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A LOOK AT BUSINESS VALUATION METHODS IN FINANCING BUSINESS PURCHASES
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Financing a business purchase in Canada comes with one major requirement - needing to know certain aspects of business valuation and how some of the key factors in that process will affect your ultimate success in buying or selling a business. Let's dig in.
WHY BUY A BUSINESS?
Why would business owners/entrepreneurs take on more risk, in effect, gamble on buying a business? Many, of course, feel that that route of a business acquisition actually eliminates the risk of financial loss if only for a reason they are buying an existing business. Knowing how to finance that purchase (if you're the buyer) or how to maximize the benefits of final valuation are key. We'll look at some key issues here from the viewpoint of both the buyer and vendor.
WHAT ARE THOSE ' SOFT FACTORS ' THAT LENDERS WILL LOOK AT?
There are some, let us call them ' soft factors ' in purchasing and financing a company if you're the buyer. Although lenders might not necessarily address these issues with you directly, we can assure you they are looking at things like your management and industry experience, external economic conditions within your industry, and the potential finaceablity of your sale at a price you and a seller have agreed on.
DON'T FORGET TO ADDRESS THESE ISSUES IN VALUING A BUSINESS
Other miscellaneous issues (they might not be that miscellaneous) include due diligence around premises and licensing issues, environmental concerns, etc. If real estate is part of your transaction, almost no traditional finance solutions can be brought to bear if there are environmental /contamination issues.
THE VALUATION PROCESS - HOW ARE BUSINESSES VALUED?
What is the value of a company? Naturally, the seller and buyer's method to ' value ' the business affects the financing you need to consummate the deal. That number can vary differently if you have chosen one business valuation alternative over another. On larger, more sophisticated transactions in corporate valuation outside the SME/SMB sector, a professional chartered business evaluator might be employed to assist you while employing a valuation method best suited to the industry and type of business in question.
HERE ARE SOME WAYS TO VALUE THE BUSINESS PURCHASE - 8 METHODS OF BUSINESS VALUATION / WHAT IS THE VALUE OF A COMPANY
These methodologies are a classic bit of art and science and may include:
Return on investment required by the owner
Cash flow analysis (these must be realistic) Here, you need to understand past and future working capital requirements - The discounted cash flow analysis in financial statements.
Book values of assets - In many cases, either buyer or sell will want to have these appraised.
Whether it be a bank or a commercial or alternative lender, any business lender will want to see some key documents around the purchase and sale. They include:
The actual sale agreement itself
Existing financing in place - e.g. bank security, leases, contracts, etc. - Lenders typically verify these by checking govt PPSA filings showing secured lenders and what collateral they claim. It's a good idea to address the potential Liquidation value of key assets and make sure an appraisal is done if one is required to determine and assist in values around the final purchase price as a part of the valuate a company process
Up to date financial statements/tax filings
If you are buying a franchise, you will, of course, need permission from the franchisor as you assess the valuation of a company/existing franchise
NORMALIZING THE FINANCIALS / ADJUSTMENTS TO THE FINANCIALS
In many business purchases, a lot of adjustments happen after the sale. They might include which party collects the outstanding receivables, who keep cash on hand, the value of inventory on hand at closing, and final payments due to leases, utilities, etc.
CONCLUSION
How to value a company - we get that one a lot. Small business acquisitions are predicted to rise significantly - Whether you're the buyer or seller of small businesses, knowing how to sell or finance a business purchase is key - seek out and speak to 7 Park Avenue Financial , a trusted, credible and experienced Canadian business financing advisor who can assist you with your business valuation methods and finance needs.
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Stan Prokop
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