TORONTO--(BUSINESS WIRE)--CPA, Rodney Davis of GreySuits Inc. a strategic accounting firm was interviewed on how business owners should start valuating their companies for future exit and profit.
Q: How do you start to determine the value of a business?
Rodney Davis: You need to understand not only the sources of income, but the strength and continuity of those sources when you exit the company. Going down a checklist, look at your balance sheet, your income source and the underlying costs. People look at the historical cost to get a sense of what the future cost might be, but you have to remove the non-recurring from the historical costs. You may have put some personal expenses through your business at one point or incurred costs to solve a unique problem in a particular year. You will want to take those out.
You should also understand what items on your balance sheet can turn into cash in the future. When someone thinks about the ultimate future income from that business, it includes the proceeds on the sale of assets, as well. This could include the liquidation of your accounts receivables, offset by the extinguishment of your accounts payable, or it could include the sale of tangible assets in a manufacturing business.
Q: How can you improve your company’s value?
Rodney Davis: One of the best things you can do is try to ensure there is a predictability to future revenue, to the cost structure and to the working capital required to support that business. The more predictable it is, the lower the risk buyers will attach to the business, and therefore, the more they’ll be willing to pay at the same level of earnings.
Q: What about the value the owner brings to the business?
Rodney Davis: When we talk about the value of a business owner, we’re talking about the difference between personal goodwill and business goodwill. People don’t pay for personal goodwill, because it isn’t necessarily transferable. If the business is dependent on you, and clients are going to leave upon your exit, then they’re not really buying that book of business. The thought that we’re not the most important thing in our business can be hard on your ego.
Q: When should owners start planning their exit strategy?
Rodney Davis: Every owner will eventually exit the business because businesses generally live longer than people. No matter what stage you are in, you should give thought to when, if and how you might want to exit that business. They say we’re born, we live, we die. Well, your businesses don't follow that pattern. There are businesses that have been around for hundreds of years and have outlived every owner they've ever had.
Rodney Davis, CA, CPA is partner and practice leader at GreySuits Advisors Inc. He has worked with private and public organizations since 1990 in change management. Video of interview available at youtu.be/vhrmXyQ2xiE
Link to Rodney Davis photo and assets: shorturl.at/uAST0