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How to value a business when contemplating a company acquisition is one of the larger challenges in Acquisitions finance. The bottom line, as we maintain, is there are some real ' highs and lows ' when it comes to buying a business. Let's dig in.
Larger corporations use some very sophisticated methods of valuing a business. While small businesses and business in the SME sector don't have those same resources the good news is that the same fundamentals apply and they are easier to understand and common sense than you think!
At he heart of the matter is the ability for you to understand the amount of profit and cash flow that any business acquisition can deliver. For smaller business acquisitions you want to ensure those profits are accompanied by your ability to take a reasonable salary or dividend out of the business if that is needed.
Remember also that if the acquisition has you taking on debt to complete the deal that debt must be retired in some manner. In many cases a solid company acquisition can be financed by monetizing the assets within the business - those assets typically might include receivables, inventory, and fixed assets such as equipment.
A very traditional way of valuing a business is the use of ' multiples'. That could be a multiple of sales, or cash flow.
Businesses that don't sell to clients on commercial credit terms have some unique challenges. Yes, cash is king, but only when it's reported and recorded properly! We encourage our clients as part of many types of financing to obtain 3 months of bank statements for any company in the financing ' crosshairs’. That gives you a strong sense of inflows and outflows in the business you are looking at.
Murphy's Law (what can go wrong... will!) can play a key role when you want to know how to value a business and finance it. We suppose that's where some of the ' lows' come in that we've mentioned.
Current financing relationships with the business you are acquiring must be ' unwound' or redone in some manner. The same applies to key relationships that have been established with key suppliers/vendors.
In some cases business acquisition finance involves the purchase of an existing franchise. In that case you must understand how franchise terms and royalties will affect your operating capital.
One of the best ways you can turnaround a business after purchasing it is by better managing operating and capital assets. That might include better receivable turnover, better inventory turns, and refinancing existing assets via a sale leaseback.
Always seek some professional help when it comes to business valuation. That might include help from your lawyer, accountant, or an experienced, credible Canadian business financing advisor; it’s all about reaching highs and avoiding the lows of company acquisitions in Canada.