owners the following headline doesn't mean much as it is much removed from their much smaller world.

Stripe reaches $35 billion valuation after $250 million funding round.

However if your search out and read the article does have some solid comparison to a small business. The $35 BILLION valuation is because they raised another $250M and are going to be quickly be able to process payment back and forth from 40 different countries. Without the $250M growth would be much slower.
Imagine your small business who had a great way to do something but lacked the funding to be able to do it. If your business was trying to target Special Interest Purchasers who had the ability to act on your growth plan you would likely be able to get more for your company.
The logic is that after reviewing a valuation showing potential 5 year Net Profit; the sale price would by higher.
Keywords here are Valuation and Special Interest Purchaser.

ARE MORE WOMEN IN MANAGEMENT BETTER FOR YOU BUSINESS?
A recent article says yes.
A Sodexo study claims that gender-balanced teams are better for returning profit.
After interviewing 250 leaders around the world ranging from engineers to presidents, and one of the best solo musicians in the world, the leaders say they would not have made it without someone helping them and giving them a chance. A recent McKinsey report stated that companies with a higher percentage of females in top management had a 41% higher return on equity.

Women are more than 50% of the consumer market worldwide so who is best to connect with the end buyer? However, at what cost? Make sure your company is ready and able to deliver a discrimination-free workplace. One misspoken lecher in your company could cost your business a lot of profit.

Chipotle

Chipotle’s stock, which has a market value of $23 billion, is up 92% so far this year, at the time of this writing. With 2,500 restaurants this means as a group each restaurant is worth $9,200,000
How much to build out a restaurant like Chipotle? My guess would be 2 to 3 million dollars at most, including a large chunk allocated for commissary assets. Where does the rest of the value come from?
This is where processes, procedures, systems, and documentation come in. Investors think the intellectual property that drives these 2,500 restaurants makes up the $6.2M difference between a high 3 million hard cost to 9.2 stock valuation.
It would seem that 70% or more of the value of Chipotle stock is intellectual property.
This is what I keep saying in my book. It is quite likely that 70% of the value of your business is intellectual property too. Measuring your value is best done through our 25 Factors Affecting Business Valuation. .

Special Interest Purchaser example

Goettl Air Conditioning & Plumbing one of the largest providers of residential HVAC and plumbing services in the Southwest US announced the purchase of Dutton Plumbing, a leading plumbing and drain services contractor in Los Angeles and Ventura counties.
Dutton Plumbing provides dedicated and dependable plumbing and drain services to approximately 10,000 homeowners every year. Dutton's focus on high-quality work and client satisfaction. The Dutton motto is, "The Plumber You'd Send to Your Mom's House." The acquisition will allow Goettl to introduce HVAC service to the Duttons client base.

This is a perfect example of a Special Interest Purchaser. Once we have determined through our proprietary "25 Factors Affecting Business Valuation" the likely value to a Special Interest Purchaser, you may want to consider how to find and contact those Special Interest Purchasers. Not likely to be found by your local business broker.

Charging California Clients 40% more?

California law AB 5 turns almost all contractors into employees, as California tries to address the perceived unfairness of Uber and others like them. In addition I am reading that anyone who provides services to a California company may be subject to pay tax on the total amount of fees they collect from California clients. SEARCH - BINDLEY v CALIFORNIA It will shock you. There are also some interesting rules regarding merchandise shipped to California. Do your research. Maybe service providers like me doing business valuations or other outsource work will have to charge California based clients 40% more to cover potential litigation and tax issues. Almost seems like a non tariff trade barrier.

Sally Beauty Holdings, Inc. gets a valuation cut from the market.

The market says $13.75 is the right price and of course this will change over time. Will the valuation get better or worse. Time will give us the answer. Is there something going on in the industry we need to be watching? Supercuts hair salon owner Regis UK enters administration. Future of 220 salons and 1,200 jobs at risk. So how does this affect the valuation of hair and beauty salons in Edmonton, Ottawa, Orlando, or for that matter anywhere in North America? One of the biggest risks and unknowns for the valuator is when a State like California or a Province like BC will step in and declare the person that rents your chair to be an employee. The fines and fees assessed against the business owner could be in the hundreds of thousands and force you out of business. Search the new California law AB 5 as it could put you out of business in a heartbeat.

Sweet Bakery market valuations are going up.

If you do a search for "sweet bakery market" you will see it expanding across the world. Valuations in this field are generally going to be up. Individual bakeries are likely to be showing strong earnings over the past few years with plenty of room to grow. Grab and Go places are going to be the big winners. The Asian market is likely to be the hottest over the next 5 years. In fact supplying food in general to Asia is likely to be a winning formula.

Valuing Software, Intellectual Property and other Intangibles.

Every valuation is going to be unique.
Replacement and cost can be a starting point, but the market must be taken into consideration.
Market approach with similar product transactions is spotty because verified trustworthy data in the transactions will be missing. Terms of sale, quality of coding, durability, testing done, maintenance cost, so is it really apples to apples.
Where is the pathway to the estimated future income and how realistic is it?
So you have a product and it works but do you have a functioning operating company that can exploit properly the marketing plan? Is the operating company properly capitalized for the task at hand? How well equipped is the management to handle your product?
How clean is the product in terms of claims by others? Legal issues can make intangibles almost worthless.
Can we differentiate between the intangible asset and the operating company?
This is where it can become gooey. An evaluator is going to have to have some experience to deal with all of this. Unfortunately, many people think that valuation is about math without taking into consideration all of the things that happen when we put things through the tried, tested and true "25 Factors Affecting Business Valuation".

Are National Chains are eating your lunch?

What happens to your local grocery store or local restaurant valuation as you compete with the chain restaurants and grocery chains who are looking to tag team as many of your customers as they can? Tim Hortons soup or chili, and McDonald's coffee can be found in a lot of grocery stores. This is a trend that is growing and requires a response to keep small business valuations from going down. If anyone has thoughts I would like to hear about them so we can help the small businesses to respond to this critical threat. Is there a way local grocers and local restaurants can team up to compete?
eric@pin.ca

Valuation expert in Winnipeg claims to be targeted by the city for successfully arguing their original valuations were wrong. Rocky Neufeld has asked Manitoba's Court of Queen's bench for an injunction preventing Winnipeg chief financial officer Mike Ruta, top tax assessor Kevin Shields and other officials "from continuing to harm" his business and economic interests. It is alleged the city of Winnipeg withheld information from the valuator in a breach of law. Neufeld claims Winnipeg has damaged his valuation reputation and business and is asking for damages.

Lexology who claims to deliver the most comprehensive source of international legal updates, analysis and insights for law firms and in-house counsel, is saying Intellectual property is 80% of the value of a business. As a business valuator I am in agreement with that. The problem of course is having ways to measure that intellectual property. At the same time we have a New York Times article talking about 180 separate cases of potential intellectual property theft from North American institutions, mainly by people with a Chinese connection. The allegations are that they are stealing "scientific ideas, designs, devices, data and methods for treatments and tools. That is a lot of value leaving the country that must be stopped. No country can survive allowing this kind of IP theft to continue.

Higher Valuation:

Tata Consultancy Services, a leading global IT services, consulting, and business solutions organization, has won the Intellectual Asset Management Asia IP Elite award in the category 'Internet and Software Team of the Year' at the Intellectual Property Business Congress Asia 2019 in Tokyo. Their modus operandi seems to be providing the tools for employees to develop and monetize patents and other reusable intellectual property across multiple industries. The end result is an increased valuation for the company clients. More value more clients.

The Value of a Brand

Look no further than your breakfast table to see the value of a brand. Honey is one of the foods most often tampered with. Pure honey in many countries is almost impossible to find. One can go to YouTube and find instructions on how to "make fake honey" which these fraudsters mix with real honey to rip off consumers. What you think is honey may in fact be 5% honey. Olive oil is another huge rip off perpetrated upon consumers.
Trustworthy brands can help you to buy the genuine product. In my case the KIRKLAND brand sold by Costco is my answer to buying pure honey and olive oil. Chosen Foods is my brand choice for pure Avocado. Of course it depends upon the corruption level of the country and the security of the supply chain of the merchant you buy from. In some countries they find a product that looks or tastes similar and fraudulently copy the packaging and labels. Clients of mine who had a distillery found that out when they tried to sell in international markets. Buying trustworthy brands from reputable merchants is your best bet at getting the real products. This is why good brands have a high valuation.

Adding Value through Goodwill

Goodwill is almost impossible to gauge. A certain small grocery chain owner Alex Campbell (now deceased) taught by example about how one might grow your valuation through goodwill. What is goodwill. The story goes that Buck Orange growers in California in 1997 were in huge trouble. The farmers told Thrifty Foods that they needed at least $12 per box to stay above water. "The Alex Campbell people said NO". They said $12 is not enough and offered the farmers $16 a box. A lot of tough old farmers and their families wept and couldn't believe someone would help them save their homes and farms.
Years later a lawn sprinkler business owner was working at a nice home in Victoria and was invited into the home for dinner at 7:00 PM. Being wet and dirty from working in the yard the sprinkler guy said "no I'm too dirty" Alex Campbell replied, "You are not too dirty to eat here, and if you don't come in you d on't get paid". Alex Campbell makes you proud to be a Canadian.

Valuation, Location, and Freedom are tied together.

While enjoying a coffee and some cheesecake (upscale coffee shop) on the beach in the Philippines on November 11th (Canadian time) I was trying to explain to my wife why we were paying $7 Canadian for a piece of Cheesecake. We were sitting next to some Chinese people who were very interested and taking video of Hong Kong news. I asked if they were from Hong Kong and they said "no, China' I asked who were the good guys and who were the bad guys. The guy got his phone translator and we began our conversation. His version was the students in Hong Kong were bad and pawns of the Americans and that the police attacking the demonstrators were good.
I told him I was a Canadian and I supported the Americans and the Hong Kong people who wanted freedom.
Chinese guy proceeded to tell me how good and how peaceful China was.
We debated freedom but my point of Chinese censorship was quickly proven when the statements I made were rejected by the Chinese Translation company, as they were critical of China. Chinese guy had to agree I was right that speech was limited in China. He couldn't understand when I told him Canadians and Americans were willing to die for the right of free speech and that is why we supported Hong Kong.
I explained to him that Canadians had a complaint against China for stealing our intellectual property as in the case of Nortel. No surprise Nortel went broke. The Chinese stole the technology and reproduced the products while being subsidized by the Chinese government.
I told him that Canada and the US did not want to trade unless they quit stealing our technology and playing by fair trade rules. I still remember Kevin, father of my daughter's friend who lost a pile of money on Nortel.
Chinese guy didn't care so much for me.
I held back and didn't tell him that Canadians and Americans would not give up our freedom of speech for pieces of bread.
Perhaps I held back because it seems in Canada today most NDP, Liberal and Green supporters are willing to give up freedom for bread.
Now back to valuation, the price of cheesecake, location, and freedom.
The cheesecake cost was 275 Peso or $7 Canadian because the coffee shop was located on a stretch of beach beside a big new hotel catering to short term tourists with money rather than locals like us. Because of the location, the coffee shop valuation should be higher also. However, because of the risk of the security of any lease in the Philippines, that coffee shop would be somewhat of a gamble. Now let's look at a similar coffee shop situation in China. If the guy who owns the coffee shop starts to criticize the Chinese President he will lose his coffee shop and maybe his life if he were to persist. Better to be a citizen of Canada, US, UK, Australia, Singapore, Japan, South Korea, or somewhere else where we have some semblance of freedom.

How to value / daycare valuation

Daycare is an industry that despite a nightmare of regulation it is making reasonable returns for corporations in the US and Canada. Small business owners providing the same service can make a living and a profit but it can be a minefield to those who don't pay attention to detail. The whole business and its valuation hinges on the lease, permit, and agreement usually with a school or community centre. If the business has a private lease or owns the building through a related entity the valuation is much stronger. Ownership can be summed up in 3 words; careful navigation necessary.

ONE MAJOR CLIENT

How a good business can get a bad valuation because of reliance on one client.
Business was started with just one client and the client and the business grew together. Many years later the business is grossing a million dollars a year and is profitable but and this is a BIG but, 90% of the business is still the one client. That client is at retirement age. The client business is good and it is quite profitable. The family might take it over but it is more likely to be sold to a bigger entity who can pay more and bring in the efficiencies of scale. One of those efficiencies is almost certainly going to be my client's million dollar a year account. Ooops, now what is the business worth? Now the business is losing money and scrambling to build new clients in a market sector that is not expanding and margins are shrinking. Buying that business based on the last 3 to 5 years of profit would not be so clever and the valuator who didn't take this into account would be rather foolish. The 25 Factors Affecting Business Valuation is hard to fool.

Saudi Aramco thinks they will be able to raise $100 Billion with maybe perhaps" a Return on Investment of 4.5%
Then as their plan would be; the investors might then pressure local governments to support the Saudi regime to protect their investments.
I might be a small-time valuator in the scheme of things but this fools nobody. They will raise money from the wealthy in Saudi Arabia who are being offered a deal they can't refuse and there is little else to be said. My guess is they will raise 25 to 40 Billion at best. I would like to be proven wrong.

Brands and Special Interest Purchasers 20 X SALES

Casamigos was George Clooney's tequila company valued at 700 Million and another 300 Million based on sales. Many people thought the Brand purchased in 2017 by Diageo for 20 times 2016 gross sales was out to lunch. Fast forward to 2019 and it would seem George Clooney has a net worth that suggests the total sale value of a BILLION DOLLARS was in fact realized as sales are strong and growing. Sales were reported to be up 61% in the first year after sale making Casamigos the third largest premium brand of tequila in the US. I have a whole file of brand valuations I use for reference and I like to check in on them once every year or two.

The value of your internet footprint and social media is of course one of the "25 Factors Affecting Business Valuation" and the recent Coty Inc 600 Million investment for a majority stake in Kylie Jenner's skincare and makeup business proves just how important social media can be to some businesses. Coty is basing a large amount of the valuation on Jenner's 260 Million social media followers in a bid to attract a younger buying audience. Meanwhile in Edmonton you didn't want to pay for the time required to update your website and social media accounts. Silly you.

Special Interest Purchaser/Merger example: Enersolv, a Vancouver-based design-build-operate mechanical contractor specialising in green HVAC systems for mixed-use developments, announced the acquisition of Craftsman Mechanical, a Surrey-based plumbing systems specialist. The deal creates an expanded workforce of plumbing, heating, ventilation and air conditioning experts delivering energy efficient and economically sustainable solutions for mixed-use commercial and residential developments. Craftsman Mechanical is a Surrey-based plumbing and heating solutions company with a 15-year track record in residential construction, commercial construction and service/maintenance solutions. Valuation methodology, price and terms have not been announced.

There is pressure on the valuations of restaurant delivery companies.
Food delivery from restaurants is popular and seems to be growing. McDonalds delivery is huge. It started in 1993 in parts of the US and is now available in about 30 countries across the world. In many countries it is done with motorcycle couriers.
As a Valuator when I look at some of these recently reported valuations, I think wow. There is room for some pain.
Grubhub recent valuation 1.3 billion
Uber Eats recent valuation 2.6 billion
Postmates recent valuation 400 million
Delivery.com recent valuation 4 million
Caviar recent valuation 100 million
Eatstreet recent valuation 6 million
WAITR recent valuation 196 million
DELIVEROO recent valuation 584 million
JustEat recent valuation 1.1 billion
These are reported valuations and may be outdated.
Some of these companies have to be a good short. And yes, I am available to help you figure out which ones. Also remember this is not a complete list by any means. We would take the information you have and run it through the 25 Factors.


A small French restaurant in Toronto is fighting back rather than being pushed out of business by property tax increases. The Toronto valuations on property would seem to be done by figuring out what the city says is "best use" for the property. Often that means a condo building. Then these wise folks at city hall tax the business as if it were a condo building instead of a small business. This logic is forcing small businesses out of business. Jobs and businesses are gone. Oh well there is always McDonald's home delivery.
The video is very well done.
Search it on google.
"Video by upscale Toronto bistro says it's being eaten alive"

ARE VISA AND MASTERCARD TRYING TO SCARE PEOPLE?
IS IT SAFE TO DO ETRANSFER IN CANADA?


Currently Canadian Banks are doing over a million eTransfers a day. At $1.50 each this is over half a BILLION dollars a year for exchanging digits of which Visa and Mastercard get NOTHING.

I called the Royal Bank and was directed to Monique in Winnipeg.
I asked her directly.
(1)Is it safe to do eTransfer in Canada?
AND
(2) Are Visa and Mastercard trying to scare people into not doing eTransfers in Canada?

According to Monique at the Royal Bank call centre in Winnipeg eTransfers are very safe.
There are some conditions.
You have to send the money to the correct email address.
If there is fraud as in someone hacking your system and sending fraudulent eTransfers Monique advised me that the Canadian banks protect the client and investigate as they do with any other fraud.
Monique could not address the issue of if Visa and Mastercard were attempting to scare people away from eTransfer.

Rule of Thumb in Business Valuation.
This is generally the lowest common denominator and a huge RED FLAG.
In fact there are 25 "Rules of Thumb" which I cover in my book "25 Factors Affecting Business Valuation"
If all of the 25 factors were not considered, your VALUATION might not be something you want to trust.
Imagine a clinic where all the doctors were leaving compared to the same financials in a clinic where all of the doctors are happy and staying on.
Imagine if 95% of the business was with one client.
Imagine if a business is located in an old mall and there is a 6 month demolition clause that includes renovations. If your competition wanted your space and were willing to renovate and make the mall look better you could be out and your clients are walking into your competitor.
The Rule of Thumb is no substitute for the "25 Factors Affecting Business Valuation"

Difference between an Asset Purchase and a Stock Purchase:

Asset Purchase:
If you are the buyer there are generally tax advantages to an asset purchase. The opposite is true if you are the seller.
There is generally much less risk for the buyer in an asset purchase.
For the buyer an asset sale is a much cleaner sale and defined risk.

A Stock Purchase;
Let us talk about some reasons you may want to do a stock purchase.
In the event you are purchasing a Walmart supplier, you may want to purchase from someone who has a holding company, who owns the operating company, who supplies Walmart.
Walmart or other suppliers may have clauses that say any supplier deal must be renegotiated if the operating company is sold. Walmart and other large distributors can be brutal. But if you buy the holding company you would be in a better legal position to avoid penalty.
The same may be true for insurance and other policies or lines of credit.
Due diligence is your friend along with a good valuator.

Arbitrage

1. The simultaneous or quick buying and selling of securities, currency, or commodities in different markets or in different derivative forms in order to take advantage of differing prices for the same asset. "profitable arbitrage opportunities in the financial markets and other places"

In my Professional Opinion "Arbitrage" is not very productive to society. True it can help to keep things level, but it adds nothing to the total sum unless it is used somehow for recycle and saves things from being part of the world's trash.

Our economy needs to reward the innovators, the growers, and the producers of both tangible and intangible goods that make life better, rather than the manipulators who stand in the way and tax productivity and innovation.

Is Bitcoin the Freedom Currency?

When Bitcoin reach $160 in 2013 I sold mine and took a profit of about $2,000
Probably a good call as if I had kept them where they were within the exchange they would have been stolen. My bitcoins could have been worth $2M at one point, but stolen nevertheless.

Prior to selling I wrote a paper on Bitcoin and realized correctly that the value was in the "blockchain" that had not been broken. The blockchain was the valuable piece. Once blockchain became usable for other endeavours Bitcoint still retained value. Why.
BECAUSE PEOPLE BELIEVED IN IT. Those people who believe in Bitcoin believe it gives them a form of freedom.

I would argue that the real "FREEDOM" currency in the world for many years to come is the US DOLLAR. What currency do the worst dictators and thugs in the world generally want to be paid? US Dollars. US Dollars are easily used anywhere in the world. WHY? Because people in the whole world trust the US Dollar more than any other currency.
I believe there is a psychological "FREEDOM" value to the US Dollar. I believe there is a similar psychological relationship to US and Western Brands. Freedom.

25 Factors Defeat Unethical Clients:

I got an email from a business owner going through a divorce/separation. He had a moving company that he needed valuing. According to this owner the business was worth nothing. He wanted to know what the down payment would be on the valuation. The wording of his email was suspect so I decided to research this guy a little before making contact. "Down Payment" it turned out, was a big deal for this guy and his associates. When they showed up for the moving job they would collect the down payment in cash. (several hundred dollars) Once all your personal belongings were on the truck this mover and his associates would demand the rest of the money. The problem was the amount demanded was several hundred dollars higher than the quote.
It was always claimed to be a mistake on the part of an associate who quoted you a wrong price and who was not available right now. The owner insists you pay in cash now or they unload your belongings on the street and keep the deposit. It is hard to believe these people could still be doing business with so many dozens of people making these sort of claims against them. Had I been foolish enough to do a valuation for this person/company, one could be sure he would have demanded a particular value he had in mind and would tell me he was not going to pay unless I did the valuation to his satisfaction. Unfortunately these people always seem to be able to find someone to give them the answer they want. By insisting on using the "25 Factors Affecting Business Valuation" we are able to thwart this type of client as the 25 Factors inevitably expose the true value and what is going on in a business.

Purpose is the first factor we look at.

For what reason does the client need the valuation.

Value to which entity.


Is there a Special Interest Purchaser in the wings? Let us use a CNC business as an example: If it is for sale purposes then one must look at the possibility or likelihood of someone purchasing the business who will run it the same as the seller has been doing. Conversely if you are purchasing a CNC business and you are going to manufacture your own products within the company, there may be some efficiencies that you will realize but are you willing to give the dollar benefit of your efficiencies to a seller?
If there were several Special Interest Purchasers then someone might pay more for the opportunity.
If the purpose was for divorce then one has to look at the value that could be achieved
if the company were to be actively marketed over a 4 to 6 month period in an all cash sale.
These are just some of the reasons why Purpose has a large influence on value.

 

 

BUSINESS VALUATION INCOME VALUATION FIRM TORONTO APPRAISALS GTA
CERTIFIED BY VALUATOR ERIC JORDAN, CPPA

(416) 639-6127

 

CPPA EXPERIENCE RECOGNIZED BY COURTS

One can go to www.canlii.org and in the Document Text search field enter “Canadian Personal Property Appraisers Group” When you hit the search button you should find at least 8 cases you can review.

 

JUDGES VALUE EXPERIENCE

https://cbvinstitute.com/wp-content/uploads/2010/10/Credibility-Under-Scrutiny.pdf


WE WIN IN COURT

Need a Bulletproof Business Valuation?

"I greatly appreciate the work Eric did on the Valuation of my company. It stood up in court. (April 2017) The Judge soundly admonished the Chartered Business Valuator who tried to contradict Eric's valuation. If someone needs confirmation and wants to speak to me, Eric has permission to release my number." (Antoine)

Second Opinion on a Questionable Valuation?

"We find that most small business valuators concentrate on Asset, Market, and Income approaches developed in the  1970's. These are generally easy to defeat in 2019 as most businesses are now made up of 75% or more in "intangible assets" these valuators neglect, or have no means, to properly measure.

 

Accounting and Business Valuation are two different things.

Experience taught me the only people who can effectively be trained in valuation using the 25 Factors Affecting Business Valuation are those with 10 or more years experience in running their own small business.

25 FACTORS AFFECTING VALUE

This is the key Point: If someone is presenting or proposing a valuation without taking these factors into consideration the valuation number is likely to be misleading and almost certainly not accurate for a small business.

  • Financials
  • Return on Investment
  • How has R&D been accounted for?
  • Shareholder Agreement (if one exists)
  • Value of Employees (cost of recruitment and training as a group)
  • Client Base and cost to rebuild
  • Value of Supply Chain
  • Value of Distribution Network if one exists
  • Internet Presence and Use (social network)
  • Dominance if any in the marketplace
  • Knowledge Base of Owner and Employees
  • Processes and Procedures Documentation (How well are all aspects of the company documented?)
  • Industry Averages
  • Lease Terms
  • Leasehold Improvements
  • Equipment
  • Inventory
  • Risk
  • Currency Fluctuations and Geopolitical Considerations
  • Opportunity
  • Liquidity
  • Leverage - Cost of money.  Is leverage applicable and if so at what risk?
  • Minority Interest (if applicable)
  • Special Interest Purchaser (Partners are also special interest purchasers as they have more knowledge, interest, and opportunity, with less risk than regular buyers.)
  • How well is the business/practice expected to function with changes in management? (if applicable)

Return on Investment is always my first and last consideration



Eric Jordan, Valuator
Valuation Analyst
Nation Wide
1-800-606-0310

eric@pin.ca

FREE CONSULTATION

RECEIVED: DECEMBER 7, 2018

Eric,

Eric was wonderful to deal with. He was very knowledgeable on the topic of business valuations and took the time to listen to my fears and concerns. He asked me questions and gave me sound advice that helped me feel at peace. Eric was honest and wise and I would fully trust his experience. Although Eric didn't need to perform a business valuation for me at this time he listened to my concerns and was honest about the services he offered. Eric also talked to me for a long time getting a scope for my situation and didn't charge me at all for what services he did provide. Thanks Eric.

Amber.

 

 

VALUATION EXPERIENCE - ERIC JORDAN

 

CPPA - Detailed Experience

My name is Eric Jordan. I am a CPPA which means Canadian Personal Property Appraiser. There are over 700 CPPA's across Canada. I specialize in Business Valuations. The Canadian Personal Property Appraisal Group provides members a proper legal structure with which to do valuations. They do not give instruction on anything other than how to use the forms and templates they provide to make a legal appraisal or valuation report. I am providing the following information on my experience because experience is the key ingredient in my credentials and my experience is extensive, relevant and when combined with my proprietary system I describe in the book "25 Factors Affecting Business Valuation" allows me to deliver what many believe to be the most accurate small Business Valuation available in Canada today.

 

EARLY LESSONS

I was born in 1952 in Southwestern Manitoba. Like many other boys that were born on a farm / ranch I was a member of the local 4H beef club. The Canadian 4-H motto is "Learn To Do By Doing". It was at the age of 12 to 15 that I received my first training in valuing or judging. My 4-H group provided a lot of training in judging cattle. Like business valuation the process involved many factors. I enjoyed this and did well at the judging competitions.

 

I got started in the construction industry at 16 learning about steel stud framing, drywall, drywall taping, acoustical tile, and other types of ceilings. I took training as an apprentice and at 19 years-old I was a sub trade foreman at the construction of J H Bruns Collegiate in Winnipeg Manitoba.

 

LEARNING TO LISTEN

I soon started my own business doing textured ceilings. I learned a lot of important lessons while running this business. The most important was learning to listen. I did specialized work. I would texture the ceilings in houses that were occupied as I had perfected a way to do this while protecting all the furniture and accessories in an effective and efficient manner. I would book work over the phone and set up a route that could take me from Manitoba to Alberta and back. One did not want to arrive at a house and find the work was impossible to do or that the owner was not likely to pay on completion. I was successful in that business. The key was to listen, listen, and listen. Asking the right questions and then listening carefully was critical to finding the correct information. Hearing the nuances became easy after a while. This is a very useful tool I use to this day while seeking information in the valuation process.

 

INTRODUCTION TO SMALL BUSINESSES

It was at about this time I got involved with the advertising business. I did advertising placemats across South Western Manitoba and Saskatchewan. If any of you are old enough and frequented Buddy's Steak Ranch on Albert Street in Regina, SK or Aunt Sarah's Restaurant in Brandon MB. you may remember my placemats with a character called "Prairie Tom" in the middle surrounded by squares of advertising.

I don’t believe my creation died when I quit doing the placemats. A short time after that "Coffee News" publication started in Winnipeg, Manitoba and the character they use to this day looks amazingly similar to "Prairie Tom". I believe I at least partially inspired the creation of that very successful publication and  I am very happy for that. The placemat advertising business put me into hundreds if not thousands of small businesses where I got to deal with the owners. Great experience for my future valuation career as my eyes were beginning to open as to what really happened in a small business. .

 

AUCTION BUSINESS - Learning to See

In about the same time period I had a mentor Charlie Salfries who was sure that I should be in the auction business. I ended up doing about six auction sales in 1980 and held an auction license in Brandon Manitoba. This was a real learning experience for understanding value and being able to see and feel how live events work. Nobody understands value better than auctioneers. When the Canadian Personal Property Appraisers Group started in 1995 most of the first members were auctioneers from across Canada.

 

ONE ON ONE - With Hundreds of Small Business Owners.

The next business I got involved with was the movie business where I owned several rental stores and operated a movie broker business. In those days movies were a sideline to almost any kind of small business. I walked into thousands of small businesses and introduced myself. Hundreds ended up dealing with me. During this two to four hour process of dealing with the client on these video tapes, I really started to learn about what happened in a small business. Not all of the money went into the till. These business owners were happy to have someone to confide in. They would tell me amazing ways they saved on paying tax and all sorts of quirks about their particular business and industry. My experience extended to the US, as I purchased movies from small businesses then leased and sold these movies back into Canada. From this experience I could now understand what really happens on the ground in a small business as compared to what shows in the financials. This was invaluable one on one experiences with hundreds of different business owners across all sorts of industries. One can never learn these things in academia and I have a real edge on those who don't have this type of experience, most especially those situations where bookkeeping is suspect or non existent.

 

PIN.CA - HELPING BUSINESS OWNERS ADVERTISE FOR BUYERS

Some video clients would tell me that they were selling so I should not leave movies with them as their business would be sold and gone by the time I was back in three months. My experience at that time suggested otherwise and I would ask them to just call me if they sold and leave the movies with a neighbouring business in the town. Two years later the business would often close down "unsold" and there would be an empty building for sale.

This is where I got the idea to set up an Internet showroom or catalogue of businesses for sale on the Internet. I was correct and the Pin.ca website has been successful helping business owners to find buyers for the past twenty years.

 

VALUATION

Working with hundreds of small businesses, advertising to the market place I got to understand about valuation. I had a client who was a Chartered Accountant who helped me to understand from the accounting industry viewpoint,  how they look at valuing a business. I knew however that that was not the whole story. At about the same time I had a client who was a Resume Broker. He had a formula for getting inside his clients head and finding out what intellectual property they retained in their brain. He would write that into a resume and these people would easily find a job. I knew that same thing would work with a small business. A friend of mine Reid Nunn had spent a long time in the insurance industry and he taught me a lot about risk. Between those three things I was able to start to put the pieces together for doing an accurate business valuation and that was the beginning of the 25 Factors Affecting Business Valuation.

 

BITCOIN AND INTANGIBLE ASSETS

By 2013 I had my valuation process fairly well in place had spent thousands of hours researching intangible assets which I felt were the most valuable part of a small business. I was doing business valuations and I decided to test my process on the toughest intangible asset in the world "Bitcoin"

I purchased 78 Bitcoins and proceeded to test.

My process led me to believe the key element in Bitcoin was the "blockchain" and for the reason of the blockchain, I deemed that Bitcoin would have value in the future. I predicted $500 Bitcoin, $1,000 Bitcoin and the real possibility of much higher. I think everyone can agree my analysis was correct and Blockchain has proven valuable.

 

CPPA CERTIFICATION (National Accreditation)

This brings us to 2015. I had a formula and a lot of experience but I lacked the legal structure to present a business valuation to a court. That is when I reached out to the Canadian Personal Property Appraisers Group  in London, Ontario. I got certified through them and became a CPPA. Now I had a proper legal structure for doing my business valuations. Canadian Personal Property Appraisers Group teaches you the legal structure you must use to produce a valid Valuation. The CPPA certificate for me now is really a moot point as my experience and the legal structure I use stand on their own.

 

BOOK AND FREE PDF

In 2017 I wrote the book "25 Factors Affecting Business Valuation" which gives a good overview of my proprietary process. It doesn’t teach you how to do a business valuation but it does let you know what must be measured.

 

Send an email to eric@pin.ca and I will be happy to send you a free PDF of my book.

 

INCOME VALUATION

For those people who need Income Valuations done, I offer my experience dealing with thousands of small business owners across Canada. Hundreds of these were close business relationships forged over time. This combined with my credentials should put me at the top of any list for an INCOME VALUATION.  

 

Experience is the key factor. I have done hundreds of business valuations and my valuations have been accepted by CRA and Court of Queen's Bench. Numerous divorce proceedings across Canada have been concluded using my valuations, and filed with the courts. (including Quebec)

 
ARTICLES

There seems to be a lot of ongoing discussion on the valuation of Saudi Aramco.
My position stays the same. I believe what will happen is the Saudi leaders will be able to strongarm the price only moderately and only for a short period of time. I predict it will take less than 4 months for the Saudi Aramco value to fall to reflect a valuation in the range of Apple, Amazon, and Google. In the long game the Saudi Aramco plan may be similar to that of the Tobacco companies who diversified into many other things. As I have stated before there is a psychological value to freedom and there may well be some "politically correct" factors at play here. For the Saudi regime this is going to be a complicated effort not so dissimilar to herding cats or pushing string uphill.

Purpose is the first factor we look at.

For what reason does the client need the valuation.

Value to which entity.


Is there a Special Interest Purchaser in the wings? Let us use a CNC business as an example: If it is for sale purposes then one must look at the possibility or likelihood of someone purchasing the business who will run it the same as the seller has been doing. Conversely if you are purchasing a CNC business and you are going to manufacture your own products within the company, there may be some efficiencies that you will realize but are you willing to give the dollar benefit of your efficiencies to a seller?
If there were several Special Interest Purchasers then someone might pay more for the opportunity.
If the purpose was for divorce then one has to look at the value that could be achieved
if the company were to be actively marketed over a 4 to 6 month period in an all cash sale.
These are just some of the reasons why Purpose has a large influence on value.

25 Factors Defeat Unethical Clients:

I got an email from a business owner going through a divorce/separation. He had a moving company that he needed valuing. According to this owner the business was worth nothing. He wanted to know what the down payment would be on the valuation. The wording of his email was suspect so I decided to research this guy a little before making contact. "Down Payment" it turned out, was a big deal for this guy and his associates. When they showed up for the moving job they would collect the down payment in cash. (several hundred dollars) Once all your personal belongings were on the truck this mover and his associates would demand the rest of the money. The problem was the amount demanded was several hundred dollars higher than the quote.
It was always claimed to be a mistake on the part of an associate who quoted you a wrong price and who was not available right now. The owner insists you pay in cash now or they unload your belongings on the street and keep the deposit. It is hard to believe these people could still be doing business with so many dozens of people making these sort of claims against them. Had I been foolish enough to do a valuation for this person/company, one could be sure he would have demanded a particular value he had in mind and would tell me he was not going to pay unless I did the valuation to his satisfaction. Unfortunately these people always seem to be able to find someone to give them the answer they want. By insisting on using the "25 Factors Affecting Business Valuation" we are able to thwart this type of client as the 25 Factors inevitably expose the true value and what is going on in a business.

Profiles of some of our previous clients:

  • Multi Million Dollar Distribution Business- Valuation for purpose of sale.
  • Plumbing and Gas Business- Valuation for purpose of divorce proceedings.
  • Multi Million Dollar Eco Tour Business- Valuation for purpose of expansion loan.
  • Law Practice- Valuation for purpose of sale.
  • Lawn and Yard Maintenance business- Valuation for purpose of divorce proceedings.
  • Art Studio Franchise- Valuation for accounting purposes and CRA requirements.
  • Plumbing Business- Valuation for purpose of divorce proceedings.
  • Irrigation and Snow Removal Business- Valuation for purpose of divorce proceedings.
  • Large Retail Bakery- Valuation for purpose of sale to employee over 5 years.
  • Software Distribution rights in Canada- For Australian Parent Company (Agency Dispute.)
  • Janitorial Supply Business- Valuation for purpose of partnership dispute.
  • Tree Pruning and Lawn Business- Valuation for purpose of sale.
  • Battery Distribution Business- Valuation for purpose of sale.
  • Software Testing and Quality Assurance Company- Valuation for purpose of partnership dispute.
  • Blind Manufacturing and Installation Company- Valuation for purpose of legal action in partnership dispute.  This went to court on May 27, 2016 and resulted in our client receiving over 80% of the amount he sued for.
    Client is available as a reference.
  • Classic Car Renovation Business- Valuation for multi-million dollar lawsuit in Florida launched by Canadian partners.
  • Dance Studio- Valuation for purpose of establishing value for pending sale.
  • Cross fit GYM- Valuation for purpose of establishing a viable price for buyer to offer.
  • Jim's Burger Location in US- Valuation for purpose of divorce proceeding.
  • Two Wholesale Bakeries- purpose of the valuation was to find values so the companies could merge.
  • Sign Manufacturing Business- Valuation for purpose of a minority shareholder leaving company.
  • Landscaping and Excavating Company- Valuation for purpose of divorce.
  • Day Care Facility- Valuation to support litigation and negotiation for damages inflicted by City in zoning error.
  • Accommodation Business- Valuation for purpose of sale.
  • Smoker Operation (8 pigs at a time in size)- Valuation for tax purposes.
  • Flooring Business- Valuation for purpose of sale.
  • Retail Wine Business (Franchise concept)- Valuation for purpose of sale.
  • Prop Business- Valuation for purpose of partnership buyout.
  • Computer Retail- Valuation for purpose of potential purchase.
  • Music Composer Business (original soundtracks for documentary movies and videos)- Valuation for purpose of divorce proceedings.
  • Two Pharmacy Locations- Valuation for purpose of sale consideration.
  • Luxury Bed and Breakfast combined with Events Business- Valuation for the purpose of sale.
  • Pool Building Company- Valuation for purpose of sale to family.
  • Automotive Related Business- Valuation for purpose of sale.
  • Specialized Manufacturing Firm within Printing Industry- Valuation necessary as someone expressed interest in purchase.
  • Daycare- Valuation for purpose of possible sale. (Interested Purchaser came forward.)
  • Focused Builder- Valuation for purpose of establishing value for employee buy in.
  • Software Maintenance Contractors- Valuation for purpose of possible merger, (many millions of dollars.)
  • Chiropractic Practice - Valuation for purpose of buy in.
  • Wholesale Food Business- Valuation for purpose of settling partnership dispute.
  • Accounting Firm- Valuation for purpose of divorce.
  • Call Centre- Valuation for internal purposes.
  • Hair Salon- Valuation for purpose of employee buy in.
  • Convenience Store and Gas- Valuation for purpose of lease dispute.
  • Specialized Builder of Restaurants- Valuation for purpose of employee buy in.
  • Wholesale Food Manufacturing and Distribution- Valuation for purpose of partnership buyout.
  • Retail Sporting Goods Franchise- Valuation for purpose of purchase.
  • Diesel Repair Shop- Valuation for purpose of partnership dispute.
  • Cellular Repair Company- Valuation for purpose of internal planning.
  • Roofing Company- Valuation for purpose of partnership consideration.
  • Upscale Personal Services Company- Valuation for purpose of internal planning.
  • Specialized Wheel Business- Valuation for purpose of sale.

How Financials Can Be Deceiving:
(This is the kind of practical solution offered by our system.)

Accounting for tax purposes is totally different than interpreting financial statements for Business Valuation Purposes. Let us give you just one example: (Think Partnership or Divorce)

For tax purposes R&D is an expense in the year the R&D occured. For the purpose of an accurate valuation the R&D should be amortized over more appropriate period. R&D may be in fact cummulative. HUGE DIFFERENCE

The financials must be normalized to reflect proper treatment of R&D. If we didn�t do this a company could spend 95% (or all) of the profit on R&D and might successfully claim the company to be worth very little for a short period of time. Perhaps not fraud but certainly manipulation, depending upon the purpose. (Divorce or other partnership)


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Testimonials at bottom of page.

Eric Jordan, Valuator
Free consultation.
Call or email now!


(416) 639-6127
eric@pin.ca
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JUDGES - LAWYERS - PARTNERS IN DIVORCE PROCEEDINGS
PARTNERS IN BUSINESS DISPUTES - BUSINESS BUYERS BUSINESS SELLERS - CANADA REVENUE AGENCY

Bring the judge a valuation based on experience and logic.
WHAT KIND OF BUSINESS VALUATION DO YOU NEED?

 FAIR MARKET VALUE - ONGOING OPERATION
 FAIR MARKET VALUE - ASSETS IN PLACE BUT NOT OPERATING
 ORDERLY LIQUIDATION
ORDERLY LIQUIDATION VALUE OVER TWO TO FOUR MONTHS

INSURANCE VALUATION
Are you insured for replacement costs of rebuilding a business after a loss including Intangible Assets? Have your insurer acknowledge and accept valuation prior to buying insurance.
Value of recruitment and training of a group of employees to the position of cohesively working together as they were prior to the point of interruption, damage or loss.
Value of rebuilding client base to where it was prior to the point of interruption, damage or loss.
Value of reimplementation of systems and procedures in place prior to the point of interruption, damage or loss.

LOANS:
Banks are losing a lot of business these days to lenders who understand intangible assets. Define the value of your intangible assets. If your bank is not considering the value of your clearly defined intangibles you need to find a new lender who is better educated in your business model.
ABOUT US:

Our Valuations are generally half price or less than others. This is possible because we are more focused on Small Business Valuations and not working for Corporations.

The niche we serve is Small Business Valuations with special expertise in understanding intangible assets that are often missed as they don't show up on the Balance Sheet. In addition to Financial Statements I take into account; processes, procedures, value of supply chain, value of distribution network, knowledge base of owner and employees, value of employees (cost of recruitment and training as a group,) value of client base, Internet presence and use, documentation and risk.

The rate of return on the real Normalized Net Income is always the first and last consideration.

Value to who? The bank, the seller, the buyer; our valuations can include more than one.
How to value a Toronto business; the valuation or appraisal is a process.  Once we have all of the information we need, via the intake conference, your valuation report will be delivered to you in approximately one week. We refer to our evaluation as a Value Statement.
WE COME AT THIS FROM THREE DISTINCT VIEWPOINTS:

EXISTING ACCOUNTING:

The view from an accounting perspective; relying on the the numbers created by the clients' existing accountant, then finding the real "normalized net income" through a proprietary process.


Toronto

25 Factors Affecting Business

Valuation

÷ø
By Eric Jordan (CPPA)
Copyright 2017; 2018 Eric Jordan Publisher by Eric Jordan 209 – 1027 Pandora Avenue

Victoria, B.C. Canada ISBN 978-1-7750074 Printed in China`

The author is the proprietor of www.pin.ca website established for over 20 years (January 1998)

promoting business opportunities and businesses for sale.

Eric Jordan is the host www.BusinessforSaleRadio.com heard on many radio channels across the

USA, Canada and around the world.

Please visit the website for local times ad stations.
i

25 Factors Affecting Business Valuation
Contents ÷ø
Acknowledgments.......................................................................... iv
Preface............................................................................................. v
Introduction..................................................................................... 7
Factors Affecting Business Value
Factor 1: History ........................................................................... 14
Factor 2: Purpose .......................................................................... 15
Factor 3: Financials....................................................................... 16
Factor 4: Research & Development (R&D).................................. 19
Factor 5: Shareholder Agreement ................................................. 23
Factor 6: Value of Employees....................................................... 25
Factor 7: Valuing Distribution and Client Base............................ 27
Factor 8: Value of Supply Chain .................................................. 28
Factor 9: Social Network - Internet Footprint............................... 29
Factor 10: Dominance in the Marketplace.................................... 30
Factor 11: Processes and Procedures ............................................ 31
Factor 12: Company Documentation............................................ 32
Factor 13: Industry Averages........................................................ 34
Factor 14: Lease Terms................................................................. 35
Factor 15: Leasehold Improvements............................................. 37
Factor 16: Equipment.................................................................... 38
ii

25 Factors Affecting Business Valuation
Factor 17: Inventory...................................................................... 39
Factor 18: Business Risk including Liquidity............................... 40
Factor 19: Currency Fluctuations and Geopolitical
Considerations.......................................................... 41
Factor 20: Opportunity.................................................................. 42
Factor 21: Leverage - Terms and Cost of Money......................... 43
Factor 22: Minority Interest .......................................................... 44
Factor 23: Special Interest Purchaser............................................ 45
Factor 24: Redundancy in Management ....................................... 46
Factor 25: Return on Investment................................................... 47
Operations Manual Template........................................................ 43
Conclusion .................................................................................... 54
iii

Acknowledgments ÷ø I
want life father, who to Fred dedicate made and me Edith this who book Jordan I am. to I who
the am teachers taught grateful by and for example. my mentors mother I would in and my
like to thank Roy and Earle Hamilton; John Koelle; Reid Nunn; Debby Schlutter; Bill Massey,
my cousin; Ange, my daughter; and all the family members who helped me along the way. A
special tribute to Charlie Salfries who was my first real mentor and who made me realize I could
be whoever I wanted to be. Thanks Charlie.
iv

Preface ÷ø

This book offers 3 things:
1. Intangible Assets and Intellectual Property
This book will prove that the average business today consists of 70% to 80% Intangible Assets.
2. 25 Factors Affecting Value
I will show the 25 main factors affecting business valuation that must be measured in order to
evaluate a business. Most of these factors are intangibles. I will explain how and why these
factors affect the value of a company. The methodology becomes clear and is proven in the
current marketplace snapshot.
3. Operations Manual Template - INCLUDED FREE - Processes, procedures, systems, and the
documentation of those factors are generally contained in what is commonly called an
Operations Manual. Having an up to date functional operations manual could add up to 25%
more value to your company. It is imperative that everyone have one of these. I have enclosed a
free template. This template will help you build your own company specific operations manual
that, when filled out, will be the best insurance you could have for your business, your
employees, your clients and your family. It will also add tens of thousands to your value; some
larger businesses could gain hundreds of thousands.
v

25 Factors Affecting Business Valuation
Links from real and accredited people and reputable sources, easily verified on the internet, will
be provided throughout the book to prove my points with logic and irrefutable evidence. In the
electronic versions, you can just click the links.
Your time will be respected. There should be no empty words, just useful information that is
actionable.
vi

Introduction ÷ø P
rocter Barber” barber and shop a small Gamble being chain paid worth of 36 60 barber 1.66
million million shops dollars in dollars. 2009. for “The Imagine I Art of a did a valuation within
this same industry using the 25 factors affecting business valuation. My methodology and
conclusions were validated when I came across the Procter and Gamble information. This made
my client feel very confident about my report. http://adage.com/article/news/cpg-marketing-p-g-
buys-art-shaving-retail- stores/137065/

Price confirmation for the “Art of Barber” sale: http://wwd.com/beauty-industry-news/beauty-
features/gallery/procter-gamble- acquisition-timeline/
Intangible Assets and Intellectual Property are the elephants in the room when it comes to small
business valuation. Few valuators are willing to come out of the old-fashioned comfort zone
provided by their associations to address the measurement of Intangible Assets.
Our methodology is not new. Venture Capitalists and industry specialists understand and use this
kind of methodology in daily business. What our proprietary system has done is to bring these
currently used processes down to the small business level. This way, the value of a business can
be measured using 2018 methodology and processes instead of the 1970’s model that is now
most commonly used in business valuation.
Wisdom and experience cannot be taught in an accounting class.
7

25 Factors Affecting Business Valuation

Section 1: ÷ø

Intangible Assets and Intellectual Property: Intangible Assets make up the majority of the value
in most businesses. My objective in this section is to help you understand and accept that it is
true. 70% to 80% of the value of your business is intangibles. If this is not true you should be
concerned.
Intangibles rule the way we live:
Google maps get you where you are going. Amazon is the largest store in the world and the
owner is now purported to be one of the world’s richest men. eBay. Who has not used eBay?
Facebook and Twitter are two of the most popular and commonly used social networking apps.
Airbnb, Uber, and GrabTaxi are all “disruptor” business models that changed how things are
done. Netflix has changed the way most people watch television and movies. Smartphones are
streaming data to the masses, including business people.
Intangibles in business I want to refer you to an internet site that you may not be familiar with
unless like me, you have a reason to follow up such information. Crunchbase.com - Crunchbase
reports on funding, mergers and sales on a more global scale than most information sources ON
A DAILY BASIS, tracking hundreds of millions of dollars in business. Most of these hundreds
of millions of dollars
8

25 Factors Affecting Business Valuation
that trade daily are intangible assets. Prove it to yourself and look at the website. The following
is an example of a daily report.
www.Crunchbase.com- Daily Newsletter - July 21, 2017
Klarna raises $225M for payments. Private equity firm Permira will pay $225 million for a stake
of at least 10 percent in Klarna, the Stockholm-based online payments unicorn (Unicorn Pay is
an online Payment Gateway Services Provider). Permira will buy shares from existing
shareholders General Atlantic, DST and co- founder Niklas Adalberth.
Insurance is a hot space for Venture Capitalists Funding for insurance-focused startups has shot
up dramatically in recent quarters, with a big chunk of investment coming from major insurers, a
Crunchbase News analysis finds.
In other news, we look at the massive growth spurt that preceded the latest Series A for loan
startup “Self-Lender.”
Shyp curtails service, cuts staff. On-demand shipping service Shyp announced in a blog post that
it is withdrawing from all but one market, the San Francisco Bay Area, and cutting staff at
headquarters in what it described as an effort to prove its business model for long-term success.
Up till now, Shyp had also been operating in Los Angeles, Chicago and New York.
Betterment closes on $70M. Online financial adviser Betterment has raised $70 million in a new
Series E-funding led by Kinnevik. The New York-based company has raised a total of $275
million to date.
9

25 Factors Affecting Business Valuation
Recent Activity on Crunchbase 181 Funding Rounds Added 130 Acquisitions Recorded $2.5B
Fundings Captured 12,087 Entities Updated
Make a list of the non-tangible things in your business. It will surprise, if not shock you.
http://www.kmworld.com/Articles/Column/The-Future-of-the-Future/The-world- of-intangible-asset-valuation-
110580.aspx
Another link - same conclusion. https://www.strategy-business.com/article/08302?gko=47f49 60% to 80% back in
2008.
Employees and client lists are not tangible assets - but try to run a business without one or the
other. What value does a business with a storefront have without a valid, renewable lease? You
might have a partner; without a solid, up-to-date shareholder agreement in place how secure is
your investment? Did you know that some franchises are for a specific time period, perhaps
twenty years? After that you may have only the salvage value of used equipment and leasehold
improvements. Your old location might be given to a new franchisee or the franchisor may tell
you that in order to continue, you need to move five blocks away into a new building and
completely rebuild the store in order to have a new twenty-year franchise agreement. What do
you think this sort of franchise is worth in the last four or five years of the franchise agreement?
10

25 Factors Affecting Business Valuation
What is a long-term lease in an airport worth to a high profit food franchise? Add to this some
exclusivity and see how that affects things. What about Research and Development (R&D)? The
R&D you keep investing in might be written off in the year it was done, but is it gone? Investors
in Google and Amazon say NO. Many learned people share the same opinion I do; I hope to
prove my points by showing you the profiles of accredited people who have written articles that I
believe strongly support and prove my position. If you don’t have a detailed, well written, and up
to date operations manual you are probably missing 25 percent of the value of your business.
Without a detailed map of what to do, your business cannot run for any length of time without
you. Who would want to buy a business without a good operation manual? Who would want to
lend money to a company without an operations manual that would allow the company to
survive even if the founder was gone? This is one of the reasons why financial institutions prefer
financing franchises over independent business startups.
I believe I have proven the point that seventy to eighty percent of the value of businesses
today is intangible.
11

Section 2 ÷ø
These are the 25 main factors affecting business valuation that must be measured in order to
evaluate a business. Most of these factors are intangibles. I will explain how and why these
factors affect the value of a company. My focus is companies valued at under 10 million dollars.
Factor 1: History Factor 2: Purpose Factor 3: Financials Factor 4: Research and Development
Factor 5: Shareholder Agreement Factor 6: Value of Employees Factor 7: Value of Distribution
and Client Base Factor 8: Value of Supply Chain Factor 9: Internet Footprint – Social Network
Factor 10: Dominance in the Marketplace Factor 11: Processes and Procedures Factor 12:
Company Documentation Factor 13: Industry Averages Factor 14: Lease Terms Factor 15:
Leasehold Improvements Factor 16: Equipment Factor 17: Inventory Factor 18: Business Risk
including Liquidity Factor 19: Currency Fluctuations and Geopolitical Considerations Factor 20:
Opportunity Factor 21: Leverage - Terms and Cost of money
12

25 Factors Affecting Business Valuation
25 main factors affecting business valuation continued.
Factor 22: Minority Interest Factor 23: Special Interest Purchaser Factor 24: Redundancy in
Management Factor 25: Return on Investment
13

Factor 1:

÷ø History

T
he of digging the value business into of a their business founders past, starts we when get with
they a the glimpse started unwritten the of what business. knowledge unique By
knowledge they had and what they were attempting to develop. What special talents did the
founders have? This can be a big help as we go through the rest of the factors, as we can
understand the “purpose” the founders had in mind when they started. In many cases, one will
find that there was an unfilled need and a plan to fill the need. History gives us a solid starting
point.
Here is a real-world example of history to the rescue:
Kraft Cadbury - History to the rescue. When Kraft took over Cadbury in 2010 it was not looking
pleasant as many Cadbury people were thinking Kraft would dilute the quality. Kraft
management went back into the founder’s history and showed how the two founders were very
similar. They were able to pacify the Cadbury people with the similar beginning information and
it was one of the smoothest mergers Kraft ever undertook. (Read the whole story)
https://hbr.org/2012/12/your-companys-history-as-a-leadership- tool
14

Factor 2:

÷ø Purpose

W
e determine the need valuation to what know is factors to the determine are purpose relevant.
value of the valuation to If the purpose of for the firm and establish a share price to facilitate a
new partner coming in, it is different than establishing a price for the purpose of a divorce
proceeding.
The divorce proceeding requires we establish a “fair market value” on the legally defined
“Effective Date of Valuation.” “Terms and Cost of Money” would not be a relevant factor
because no seller terms would be considered.
A valuation for the purpose of establishing value of shares for a partner coming in, would
certainly look at “Terms and Cost of Money” as a relevant factor affecting value. If the “buy in”
is 100% financed by the existing partner or partners and the “risk” minimized for the buyer, a
higher valuation is likely because of lack of risk.
If I am hired by a prospective buyer of a restaurant, the purpose of the valuation changes. I
would look at the value of the business to the current owner, but additionally I would be looking
at how the subject business would fit on the new proposed purchaser. In this way, the prospective
buyer can make an informed decision about making an offer to purchase. When we look at
purpose, this system requires that we ask the question, “value to whom?”
15

Factor 3: Financials ÷ø W
hen statements prevailing analyzing fair to reflect financial market only price statements
purchases that are one related and must expenses directly adjust the to at
the business.
We want to find out if the operation of the business is making money or losing money. We need
to know if there are redundant assets that need to be stripped out of the balance sheet. For the
purpose of a business valuation we want to look at the balance sheet and income statements.
(Income statements are sometimes called profit and loss statements).
We will need to normalize the information. Any underpayments, perks or advantages to anyone
including owners, friends, and family must be accounted for at fair market value. Once
everything is adjusted to “fair market” we have what would be called “Normalized Net Income.”
Depending upon the situation and purpose we may want to look at 2 to 10 years of financial
statements. If auditing is required I suggest an outside accounting firm for that process. The
delicate part for small business valuation is “discretionary income.”
16

25 Factors Affecting Business Valuation
What to count, how to measure, and what is the purpose.
Determining the “Normalized Net Income” is a real skill set and the first and most important step
in determining the value of your small business, any other term implying the same thing is
suspect. (Small business being less than ten million dollars in sales.)
If you are reading financial information about a small company and you see the terms, owner's
discretionary income, seller's discretionary income, seller's discretionary earnings, free cash
flow, seller's discretionary cash flow or owner's cash flow. BE CAUTIOUS! These are terms that
people feel they can trust, but in fact they are often very misleading. You may also see the term
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) this is a legitimate
term, but only when used in the right context.
If these terms are used in relation to the sale of a small business, someone (usually the buyer) can
be easily misled. The managers of banks and other financial institutions have been misled by
these terms so often that their head offices are often very skeptical about financing the purchase
of any small business.
OWNER'S DISCRETIONARY INCOME: This term will often be used by those trying to sell a
franchise. They will show you a number like $75,000 per year, or perhaps even $90,000 for
owning and operating something like a plumbing franchise. What they do not make clear is that
the $90,000 per year is BEFORE the owner/manager/PLUMBER is paid. Depending on where
you live a plumber will probably make $65,000 to $85,000 a year just by going to work every
day.
17

25 Factors Affecting Business Valuation
If the people selling the franchise were being truthful they would use the term “Normalized Net
Income” that would show the profit after everything, including the owner’s wages, were paid out
at fair market value. If the fair market value of the plumber's/owner's wages were $70,000 the
true profit figure would be $20,000 not $90,000. The perpetrators are generally white shirt and
tie, and go to great lengths to convince buyers they are professionals, and in a dark way, that is
true.
“Free Cash Flow, Owner’s Cash Flow and Owner’s Discretionary Income” are all 'weasel' words
used in the process of separating buyers from their hard-earned money.
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) Some industry
groups think it is okay to include one owner/manager wage in EBITDA, which results in the
same misleading situation. You therefore must be very careful in the context that EBITDA is
used, most especially if dealing with small business and the numbers are being explained by a
deceitful sales person or owner.
EBITDA is generally used as a measure of a company’s operating cash flow based on stated
earning from financial statements BEFORE interest, taxes, depreciation and amortization.
https://www.entrepreneur.com/encyclopedia/owners-salary
Here are some searches you may want to do to confirm the conclusions above.
normalization of financials in a business valuation net income after normalization owner’s
income included as company earnings.
18

Factor 4: Research & Development (R&D) ÷ø Y

our really R&D gone? was Generally, written NOT.
off on your taxes. Is the R&D
Research and Development in most western nations is written off for tax purposes in the income
statement/profit and loss. For tax purposes this is reasonable and lawful.
For the purpose of valuation this is not so true. The value of the R&D did not disappear in the
year it was written off. Most often it is added to an existing base of R&D and will be added to
again in the next year. It is my opinion that the useful lifespan of R&D is somewhere between 5
and 12 years in some industries; in others, the R&D is accumulative, meaning that it keeps on
growing. For the purpose of valuation R&D c o u l d be accounted for in the balance sheet as an
intangible asset. This means that depending upon the individual business, the valuator will need
to make a judgement regarding lifespan of the R&D and possibly adjust the balance sheet to
correspond.
I am not the only one to come to this conclusion. Millions of shareholders of public companies
and investors in private companies believe this is true. This is why companies like Uber and
Airbnb have such high valuations. People are investing, not because these companies are making
a lot of profit, but because the investors believe in the R&D. For public companies, Amazon for
example; not yet returning a lot of profit but certainly a company with lots of R&D that people
believe in by the
19

25 Factors Affecting Business Valuation
billions of dollars. I’m not sure how many billions of dollars of proof I would be expected to
produce, but one could compose a very large list of both public and private companies where the
share price or valuation is based upon the perceived value of the R&D.
Unless purchased, Brand is the result of R&D and marketing within. When R&D is part and
parcel of a brand, the R&D often has an accumulative value. Uber would be worth much more
than the accumulative value of their R&D, as would most companies who have developed things
and are successful. Stability and growing sales are key to the measure.
Certainly, with any kind of software company, the R&D is of immense value but it may not be
shown in the balance sheet. There is a reasonably simple way of looking at this. Many small
business owners have both an operating company and a holding company with identical
ownership. The holding company generally holds the real estate and possibly other hard assets.
The operating company runs the business and pays the holding company fair market value rent
on the real estate or other hard assets. The key is, it must be done at fair market value.
For purpose of valuation consider that there is a development company and an operating
company. The development company does the R&D and then sells the R&D to the operating
company. Now you have a measured and identifiable intangible asset with a receipt that can be
placed into the balance sheet as an asset and depreciated over time, instead of being a direct cost
this year in the income statement.
There are some tax rules in different jurisdictions for all of this according to the Association of
Chartered Certified Accountants in the UK.
20

25 Factors Affecting Business Valuation
http://www.accaglobal.com/gb/en/student/exam-support- resources/fundamentals-exams-study-
resources/f7/technical-articles/rd.html
Under International Accounting Standards (ISA) 38, regarding R&D an intangible asset arising
from development can be capitalized if an entity can demonstrate all of the following criteria:
the technical feasibility of completing the intangible asset (so that it will be available for use or
sale), intention to complete and use or sell the asset, ability to use or sell the asset, existence of a
market or, if to be used internally, the usefulness of the asset, availability of adequate technical,
financial, and other resources to complete the asset, and the cost of the asset can be measured
reliably.
UK has slightly different interpretations. (See link above)
NOTE THAT WE VALUE R&D FOR VALUATION PURPOSES NOT TAX PURPOSES.
SOME OF THE ABOVE WOULD BE OF INTEREST TO THOSE WISHING TO RAISE
MONEY AND WANTING TO LEGITIMATELY SHOW VALUE IN THE COMPANY.
Some very bright people have done a lot of research on this subject:
Read the background on them first: http://www.valens-research.com/about/background/
21

25 Factors Affecting Business Valuation
Now, read what they have to say about capitalization on the balance sheet:
https://www.valens-research.com/rd-investment-not-expense-capitalizing-rd- impacts-understanding-corporate-
profitability/
https://www.theguardian.com/business/2017/apr/15/tesla-electric-cars-sparks- fly-wall-street-valuation
22

Factor 5: Shareholder ÷ø

Agreement
S
hareholder all shareholder matters agreements agreement in are the legal basis for dealing with a
business. Without a legally binding any dispute can become a seriously costly matter. Minority
shareholders are probably the most at risk in a situation where there is no legal shareholder
agreement. Just ask any minority shareholder who has been involved in a dispute.
There have been situations where minority shareholders thought their 10% interest in a million-
dollar company would be worth $100,000 this is not necessarily true.
When, how, and how much you might recover as a minority shareholder could be half, unless
there is a strong legal shareholder document to support your claims. Inversely, majority shares
have the possibility of being worth more. Potential for protracted legal wrangling could cause a
valuator to come with a lower value than would otherwise result if a proper legal shareholder
agreement was in place. There are different sorts of “shotgun” clauses that can be included in
these shareholder agreements. Payouts can be over a number of years, so the company can afford
to pay someone out.
23

25 Factors Affecting Business Valuation
A shareholder agreement that was detrimental to the remaining shareholders could result in a
much lower value as well. Have a lawyer you trust review any shareholder agreement before you
sign. Google “shareholder agreements” to find anything you are in doubt about.
24

Factor 6: Value ÷ø

of Employees C

runchbase Intelligence trading data shows firms (AI) t h a t hands at valuation working with
Artificial are being funded and numbers representing ten million dollars per employee (USD).
Crunchbase.com is not an academic journal but they are the world’s only relevant source of data
on large tech buyouts and funding is updated on a daily basis. Tens if not hundreds of millions of
dollars in new deals are posted daily. www.crunchbase.com is free to view.
QHR - Canadian Company, Kelowna, British Columbia, Canada sold in fall of 2016. QHR sale
($170,000,000 sale with 200 employees) = $850,000 CDN per employee and rather strongly
makes the case that skilled employees are worth something.
Established Web Design and Digital Ad Agency For Sale
South Florida, Florida UNDER OFFER (recent 2017) Asking Price: $1,245,000 (USD) Furniture
/ Fixtures included Sales Revenue: $780,000 (USD) Cash Flow: $303,000 (USD) Asking:
$155,000 per employee
25

25 Factors Affecting Business Valuation
This is not to say that every company is worth millions per employee, but it is important data to
reference. The push for high wages in the restaurant industry is causing the restaurant industry to
automate. The employees that are valuable are those who are working on the automation and
artificial intelligence robots that will replace the restaurant employees.
Most businesses will fall somewhere in between. Doing the research and understanding the
proper measurement for each individual business is a critical exercise in any accurate business
valuation. There is a lot of room between zero and ten million dollars for employee value.
Employees and contract workers are generally both considered when doing business valuation.
26

Factor 7: Value Distribution and Client Base ÷ø D
id supermarket built you around ever shelf product wonder at eye placement. why level?
products There Planogram is a appear whole defines industry on the

the what, where, and how much
in retail merchandising. Manufacturers, wholesalers and distributors invest a lot in getting proper
visibility on the retail level. The end buyer can also be considered as part of the client base. It
can take many years to build a client base that will go looking for the product you want to sell.
For the purpose of valuation, one must be able to measure the retail purchaser, the retailer, the
wholesaler and distributor. How much time and money would be spent to replace what has been
achieved? This is why companies buy other companies instead building from scratch.
We should point out that not every factor affecting value is relevant in each individual valuation.
One must know what factors are important to measure and what factors are irrelevant for each
subject business.
27

Factor 8: Value of Supply Chain ÷ø F
irst: old into Russian Imagine Canada. military yourself Your company rifles, as the ammunition,
owner is a supplier of a company and to related retailers importing items and also has an online
store. Your supply chain is from the Ukraine. This is about as unstable as it can possibly be with
the current geopolitical situation, and you are unable to get product. This leaves a very big dent
in your business and it is not going to be hard to measure the value.
Second: Imagine yourself as the exclusive Canadian importer of several well know Asian food
brands. Sales are strong, and everyone is happy. The ties are strong and go back 35 years. This
will take a lot more work to measure than scenario one.
Most valuations will be somewhere between these two extremes.
28

Factor 9: Internet Footprint – Social Network ÷ø L
ook relevant commerce at your searches? website? website. How What How many are well the
views does details?
it does place it get? on Google Is it an for e-
Additionally, there are all of the social networking sites. Facebook, Twitter, LinkedIn, Google+,
YouTube, Pinterest, Instagram, Flickr, Reddit, Snapchat, WhatsApp, Quora, Vine,
StumbleUpon, and Digg are some of the more popular social media sites.
What percentage of your sales are e-commerce on your own website?
Do you sell e-commerce on other platforms such as Amazon or AliExpress?
If you are a service company what percentage of your business comes from the internet? If you
run a retail store, how much of a role does your website and/or social media play in your
customer's decision to come to your store?
Even if this is not a relevant factor it may still be worth considering because you, or someone
else, can change this to make it better. This is where the measurement comes in.
29

Factor 10: Dominance ÷ø
in the Marketplace M

ention That search is ketchup engine product and domination and most most people people in the
will marketplace. will think think of of Mention Google. Heinz.

That is domination of a service in the marketplace.
Most businesses will not be in such a fortunate situation. Some companies will have 25% or
perhaps 75% of the market within a certain geographic area. If so, this will certainly increase the
valuation.
A fishing license or a dairy quota would have some dominance effect.
There have been issues with cities who issue taxi licenses promising in effect dominance, then
the licensees have been “interrupted” by a technology called Uber. The hotel industry is similarly
concerned with Airbnb and similar services.
A dominance situation that a valuator will commonly come across is an exclusive lease for a
service or retail category in a specific geographical area, something like an airport, university, or
shopping centre. Profits are almost locked in for such situations so of course the value is higher
as long as the lease is long-term. In some cases, the long-term lease might be the most valuable
part of the business.
Dominance is not always a relevant factor affecting value.
30

Factor 11: Processes and Procedures Agreements, Licenses ÷ø

and Other Intangible Assets U

nless proprietary patented it is a franchise, every company has their own processes and
procedures or something that is with a long expiry date. A registered brand or other intangible
assets must be measured.
For example, a successful retail bakery in an urban centre with its own proprietary processes and
procedures that result in a product that retail clients choose to purchase on an ongoing basis. This
is a huge consideration for value. The measurement of some of this is often a ratio depending
upon market share or penetration, and the means to deliver via employee base. Most franchises
today are not doing something so unique, but have simply put very tight processes and
procedures into what would often be considered a simple service. Think lawn services, hair
salons, tanning salons, pet grooming, sewer pipe cleaning, fencing, car cleaning, car
maintenance, and computer repair for just a starter list. Keep in mind some franchises have a
defined end date and the franchisor may have no obligation to renew a franchise.
Processes and procedures do not stand alone. There must also be documentation which we refer
to next. There is a whole section of this book where we show you a template that can be used to
document the processes, procedures, and systems of a company.
31

Factor 12: Company ÷ø

Documentation
I
magine documents procedures, that all you and aspects have systems a fully of are your
completed documented. business. operations All It is the done manual processes, so well that
that your business runs as smoothly when you are away as when you are home.
Imagine that you run the same business that is just as profitable; but where nothing is
documented. As long as everyone is healthy, all is well. You can’t be gone for weeks, perhaps
not even for days without the need to be in constant communication.
The first option offers security of income not only for the owner, family and employees but also
security of continued service for the clients. The owner could protect his family from his/her
untimely death by having life insurance that is readily available for most business owners.
Adequate disability insurance for small business owners is generally too costly and usually not
even available. That leaves the owner, family, employees, and clients all at a lot of risk. The
more of the operations manual you have completed, the better you have protected the future for
yourself and all of those around you.
Not all of this would be on a computer, but rather printed out with spaces for computer
passwords, banking information. Where are the spare keys? Important client and supplier
information. The list is comprehensive.
32

25 Factors Affecting Business Valuation
All of the information on each employee's job needs to be documented and regularly updated.
This is especially important for the founder of a small business to leave a paper trail for the
family to follow. This insures the business will continue if something happens to key players.
A buyer will pay a lot more for a well-documented company than one where the owner says; “I
will train you.” Sure, and what happens if the owner has a heart attack the day after the sale?
Documentation is so important; a template for making your own small business operations
manual is included at the end of this book to give our readers added value.
33

Factor 13: Industry ÷ø
Averages
I
ndustry valuations. comparable. averages One Air must conditioning are make not a relevant
factor for all business sure the comparable data is truly companies in Miami, Florida are not
comparable with air conditioning companies in Seattle Washington.
Many valuators use comparable sales as a major consideration, but this can be very inaccurate as
the sales figures don’t tell you if terms were given, how much net profit was recorded for the
preceding years or if owner’s wages were included in the profit. Costs can vary significantly.
Unless you are talking about franchises, no two businesses are totally comparable, in fact most
are very different. Being careful to measure data that is truly apples to apples is most important.
Industry averages can provide a guideline. It must be understood that industry averages include
both winners and losers and are too broad to provide any sort of accurate measurement for a
specific business. In some cases, industry averages will be important but in cases where the
business is more unique, the industry averages will mean much less.
34

Factor 14: Lease ÷ø
Terms
A
business limitations leasehold with improvements, on its no value. lease, Costs reopening, or a
lease ending soon, has of relocating could include transferring utilities and associated fees, new
equipment and fixtures, to name a few. A strong renewable lease is going to enhance the value of
a profitable business. However, a strong long-term lease can choke an unprofitable company. If
you sign such a long-term lease and if something else happens (your supply or client base
evaporates), you are in a lot of trouble and the lease obligations might offset a lot of inventory
that is paid for, your company could be rendered almost worthless due to lease obligations. Also,
remember that your landlord is not obligated to renew your lease or let you out of a lease you
have signed.
Reading the lease carefully is an important factor in business valuation. When you are
considering purchasing a business you better know the terms and conditions of the lease you will
be taking over. You might want to be renegotiating the lease prior to purchase to make sure you
have enough time to make the purchase worthwhile. The reputation of the landlord matters a lot.
35

25 Factors Affecting Business Valuation
A long-term lease negotiated in Calgary just prior to an oil price downturn can have the effect of
making the company worthless to a prospective buyer. In other cases, a long-term lease at a
locked in rate can be more valuable than anything else in the company. Lease terms need to be
measured carefully in a business valuation.
36

Factor 15: Leasehold ÷ø

Improvements
L
easehold classifications improvements and are often valued have along three with distinct
equipment.
value
Value within an “operating business” Value as “equipment in place” even if the business is not in
operation, but a reasonable new lease can be negotiated
Leasehold improvements and equipment may only be worth “liquidation value” if the business is
not operating and you can’t negotiate or renegotiate a lease. Note that in “liquidation value” it is
important to calculate the cost of liquidation which could run from 20% to 45% of the total
received
If you are opening an upscale spa or upscale restaurant you can expect leasehold improvements
sometimes called your “buildout” to be between $300,000 to $1,000,000. In a business valuation,
one must consider the time left before renovations are necessary again. If for some reason the
franchise is lost, or the lease does not renew, your leasehold improvements may be of little value.
In most cases used equipment is worth very little without a lease.
For accurate valuation one must measure by the correct classification.
37

Factor 16: Equipment Tools, Vehicles ÷ø

and Other Hard Assets.
E
quipment with of the original equipment will cost generally is and most depreciated be often
listed neither in value. the of balance these Fair market numbers.
sheet along value
Equipment generally has two classifications:
equipment value within an operating business liquidation value
Equipment, in some cases, would be part of the leasehold improvements and could have extra
value as “equipment in place” provided a lease could be negotiated.
Equipment may only be worth liquidation value if the business is not operating. If this is the case
it is important to calculate the cost of liquidation, which could run from 20% to 45% of the total
received. It is important to know what measurement best suits the purpose of the valuation.
38

Factor 17: Inventory ÷ø I
nventory many inventory? mitigating will What generally would factors. be be How the valued
cost marketable at of cost, selling however is the the inventory remaining there are
at retail, wholesale, and

liquidation?
Inventory within an operating business is going to have more value than “inventory that is in
place” or value of inventory net of liquidation. Net liquidation might be 40% less than t h e gross
liquidation figure, to take into account the costs associated with the liquidation of the inventory.
Inventory value within an operating business may be very close to wholesale depending upon
marketability factors. One must understand what they are measuring and for what purpose to
make an accurate estimate of value.
39

Factor 18: Business Risk including Liquidity ÷ø A

sking situation all is of difficult the right and challenging.
questions and measuring each
Are you in an industry that is being disrupted or about to be disrupted? An example would be the
taxi business disrupted by Uber. Is your business niche heavy into manual labour that will be
replaced by robots and artificial intelligence? Are there new innovative processes and procedures
being developed that could replace what your company does? Could your industry niche be
outsourced to another country? Competition is of course always a concern unless you have
market domination through some kind of exclusivity arrangement. If you lost a big contract
could a lender call a loan and put you into a liquidity crisis? If a large contract could not or
would not pay, could your business find itself in a liquidity crisis? One must also look at liquid
investments as compared to investment in small business that is not liquid. This is a huge
consideration for most investors. Who wants to wait two years or a lifetime trying to get back
money that was invested? This is why ratios are so different between “liquid shares” that can be
easily sold in public companies and shares that might be hard to sell in a private business.
40

Factor 19: Currency Fluctuations and Geopolitical Considerations
÷ø C
onsider materials yet, you a are from Canadian in China Western with company Canada, pricing
perhaps importing in US Edmonton.
dollars. construction Worse
You just signed a long-term lease on a much bigger space. The next month OPEC decides to try
and take out the North American oil producers and the oil price tanks. The Canadian dollar tanks
along with oil. There is a government in place in Ottawa that is not Alberta or oil company
friendly. How do you think this would affect the value of your construction material
wholesale/retail operation?
When doing business valuation, it is best to be well-read on business and politics both at home
and abroad over a number of years. Understanding the right questions to ask and knowing what
is important to whatever niche business you are dealing with is essential.
Experience and wisdom cannot be taught.
41

Factor 20: Opportunity ÷ø N
ow processes, is all we of this can procedures, is go documented, back systems to and research
and how employees. well and does development, it How all work well
together? Risk may of course temper some of the opportunity enthusiasm in the final
measurement. Do you know the market trends and where your market niche is going and where
you are positioned within that market? When we measure the R&D, processes, procedures,
systems, documentation, employees, contractors, and how well all of these factors work together
we get an idea of the potential for the company.
Let us suggest you are an internet media company helping people to brand and market their
products and services. You have a young and talented team that has been building for six years
and are now starting to show significant profit after taking the redundancy out of the system.
The story could of course be exactly the opposite, the profit is in the past, older workforce, losing
market share and no R&D to support growth.
Asking the relevant questions and finding out what is going on within the company is the task of
the valuator. One does not know until they start the measuring process.
42

Factor 21: Leverage - Terms and Cost of Money ÷ø D

epending applicable.
on the situation, this factor may not be
The cost of money is not uniform. A large company may have cash on hand that they are
receiving almost zero return on. This makes their cost of capital much different than a small
business or individual who might have to pay market rates which could be 5% to 25% depending
upon each individual situation.
If your father-in-law has excess retirement money and is willing to support you in your new
business venture by loaning you $500,000 to $2,000,000 at 3% you have a huge market
advantage going in.
Another thing that can happen is a retiring business owner may decide you are a good manager
and he will finance the business at a very reasonable interest rate with almost no down payment.
The seller trusts the business is good and that you are a good manager. The seller might feel
more comfortable with some of his retirement money still left in the successful business he built.
Compare this to the situation where a buyer must find his or her own money for down payment
and borrow the rest at market rates that may be inflated to reflect perceived risk.
43

Factor 22: Minority ÷ø
Interest
M
ost private value people of company the think 40% that block valued if you is $400,000. at own a
40% of the shares in a million dollars that the

Not necessarily. It depends upon your
shareholder agreement and your ability to finance any litigation necessary to enforce that
shareholder’s agreement. There are judges that might consider your minority shares as only
being worth half.
Having a solid shareholder agreement and understanding who you are in business with can save
you a lot of pain in the future. As a minority shareholder, how are your dividends going to be
paid? Who governs that process? It is a lot easier to buy in than get paid out. There are
companies that actively seek to purchase minority shareholder positions at a low price with the
intent of negotiating better terms from the majority shareholders who may not want to face
protracted litigation against an experienced and well financed minority partner group.
44

Factor 23: Special Interest Purchaser ÷ø A
special assets advantage in interest place of the purchaser that efficiencies with is this a and
purchaser purchase economies can who take of already scale. further has

If there are significant
advantages such as elimination of competition, technology advantages, purchasing power
advantages, and a reduction in costs by sharing overhead, then the premium paid will be or could
be higher. The price could be much higher if there is more than one potential purchaser.
A purchaser who has insider knowledge and information that significantly reduces risk in the
marketplace could definitely be considered a special interest purchaser, in comparison to an
arm’s length, third-party buyer. In this definition, the working partners in a small business would
all be special interest purchasers. The owner/ partners understand the risks and relationships at
stake. Because nothing really changes, there should be high client retention and little risk to cash
flow and profit.
An arm's length third- party must always be concerned about relationships with both the supply
chain and client list.
45

Factor 24: Redundancy ÷ø

in Management
W
hat it operations documented? is the backup manual This plan should for and management part
all be of part and the of how an company existing well is
documentation. However, because this point is so important it must be covered again on its own.
The higher up the food chain in the company the more extensive we want the backup plan for
each management person.
What is the plan for everyone in management and how good does the valuator find it to be? Is
the operations manual remotely up to date with computer related passwords?
The valuator must measure what is available and compare it to what should be available.
46

Factor 25: Return ÷ø
on Investment
R
eturn be should considered on have investment first found and is the the last. “Normalized most
From important our financial Net factor Income” review, and must we if everyone and
everything was paid at market value.
We have measured the processes, procedures, systems, documentation, and employees. We have
looked at all of the other factors affecting value and we have weighed them up, balancing the risk
and opportunity factors. Now we make a determination of what is a reasonable return on
investment with all of the relevant factors measured and taken into consideration. Some very
large companies such as Amazon, have a very high stock price without earnings to justify. On
the other end of the scale would be service businesses in an industry that is being trashed.
The valuator must understand and measure accordingly.
47

Section 3: Operations: Manual ÷ø

Template
1.
Company Structure
2.
Products and Services
3.
Direct Employees, Contract Workers and Outside Contractors
4.
Licenses, Permits, Accreditation and Certification
5.
Business Suppliers
6.
Clients
7.
Office Procedures
8.
Business Procedures
9.
Business Equipment
10.
Office Equipment
11.
Emergency Equipment
1. Company Structure What is the legal structure of the company?
Proprietorship Partnership Incorporation Public
48

25 Factors Affecting Business Valuation
Ownership:
Names Percentages Shareholder agreement Where is the legal jurisdiction of the company?
Where are these documents stored?
Is this a franchise? If yes:
Where is the franchise agreement? What does it say about? o Length of time o Selling o Renewal
rights
2. Products and Services
Provide an overview of the products and/or services produced by the business
3. Direct Employees, Contract Workers and Outside Contractors
Who does the work? Where is the production of goods and/or services done? What control do
you have?
Direct Employees
Name, and other information Date of hire Salary, bonuses, and dividends Any extra perks? What
do they represent in the company? What roles do they play? What are their responsibilities?
49

25 Factors Affecting Business Valuation
Who do they answer to? Which people would be best able to replace them (often more than just
one person) In their own words, what exactly do they do? What confidential information does
this person have? Have they signed a confidentiality non-disclosure agreement - if no - why not?
Computer passwords and other such tech information. This needs to be handwritten on a page
with the person's name at the top and kept in a safe place “locked” with an additional copy at
your accountant’s and/or lawyer’s office. UPDATE REGULARLY.
Contract Workers and Outside Contractors
Name, and other information What is their job description? Include all responsibilities. What are
the terms of their contract? What special knowledge and information about the company do they
have? This includes relationships, proprietary information they maintain, and of course computer
passwords and other access codes
Professional Services Lawyer Accountant and/or Bookkeeper (taxes, payroll, etc.) Financial
Institutions Insurance Investment Advisors Credit Card Processing Collections Human
Resources Media Specialists
50

25 Factors Affecting Business Valuation
Consultants (including Business Valuator) IT Computer Hardware and Software Repair IT for
Internet presence including social media, domain registration and hosting
Daily, Monthly and Yearly Tasks
Regarding payments and other financial issues Full details required Details
Never store sensitive information into software programs that could get hacked. Have printed
copies that you have control of at your lawyer or accountant’s office. An inexpensive computer
and backup drive in your safe might be prudent.
Blue Collar Services
Provide complete details Security Plumber Electrician Janitorial Landscaping Delivery Other
4. Licenses to Operate
City business license Other geographic licenses Association and industry certifications and
licensing
5.Business Suppliers
Full list and documentation 51

25 Factors Affecting Business Valuation
6. Clients
Full list in order of importance and/or most profitable
7. Office Procedures
Opening and closing procedures Alarm system passwords and/or codes (need to be handwritten
and locked somewhere secure)
8. Business Procedures
Staffing Training Order processing and sales procedures Call comes in, document what happens
after that Customer service procedures Shipping and receiving
9. Equipment
List each piece Where are the keys? Who knows how to operate it? Who repairs it? Any quirks?
Insurance? Registration? Permits? Lease information
10. Office Equipment
List each piece Computers Passwords (handwritten and stored in a secure location)
52

25 Factors Affecting Business Valuation
Maintenance Where you purchase the consumables Lease information
11. Emergency Procedures
Full details including muster stations In case of fire In case of an earthquake
53

Conclusion ÷ø T
his mostly value. book Depending the should intangibles have upon helped the in you to
understand a business that reason or purpose that it is determine the that caused you to read this
book, you will determine how you utilize the information. If you are a business owner, this book
will have given you some clarity on what is valuable in your own business. Just by
understanding this you will know where you should invest your time.
If you put some time into developing an operation manual from the free template in Section 3,
you are likely to be gaining tens of thousands of dollars (or more) in value from documenting all
these things.
Lawyers, lenders, and accountants will know which clients will benefit the most from reading
this book and point them in the right direction.
Divorce litigants and others in dispute will better understand their own situation and be better
able to make decisions going forward.
I cannot teach wisdom. I cannot teach experience.
If, however, you are stable, motivated and feel you have enough wisdom and experience to
qualify, I am open to training associates anywhere in the world. www.pin.ca

 

Changes have been made to the Municipal Code Chapter 19, the by-law which governs the establishment and operation of Business Improvement Areas in Toronto. In July 2011, Toronto City Council adopted amendments regarding starting a BIA, the BIA polling processes, proxy voting, board eligibility and board governance Business Improvement Areas are encouraged to keep on top of changes in the by-laws, regulations, urban design issues and other items of interest affecting their operations.

Develop your business plan
Before starting your business
Here are some resources to help you decide if entrepreneurship is for you.
A business plan is an outline for the development, execution and control of a new or existing business. Visit any Enterprise Toronto small business centre for one-to-one consultation on business plan development
Register your business
Access in-person, one-to-one support for business registrations, name searches and incorporation at all Enterprise Toronto small business centres

 

Toronto gets a bad rap. I like Toronto. I think it�s one of the top 100 cities in Canada
http://www.toronto.ca/  = Official city of Toronto website
http://www.seetorontonow.com/  = Tourist website for Toronto
http://www.utoronto.ca/ = University of Toronto
http://www.toronto.com/ = Enterprise Toronto
http://www.torontopearson.com/ # = Toronto's main Airport
http://www.torontozoo.com/  = Toronto Zoo
http://www.torontolife.com/ = Social happenings of Toronto
http://www.torontoport.com/  = Toronto Port Authority
http://www.archtoronto.org/  = Catholic Church Toronto
http://www.torontopolice.on.ca   = Toronto Police Department

 

RISK:
Looking from the insurance viewpoint and assessing risk to buyer.

HUMAN CAPITAL:
From the point of view of a resume broker; assessing the value of the
human capital involved in the business.


INTELLECTUAL PROPERTY AND PROPRIETARY PROCESSES:
Understanding, assessing and estimating the intellectual property and proprietary knowledge that is transferred with the business.  Change of ownership and management does matter.
INTAKE CONFERENCE:
This is a 2 to 3 hour conference call that can include as many stakeholders as required.
As no two businesses are the same, the questions will vary.
Below is a list of some of the areas that we will cover.

(1) Why: What is the purpose of the valuation?

(2) Who: Value with whom owning and managing the business?

  • Your current value with current ownership and management?
  • Value with a new business owner with less experience?
  • Value with buyer like you with similar business management experience?
  • Value with an upscale buyer who has the financial ability to build on what you have accomplished in your business?
  • These WHO questions make a huge difference to the final appraisal.

(3) Normalized Net Income: I must understand what questions to ask to be able to determine the real 'Normalized Net Income.' This figure is seldom what you see in your year-end accounting, which is generally calculated to determine the lowest amount of tax legally payable.

  • Owners and families are often overpaid or underpaid depending upon individual tax situations.
  • What would the owner have to pay someone to fill his/her position in the business?
  • There are about twenty more normalizing questions that must be answered and these can be different depending upon the answers given to previous questions. This is where experience counts.

(4) Leasehold Improvements: These need to be covered regardless of whether the building is leased or owned.
It is important that the right questions are asked in any comprehensive appraisal.

(5) Hard Assets: Determining fair market value.
Book value means nothing if we want to know the true value of the business.

  • Business Equipment
  • Business Inventory

(6) Intellectual Property: Copyright, Proprietary Processes, Business Operation Manuals. These are your operating manuals; the step by step instructions on how to run your business and how to train others to operate your business. This greatly affects value; positively if it you have them and negatively if you don�t have them, and much more negative if it would not be possible for you to have a practical manual that would allow for your business to continue if you were unable to function.

(7) Value of Cash Flow: This is calculated by finding the normalized net income then multiplying it by a ratio determined by risk, opportunity, and the intellectual property affecting the means to produce.

(8) Soft Assets: Do you have intellectual property that has fair market cash value outside of your business?

(9) Risk: What are the possible risks to your business?
No appraisal can be completed without properly understanding risk.

  • How long is the business lease?
  • Are there reasonable options to extend the lease?
  • If the owner of the building also owns the business has the rent been paid at market rates?
  • Are you in a one industry area, or is the area changing?

As you can well understand, no computer program, gross sales or other rule of thumb guessing techniques are going to be helpful for you in determining the real value of your business. In fact, these techniques could harm you. Valuation and appraisal is our full time business. We do a lot of business valuations.

Business Valuation
for Your Toronto Business

Generally $1,000 to $5,000
Call for exact pricing for your situation.

 


Eric Jordan, President
Free consultation.
Call or email now!
(416) 639-6127
1-800-606-0310

111 Queen Street E.
Toronto ON Canada M5C 1S2

eric@pin.ca
Business Valuations / Appraisals
Certified by Eric Jordan, CPPA.
Appraisals to Support Litigation

 

 

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REFERRALS / TESTIMONIALS


How to value a Toronto business or price businesses in Toronto using valuation and appraisal principles - $1,000 to $5,000

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