2012 Toronto Entrepreneurs Conference - Peter Weinstein

1. PUTTING A VALUE ON YOUR BUSINESS
Peter Weinstein, MBA, CA, CBV
Partner, Business Valuation and Litigation Support
Stern Cohen LLP
T. 416-967-5100 F. 416-967-4372
www.sterncohen.com
pweinstein@sterncohen.com

2. Introduction

3. Introduction

4. Introduction
Based on a recent survey up to 70% of
business owners will be in a position to retire
before 2020.
50% of leaders surveyed are not prepared for
succession.

5. Introduction
Putting a value on your business is one part of
a succession plan.
Consider who will own the company, who will
manage the company and when management
will be transitioned.

6. Introduction
There are significant benefits to planning out
a sale well in advance

7. Introduction
The value of a business is a function of:
1) The anticipated income of the business
2) The risk of achieving the anticipated
income
3) The assets used in the business

8. Who to sell to
1) Competitors/synergistic buyers
2) Financial buyers Price
Paid For
3) Employees/management Business
4) Relatives/family members

9. Valuing Your Business
Three generally accepted approaches to
valuing a business:
1) Assets
2) Market
3) Earnings or cash flow

10. Valuing Your Business – Assets Approach
Assets approach used when:
1) Value is directly related to the assets
owned
2) Assets are not generating adequate
income/returns
3) Can be considered a minimum value for an
operating business

11. Valuing Your Business – Market Approach
Using the market approach the company is
valued based on:
1) The price paid in comparable transactions
2) Trading multiples for public companies

12. Valuing Your Business – Market Approach
The market approach is used when:
1) There is reliable information regarding
trading multiples and transactions
2) Can be difficult to use this approach for
smaller private companies

13. Valuing Your Business – Earnings Approach
Earnings approach used when:
1) The business is profitable and earning a fair
return on its capital
2) The purchaser wants to acquire the future
earnings or cash flows

14. Valuing Your Business – Earnings Approach
Earnings or cash flow approaches include:
1) Multiple EBITDA
2) Multiple of net earnings (after income
taxes)
3) Capitalized cash flows
4) Discounted cash flows (DCF)

15. Valuing Your Business – Earnings Approach
1) Identify maintainable earnings.
2) Select appropriate earnings multiple
= Value of operations
3) Add: redundant or non-operating
= Total value of company

16. Valuing Your Business – Earnings Approach
Maintainable earnings: adjust for unusual or
non-economic items such as:
1) Salaries expense
2) Rent to related parties
3) Non-recurring expenses
4) Discretionary personal expenses

17. Valuing Your Business – Earnings Approach
Earnings Multiple / Capitalization Rate
• Many studies and sources of data
• Some information is market based
• Studies regarding returns on equity available

18. Valuing Your Business – Earnings Approach
• Multiple will differ depending on the valuation
approach used (i.e. EBITDA vs. net income)
• Adjustment for positive and negative factors
specific to the company
• Consider the industry in which it operates

19. Valuing Your Business – Earnings Approach
Public Company Valuation Parameters:
Price Earnings Ratios*
Dow Jones Industrial Average 14.6
S&P 500 Index 16.3
S&P/TSX Composite Index 15.8
Google 21.3
Apple 18.1
Public Software Companies (generally) 11 to 14 times EBITDA
* On or about March 31, 2012

20. Valuing Your Business – Earnings Approach
INCREASE VALUE DECREASE VALUE
1) INDUSTRY Growing (or Shrinking (or
stable). volatile).
2) SALES Increasing (or Decreasing.
stable).
3) EARNINGS Positive income Losses.
and cash flows.

21. Valuing Your Business – Earnings Approach
INCREASE VALUE DECREASE VALUE
4) CAPITAL Well capitalized. Significant debt
STRUCTURE and interest
costs.
5) EMPLOYEES Stable and Frequent
skilled. turnover, poor
morale.
6) MANAGEMENT Diverse skills. Dependence on
Limited personal one or a few
goodwill. individuals.

22. Valuing Your Business – Earnings Approach
INCREASE VALUE DECREASE VALUE
7) CUSTOMERS Long term stable Dependence on a
customers. few customers.
8) SUPPLIERS Many potential Few potential
suppliers. suppliers for key
inputs.
9) PRODUCT Increasing The same or
demand, similar products
proprietary are widely
protection. available.

23. Valuing Your Business – Earnings Approach
INCREASE VALUE DECREASE VALUE
10) BRAND AND Recognized Limited name
NAME brand. recognition, or
RECOGNITION. negative
association.
11) INTANGIBLE Some degree of Lack of
ASSETS. protection. proprietary
products. Many
potential
substitutes.

24. Valuing Your Business – Earnings Approach
INCREASE VALUE DECREASE VALUE
12) BARRIERS TO Barriers to entry Few barriers to
ENTRY assist to entry.
maintain market
position.
13) STRATEGIC Ability for a Few potential
IMPORTANCE purchaser to synergies
OF COMPANY generate
synergies.

25. Valuing Your Business – Earnings Approach
INCREASE VALUE DECREASE VALUE
14) LEVEL OF Company is able Highly
COMPETITION to differentiate competitive, very
itself. price sensitive
customers.
15) DOCUMENTS Well organized Records not well
AND RECORDS and current. maintained. May
include non-
operating
expenses.

26. Valuing Your Business – Earnings Approach –
Redundant Assets
• Redundant assets are added or deducted
separately
• Beneficial to remove these from the operating
company prior to the sale
• The most common adjustment is real estate
• Can also include positive or negative adjustment
for cash in the business or excessive leverage

27. Valuing Your Business – Earnings Approach –
Sample Calculations
Low High
Indicated maintainable earnings 1,070,000
Multiples of: 5.00 5.50
Resultant value of operations 5,350,000 5,885,000
Add: Redundant assets (marketable
securities), rounded 1,420,000 1,420,000
Total 6,770,000 7,305,000
Midpoint, rounded 7,038,000

28. About Stern Cohen Valuations Inc.
Peter Weinstein has assisted clients in numerous business valuation, litigation support
and transfer pricing mandates. Valuations have been prepared to assist in planning for a
potential sale, for estate and income tax planning, shareholder disputes and other
litigation purposes.
Stern Cohen Valuations Inc. encompasses the business valuation, economic analysis and
litigation support practice of Stern Cohen LLP. Stern Cohen LLP was founded in 1963 and
operates as a full service accounting firm. Clients include a diversified mix of owner
managed businesses as well as subsidiaries of foreign companies.
Contact Information:
Peter Weinstein MBA, CAIFA, CBV
Stern Cohen Valuations Inc.
45 St. Clair Avenue West Suite 1400 Toronto ON M4V 1L3
T. 416-967-5100 F. 416-967-4372 www.sterncohen.com
pweinstein@sterncohen.com