This seminar was presented by Jessica Man from CW Partners. The content was great and it presented how to valuate your business in anticipation of retiring and exiting.
BizON had the pleasure of attending and wanted to share this presentation with you. If you have any questions please do not hesitate to contact us.
3. WHAT IS SUCCESSION PLANNING
A planning process to:
1. Transfer management responsibilities
2. Transfer legal ownership
4. SUCCESSION PLANNINGTIMELINE
Succession Planning Timeline
Get Ready Get Set Go
Ownership
Transition
Ensure
Corporate
Sale
Readiness
Establish
Value/Price
Tax
Planning
Develop
Successors
Contingency
Plans
Prepare Will &
Estate Plan
Choose Sale
Option
Execute
Terms of
Sale
Financing for
Buyer
Corporate
Goal Planning
Personal Goal
Planning
5. WHY IS IT IMPORTANT
Effective plans maximize value!
6. WHAT IS AVALUE?
“An Asset is worth what it can
earn and reflects a future income
stream”
7. PRINCIPLES OFVALUATION
Value is at a point of time
Value is related to future expectations
Value relates to earning power
More than one special purchaser will make a special
purchaser market
11. RISK FACTORS
Nature of business
Clientele
Credit and collection policies
Geographic location
Growth prospects of clients
Owner-Client relationships:Transferable?
12. RISK FACTORS (CTD)
Operating productivity
Size
Financial position
Staff compensation
Industry
Economic, social and political environment
14. VALUATION EXAMPLE
Small Business
Service Industry
Assumptions:
Going Concern
Capitalization Earnings Method
15. EARNINGS CAPITALIZATION METHOD
Formula
Maintainable Earnings BeforeTaxes
multiplied by (x)
Capitalization earnings multiple
plus (+)
Redundant assets
equals (=)
Fair MarketValue
16. INCOME STATEMENT
Ref. 2014 2015
$ $
Revenue (A) 950,000 1,000,000
Operating Expenses
Remuneration 550,000 625,000
Office and general 142,500 150,000
Professional fees 10,000 25,000
Rent 50,000 50,000
Selling expenses 80,000 100,000
Total operating expenses (B) 832,500 950,000
Income before taxes (C=A-B) 117,500 50,000
BUSINESS VALUATION TEMPLATE
CAPITALIZED EARNINGS METHOD
ABC COMPANY
INCOME STATEMENT
YEARS ENDED JUNE 30, 2014 AND 2015
17. BALANCE SHEET
2014 2015
$ $
ASSETS
Current
Cash 30,000 45,000
Accounts receivable 45,000 50,000
75,000 95,000
Non-current
Property, plant and equipment (net) 50,000 55,000
125,000 150,000
CAPITALIZED EARNINGS METHOD
ABC COMPANY
BALANCE SHEET
AS AT JUNE 30, 2014 AND 2015
18. BALANCE SHEET
2014 2015
$ $
LIABILITIES
Current
Accounts payable 20,000 25,000
Long-term
Long-term debt 100,000 90,000
120,000 115,000
SHAREHOLDERS' EQUITY
Capital stock 100 100
Retained earnings 4,900 34,900
5,000 35,000
125,000 150,000
Net Working Capital 55,000 70,000
CAPITALIZED EARNINGS METHOD
ABC COMPANY
BALANCE SHEET
AS AT JUNE 30, 2014 AND 2015
19. CALCULATION OF MAINTAINABLE EARNINGS
Notes in Financial Statements
Professional fees of $15,000 related to litigation in 2015
Severance Package of $50,000 for a retired employee in
2015
Management Bonus of $75,000 for tax planning in 2014
and 2015
Family travel to Italy in 2015
Interest on long-term loan of $8,000 and $6,000 in
2014 and 2015 respectively
20. BUSINESS VALUATION TEMPLATE
CAPITALIZED EARNINGS METHOD
ABC COMPANY
MAINTAINABLE EARNINGS BEFORE INTEREST AND TAXES
YEARS ENDED JUNE 30, 2014 AND 2015
Ref. 2014 2015
$ $
Income before taxes
Adjustments to income
Professional fees
Employee termination/settlement
Management bonuses
Travel
Interest on long-term debt
Total Adjustments
Maintainable earnings before interest and
taxes (Maintainable earnings)
Average maintainable earnings
117,500 50,000
15,000
50,000
75,000 75,000
8,000
10,000
6,000
83,000 156,000
200,500 206,000
203,250
(C=A+B)
(A)
(B)
21. BUSINESS VALUATION TEMPLATE
CAPITALIZED EARNINGS METHOD
ABC COMPANY
CALCULATION OF FAIR MARKET VALUE
Ref. Low High
Maintainable Earnings
Capitalization Multiples
Capitalized Earnings
Add: Net Realizable Value of Redundant Assets
Excess Working Capital
Enterprise Value
Less: Fair Market Value of Long-term debt
Fair Market Value of Shares
203,250 203,250
3 5
609,750 1,016,250
70,000 70,000
679,750 1,086,250
(90,000) (90,000)
589,750 996,250
(A)
(B)
(C=AxB)
(D)
(E=A+D)
(F)
(G=E+F)
22. BUILDINGVALUE
Plan and set goals
Maintain profitability at benchmark levels
Improve organic growth rate
Establish a stable financial position
Put employment contracts in place
23. MARKETTRANSACTIONS
Accountant - 0.75 to 1x revenue
Insurance Brokers - 3x commission income
Dentists – (General) - 1x revenue
Service Business (General) - 0.5 to 1x revenue
E-commerce - 3 to 6x EBITDA
Manufacturing - 5 to 7x EBITDA