Ottawa Valuator Business Valuation Income Valuation And Appraisal Firm  appraisal, business valuation, business evaluation, Ottawa ON  Tax issues, divorce or sale. Income Valuation for divorce proceedings.

 

Income Valuation Business Valuation and Appraisal Divorce Dispute Sale

How to Value an Ottawa Business - Income Valuation for Divorce, Dispute or Sale.
Generally $1,000 to $5,000
Call for exact pricing for your situation.

OttawaBusinessValuationAndAppraisal.com

(613) 319-8535

Video explaining my approach to Business Valuation available on Youtube.

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BUSINESS VALUATION Firm, INCOME VALUATION, AND APPRAISALS
CERTIFIED BY VALUATOR ERIC JORDAN, CPPA.

Eric Jordan Ottawa business valuator is an accredited CPPA giving you a business valuation certified by an experienced industry specialist, making this one of the best business valuation firms in Ottawa with CPPA certification. If you are considering a small business valuation due to an acquisition in Ottawa you may wish to compare CBV designation as compared to CPPA. Chartered Business Valuators are unlikely to have the vast experience possessed by Eric Jordan. CBV program shows you how to become a certified business appraiser in Ottawa. You may pass the Chartered Business Valuators CBV Canada exam but the resulting business valuations can generally be shredded by the experience of someone like Eric Jordan using the “25 Factors Affecting Business Valuation. Watch the YouTube on the page and pay attention to the Experience section. You will surely agree Eric Jordan distinguishes himself as the best qualified valuator to give you an affordable and professional business valuation in Ottawa for 2019.


WE WIN IN COURT

Need a Bulletproof Business Valuation?

"I greatly appreciate the work Eric did on the Valuation of my company. It stood up in court. (April 2017) The Judge soundly admonished the Chartered Business Valuator who tried to contradict Eric's valuation. If someone needs confirmation and wants to speak to me, Eric has permission to release my number." (Antoine)

Second Opinion on a Questionable Valuation?

We find that most small business valuators concentrate on Asset, Market, and Income approaches developed in the  1970's. These are generally easy to defeat in 2017 as most businesses are now made up of 50% or more in 'intangible assets' these valuators neglect, or have no means, to properly measure.

25 FACTORS AFFECTING VALUE

This is the key Point: If someone is presenting or proposing a valuation without taking these factors into consideration the valuation number is likely to be misleading and almost certainly not accurate for a small business.

  • Financials
  • Return on Investment
  • How has R&D been accounted for?
  • Shareholder Agreement (if one exists)
  • Value of Employees (cost of recruitment and training as a group)
  • Client Base and Cost to Rebuild
  • Value of Supply Chain
  • Value of Distribution Network if one exists
  • Internet Presence and Use (social network)
  • Dominance if any in the Marketplace
  • Knowledge Base of Owner and Employees
  • Processes and Procedures Documentation (How well are all aspects of the company documented?)
  • Industry Averages
  • Lease Terms
  • Leasehold Improvements
  • Equipment
  • Inventory
  • Risk
  • Currency Fluctuations and Geopolitical Considerations
  • Opportunity
  • Liquidity
  • Leverage - Cost of money.  Is leverage applicable and if so at what risk?
  • Minority Interest (if applicable)
  • Special Interest Purchaser (Partners are also special interest purchasers as they have more knowledge, interest, and opportunity, with less risk than regular buyers.)
  • How well is the business/practice expected to function with changes in management? (if applicable)

Return on investment is always my first and last consideration.


 


Eric Jordan, Valuator
Valuation Analyst
Nation Wide
1-800-606-0310

eric@pin.ca
Free consultation.
Call or email now

1.800.606.0310

FREE CONSULTATION

RECEIVED: DECEMBER 7, 2018

Eric,

Eric was wonderful to deal with. He was very knowledgeable on the topic of business valuations and took the time to listen to my fears and concerns. He asked me questions and gave me sound advice that helped me feel at peace. Eric was honest and wise and I would fully trust his experience. Although Eric didn't need to perform a business valuation for me at this time he listened to my concerns and was honest about the services he offered. Eric also talked to me for a long time getting a scope for my situation and didn't charge me at all for what services he did provide. Thanks Eric.

Amber.

 

 

VALUATION EXPERIENCE - ERIC JORDAN

 

CPPA - Detailed Experience

My name is Eric Jordan. I am a CPPA which means Canadian Personal Property Appraiser. There are over 700 CPPA's across Canada. I specialize in Business Valuations. The Canadian Personal Property Appraisal Group provides members a proper legal structure with which to do valuations. They do not give instruction on anything other than how to use the forms and templates they provide to make a legal appraisal or valuation report. I am providing the following information on my experience because experience is the key ingredient in my credentials and my experience is extensive, relevant and when combined with my proprietary system I describe in the book "25 Factors Affecting Business Valuation" allows me to deliver what many believe to be the most accurate small Business Valuation available in Canada today.

 

EARLY LESSONS

I was born in 1952 in Southwestern Manitoba. Like many other boys that were born on a farm / ranch I was a member of the local 4H beef club. The Canadian 4-H motto is "Learn To Do By Doing". It was at the age of 12 to 15 that I received my first training in valuing or judging. My 4-H group provided a lot of training in judging cattle. Like business valuation the process involved many factors. I enjoyed this and did well at the judging competitions.

 

I got started in the construction industry at 16 learning about steel stud framing, drywall, drywall taping, acoustical tile, and other types of ceilings. I took training as an apprentice and at 19 years-old I was a sub trade foreman at the construction of J H Bruns Collegiate in Winnipeg Manitoba.

 

LEARNING TO LISTEN

I soon started my own business doing textured ceilings. I learned a lot of important lessons while running this business. The most important was learning to listen. I did specialized work. I would texture the ceilings in houses that were occupied as I had perfected a way to do this while protecting all the furniture and accessories in an effective and efficient manner. I would book work over the phone and set up a route that could take me from Manitoba to Alberta and back. One did not want to arrive at a house and find the work was impossible to do or that the owner was not likely to pay on completion. I was successful in that business. The key was to listen, listen, and listen. Asking the right questions and then listening carefully was critical to finding the correct information. Hearing the nuances became easy after a while. This is a very useful tool I use to this day while seeking information in the valuation process.

 

INTRODUCTION TO SMALL BUSINESSES

It was at about this time I got involved with the advertising business. I did advertising placemats across South Western Manitoba and Saskatchewan. If any of you are old enough and frequented Buddy's Steak Ranch on Albert Street in Regina, SK or Aunt Sarah's Restaurant in Brandon MB. you may remember my placemats with a character called "Prairie Tom" in the middle surrounded by squares of advertising.

I don’t believe my creation died when I quit doing the placemats. A short time after that "Coffee News" publication started in Winnipeg, Manitoba and the character they use to this day looks amazingly similar to "Prairie Tom". I believe I at least partially inspired the creation of that very successful publication and  I am very happy for that. The placemat advertising business put me into hundreds if not thousands of small businesses where I got to deal with the owners. Great experience for my future valuation career as my eyes were beginning to open as to what really happened in a small business. .

 

AUCTION BUSINESS - Learning to See

In about the same time period I had a mentor Charlie Salfries who was sure that I should be in the auction business. I ended up doing about six auction sales in 1980 and held an auction license in Brandon Manitoba. This was a real learning experience for understanding value and being able to see and feel how live events work. Nobody understands value better than auctioneers. When the Canadian Personal Property Appraisers Group started in 1995 most of the first members were auctioneers from across Canada.

 

ONE ON ONE - With Hundreds of Small Business Owners.

The next business I got involved with was the movie business where I owned several rental stores and operated a movie broker business. In those days movies were a sideline to almost any kind of small business. I walked into thousands of small businesses and introduced myself. Hundreds ended up dealing with me. During this two to four hour process of dealing with the client on these video tapes, I really started to learn about what happened in a small business. Not all of the money went into the till. These business owners were happy to have someone to confide in. They would tell me amazing ways they saved on paying tax and all sorts of quirks about their particular business and industry. My experience extended to the US, as I purchased movies from small businesses then leased and sold these movies back into Canada. From this experience I could now understand what really happens on the ground in a small business as compared to what shows in the financials. This was invaluable one on one experiences with hundreds of different business owners across all sorts of industries. One can never learn these things in academia and I have a real edge on those who don't have this type of experience, most especially those situations where bookkeeping is suspect or non existent.

 

PIN.CA - HELPING BUSINESS OWNERS ADVERTISE FOR BUYERS

Some video clients would tell me that they were selling so I should not leave movies with them as their business would be sold and gone by the time I was back in three months. My experience at that time suggested otherwise and I would ask them to just call me if they sold and leave the movies with a neighbouring business in the town. Two years later the business would often close down "unsold" and there would be an empty building for sale.

This is where I got the idea to set up an Internet showroom or catalogue of businesses for sale on the Internet. I was correct and the Pin.ca website has been successful helping business owners to find buyers for the past twenty years.

 

VALUATION

Working with hundreds of small businesses, advertising to the market place I got to understand about valuation. I had a client who was a Chartered Accountant who helped me to understand from the accounting industry viewpoint,  how they look at valuing a business. I knew however that that was not the whole story. At about the same time I had a client who was a Resume Broker. He had a formula for getting inside his clients head and finding out what intellectual property they retained in their brain. He would write that into a resume and these people would easily find a job. I knew that same thing would work with a small business. A friend of mine Reid Nunn had spent a long time in the insurance industry and he taught me a lot about risk. Between those three things I was able to start to put the pieces together for doing an accurate business valuation and that was the beginning of the 25 Factors Affecting Business Valuation.

 

BITCOIN AND INTANGIBLE ASSETS

By 2013 I had my valuation process fairly well in place had spent thousands of hours researching intangible assets which I felt were the most valuable part of a small business. I was doing business valuations and I decided to test my process on the toughest intangible asset in the world "Bitcoin"

I purchased 78 Bitcoins and proceeded to test.

My process led me to believe the key element in Bitcoin was the "blockchain" and for the reason of the blockchain, I deemed that Bitcoin would have value in the future. I predicted $500 Bitcoin, $1,000 Bitcoin and the real possibility of much higher. I think everyone can agree my analysis was correct and Blockchain has proven valuable.

 

CPPA CERTIFICATION (National Accreditation)

This brings us to 2015. I had a formula and a lot of experience but I lacked the legal structure to present a business valuation to a court. That is when I reached out to the Canadian Personal Property Appraisers Group  in London, Ontario. I got certified through them and became a CPPA. Now I had a proper legal structure for doing my business valuations. Canadian Personal Property Appraisers Group teaches you the legal structure you must use to produce a valid Valuation. The CPPA certificate for me now is really a mute point as my experience and the legal structure I use stand on their own.

 

BOOK AND FREE PDF

In 2017 I wrote the book "25 Factors Affecting Business Valuation" which gives a good overview of my proprietary process. It doesn’t teach you how to do a business valuation but it does let you know what must be measured.

 

Send an email to eric@pin.ca and I will be happy to send you a free PDF of my book.

 

INCOME VALUATION

For those people who need Income Valuations done, I offer my experience dealing with thousands of small business owners across Canada. Hundreds of these were close business relationships forged over time. This combined with my credentials should put me at the top of any list for an INCOME VALUATION.  

 

Experience is the key factor. I have done hundreds of business valuations and my valuations have been accepted by CRA and Court of Queen's Bench. Numerous divorce proceedings across Canada have been concluded using my valuations, and filed with the courts. (including Quebec)

 

Profiles of some of our previous clients:

  • Multi Million Dollar Distribution Business- Valuation for purpose of sale.
  • Plumbing and Gas Business- Valuation for purpose of divorce proceedings.
  • Multi Million Dollar Eco Tour Business- Valuation for purpose of expansion loan.
  • Law Practice- Valuation for purpose of sale.
  • Lawn and Yard Maintenance business- Valuation for purpose of divorce proceedings.
  • Art Studio Franchise- Valuation for accounting purposes and CRA requirements.
  • Plumbing Business- Valuation for purpose of divorce proceedings.
  • Irrigation and Snow Removal Business- Valuation for purpose of divorce proceedings.
  • Large Retail Bakery- Valuation for purpose of sale to employee over 5 years.
  • Software Distribution rights in Canada- For Australian Parent Company (Agency Dispute.)
  • Janitorial Supply Business- Valuation for purpose of partnership dispute.
  • Tree Pruning and Lawn Business- Valuation for purpose of sale.
  • Battery Distribution Business- Valuation for purpose of sale.
  • Software Testing and Quality Assurance Company- Valuation for purpose of partnership dispute.
  • Blind Manufacturing and Installation Company- Valuation for purpose of legal action in partnership dispute.  This went to court on May 27, 2016 and resulted in our client receiving over 80% of the amount he sued for.
    Client is available as a reference.
  • Classic Car Renovation Business- Valuation for multi-million dollar lawsuit in Florida launched by Canadian partners.
  • Dance Studio- Valuation for purpose of establishing value for pending sale.
  • Cross fit GYM- Valuation for purpose of establishing a viable price for buyer to offer.
  • Jim's Burger Location in US- Valuation for purpose of divorce proceeding.
  • Two Wholesale Bakeries- purpose of the valuation was to find values so the companies could merge.
  • Sign Manufacturing Business- Valuation for purpose of a minority shareholder leaving company.
  • Landscaping and Excavating Company- Valuation for purpose of divorce.
  • Day Care Facility- Valuation to support litigation and negotiation for damages inflicted by City in zoning error.
  • Accommodation Business- Valuation for purpose of sale.
  • Smoker Operation (8 pigs at a time in size)- Valuation for tax purposes.
  • Flooring Business- Valuation for purpose of sale.
  • Retail Wine Business (Franchise concept)- Valuation for purpose of sale.
  • Prop Business- Valuation for purpose of partnership buyout.
  • Computer Retail- Valuation for purpose of potential purchase.
  • Music Composer Business (original soundtracks for documentary movies and videos)- Valuation for purpose of divorce proceedings.
  • Two Pharmacy Locations- Valuation for purpose of sale consideration.
  • Luxury Bed and Breakfast combined with Events Business- Valuation for the purpose of sale.
  • Pool Building Company- Valuation for purpose of sale to family.
  • Automotive Related Business- Valuation for purpose of sale.
  • Specialized Manufacturing Firm within Printing Industry- Valuation necessary as someone expressed interest in purchase.
  • Daycare- Valuation for purpose of possible sale. (Interested Purchaser came forward.)
  • Focused Builder- Valuation for purpose of establishing value for employee buy in.
  • Software Maintenance Contractors- Valuation for purpose of possible merger, (many millions of dollars.)
  • Chiropractic Practice - Valuation for purpose of buy in.
  • Wholesale Food Business- Valuation for purpose of settling partnership dispute.
  • Accounting Firm- Valuation for purpose of divorce.
  • Call Centre- Valuation for internal purposes.
  • Hair Salon- Valuation for purpose of employee buy in.
  • Convenience Store and Gas- Valuation for purpose of lease dispute.
  • Specialized Builder of Restaurants- Valuation for purpose of employee buy in.
  • Wholesale Food Manufacturing and Distribution- Valuation for purpose of partnership buyout.
  • Retail Sporting Goods Franchise- Valuation for purpose of purchase.
  • Diesel Repair Shop- Valuation for purpose of partnership dispute.
  • Cellular Repair Company- Valuation for purpose of internal planning.
  • Roofing Company- Valuation for purpose of partnership consideration.
  • Upscale Personal Services Company- Valuation for purpose of internal planning.
  • Specialized Wheel Business- Valuation for purpose of sale.

 

How Financials Can Be Deceiving:
(This is the kind of practical solution offered by our system.)

Accounting for tax purposes is totally different than interpreting financial statements for Business Valuation Purposes. Let us give you just one example: (Think Partnership or Divorce)

For tax purposes R&D is an expense in the year the R&D occurred. For the purpose of an accurate valuation the R&D should be amortized over more appropriate period. R&D may be in fact cummulative. HUGE DIFFERENCE

The financials must be normalized to reflect proper treatment of R&D. If we didn't do this a company could spend 95% (or all) of the profit on R&D and might successfully claim the company to be worth very little for a short period of time. Perhaps not fraud but certainly manipulation, depending upon the purpose. (Divorce or other partnership)

 


 

When a small publicly traded TSX (Toronto Stock Exchange) listed company needed a report on fair value to meet TSX requirements they turned to Eric Jordan...

Testimonials at bottom of page.

Eric Jordan, Valuator
Free consultation.
Call or email now!


(613) 319-8535
eric@pin.ca
116 Albert Street, Ottawa, ON K1P 5G3 Canada

 

 

JUDGES - LAWYERS - PARTNERS IN DIVORCE PROCEEDINGS
PARTNERS IN BUSINESS DISPUTES - BUSINESS BUYERS BUSINESS SELLERS - CANADA REVENUE AGENCY

Bring the judge a valuation based on experience and logic.
WHAT KIND OF BUSINESS VALUATION DO YOU NEED?

  FAIR MARKET VALUE - ONGOING OPERATION
FAIR MARKET VALUE - ASSETS IN PLACE BUT NOT OPERATING
ORDERLY LIQUIDATION
  ORDERLY LIQUIDATION VALUE OVER TWO TO FOUR MONTHS

  INSURANCE VALUATION
Are you insured for replacement costs of rebuilding a business after a loss including Intangible Assets? Have your insurer acknowledge and accept valuation prior to buying insurance.
  Value of recruitment and training of a group of employees to the position of cohesively working together as they were prior to the point of interruption, damage or loss.
  Value of rebuilding client base to where it was prior to the point of interruption, damage or loss.
  Value of re implementation of systems and procedures in place prior to the point of interruption, damage or loss.

LOANS:
Banks are losing a lot of business these days to lenders who understand intangible assets. Define the value of your intangible assets. If your bank is not considering the value of your clearly defined intangibles you need to find a new lender who is better educated in your business model.
ABOUT US:

Our Valuations are generally half price or less than others. This is possible because we are more focused on Small Business Valuations and not working for Corporations.

The niche we serve is Small Business Valuations with special expertise in understanding intangible assets that are often missed as they don't show up on the Balance Sheet. In addition to Financial Statements I take into account; processes, procedures, value of supply chain, value of distribution network, knowledge base of owner and employees, value of employees (cost of recruitment and training as a group,) value of client base, Internet presence and use, documentation and risk.

The rate of return on the real Normalized Net Income is always the first and last consideration.

Value to who? The bank, the seller, the buyer; our valuations can include more than one.
 
How to value an Ottawa business; the valuation or appraisal is a process.  Once we have all of the information we need, via the intake conference, your valuation report will be delivered to you in approximately one week. We refer to our evaluation as a Value Statement.
WE COME AT THIS FROM THREE DISTINCT VIEWPOINTS:

EXISTING ACCOUNTING:

The view from an accounting perspective; relying on the the numbers created by the clients' existing accountant, then finding the real "normalized net income" through a proprietary process.

 

Ottawa
Ottawa Harmonized Licensing By-law No. 2002 - 189 A by-law of the City of Ottawa respecting the licensing, regulating and governing of certain businesses.

 

25 Factors Affecting Business Valuation
Recent Activity on Crunchbase 181 Funding Rounds Added 130 Acquisitions Recorded $2.5B
Fundings Captured 12,087 Entities Updated
Make a list of the non-tangible things in your business. It will surprise, if not shock you.
http://www.kmworld.com/Articles/Column/The-Future-of-the-Future/The-world- of-intangible-asset-valuation-
110580.aspx
Another link - same conclusion. https://www.strategy-business.com/article/08302?gko=47f49 60% to 80% back in
2008.
Employees and client lists are not tangible assets - but try to run a business without one or the
other. What value does a business with a storefront have without a valid, renewable lease? You
might have a partner; without a solid, up-to-date shareholder agreement in place how secure is
your investment? Did you know that some franchises are for a specific time period, perhaps
twenty years? After that you may have only the salvage value of used equipment and leasehold
improvements. Your old location might be given to a new franchisee or the franchisor may tell
you that in order to continue, you need to move five blocks away into a new building and
completely rebuild the store in order to have a new twenty-year franchise agreement. What do
you think this sort of franchise is worth in the last four or five years of the franchise agreement?
10

25 Factors Affecting Business Valuation
What is a long-term lease in an airport worth to a high profit food franchise? Add to this some
exclusivity and see how that affects things. What about Research and Development (R&D)? The
R&D you keep investing in might be written off in the year it was done, but is it gone? Investors
in Google and Amazon say NO. Many learned people share the same opinion I do; I hope to
prove my points by showing you the profiles of accredited people who have written articles that I
believe strongly support and prove my position. If you don’t have a detailed, well written, and up
to date operations manual you are probably missing 25 percent of the value of your business.
Without a detailed map of what to do, your business cannot run for any length of time without
you. Who would want to buy a business without a good operation manual? Who would want to
lend money to a company without an operations manual that would allow the company to
survive even if the founder was gone? This is one of the reasons why financial institutions prefer
financing franchises over independent business startups.
I believe I have proven the point that seventy to eighty percent of the value of businesses
today is intangible.
11

Section 2 ÷ø
These are the 25 main factors affecting business valuation that must be measured in order to
evaluate a business. Most of these factors are intangibles. I will explain how and why these
factors affect the value of a company. My focus is companies valued at under 10 million dollars.
Factor 1: History Factor 2: Purpose Factor 3: Financials Factor 4: Research and Development
Factor 5: Shareholder Agreement Factor 6: Value of Employees Factor 7: Value of Distribution
and Client Base Factor 8: Value of Supply Chain Factor 9: Internet Footprint – Social Network
Factor 10: Dominance in the Marketplace Factor 11: Processes and Procedures Factor 12:
Company Documentation Factor 13: Industry Averages Factor 14: Lease Terms Factor 15:
Leasehold Improvements Factor 16: Equipment Factor 17: Inventory Factor 18: Business Risk
including Liquidity Factor 19: Currency Fluctuations and Geopolitical Considerations Factor 20:
Opportunity Factor 21: Leverage - Terms and Cost of money
12

25 Factors Affecting Business Valuation
25 main factors affecting business valuation continued.
Factor 22: Minority Interest Factor 23: Special Interest Purchaser Factor 24: Redundancy in
Management Factor 25: Return on Investment
13

Factor 1:

÷ø History

T
he of digging the value business into of a their business founders past, starts we when get with
they a the glimpse started unwritten the of what business. knowledge unique By
knowledge they had and what they were attempting to develop. What special talents did the
founders have? This can be a big help as we go through the rest of the factors, as we can
understand the “purpose” the founders had in mind when they started. In many cases, one will
find that there was an unfilled need and a plan to fill the need. History gives us a solid starting
point.
Here is a real-world example of history to the rescue:
Kraft Cadbury - History to the rescue. When Kraft took over Cadbury in 2010 it was not looking
pleasant as many Cadbury people were thinking Kraft would dilute the quality. Kraft
management went back into the founder’s history and showed how the two founders were very
similar. They were able to pacify the Cadbury people with the similar beginning information and
it was one of the smoothest mergers Kraft ever undertook. (Read the whole story)
https://hbr.org/2012/12/your-companys-history-as-a-leadership- tool
14

Factor 2:

÷ø Purpose

W
e determine the need valuation to what know is factors to the determine are purpose relevant.
value of the valuation to If the purpose of for the firm and establish a share price to facilitate a
new partner coming in, it is different than establishing a price for the purpose of a divorce
proceeding.
The divorce proceeding requires we establish a “fair market value” on the legally defined
“Effective Date of Valuation.” “Terms and Cost of Money” would not be a relevant factor
because no seller terms would be considered.
A valuation for the purpose of establishing value of shares for a partner coming in, would
certainly look at “Terms and Cost of Money” as a relevant factor affecting value. If the “buy in”
is 100% financed by the existing partner or partners and the “risk” minimized for the buyer, a
higher valuation is likely because of lack of risk.
If I am hired by a prospective buyer of a restaurant, the purpose of the valuation changes. I
would look at the value of the business to the current owner, but additionally I would be looking
at how the subject business would fit on the new proposed purchaser. In this way, the prospective
buyer can make an informed decision about making an offer to purchase. When we look at
purpose, this system requires that we ask the question, “value to whom?”
15

Factor 3: Financials ÷ø W
hen statements prevailing analyzing fair to reflect financial market only price statements
purchases that are one related and must expenses directly adjust the to at
the business.
We want to find out if the operation of the business is making money or losing money. We need
to know if there are redundant assets that need to be stripped out of the balance sheet. For the
purpose of a business valuation we want to look at the balance sheet and income statements.
(Income statements are sometimes called profit and loss statements).
We will need to normalize the information. Any underpayments, perks or advantages to anyone
including owners, friends, and family must be accounted for at fair market value. Once
everything is adjusted to “fair market” we have what would be called “Normalized Net Income.”
Depending upon the situation and purpose we may want to look at 2 to 10 years of financial
statements. If auditing is required I suggest an outside accounting firm for that process. The
delicate part for small business valuation is “discretionary income.”
16

25 Factors Affecting Business Valuation
What to count, how to measure, and what is the purpose.
Determining the “Normalized Net Income” is a real skill set and the first and most important step
in determining the value of your small business, any other term implying the same thing is
suspect. (Small business being less than ten million dollars in sales.)
If you are reading financial information about a small company and you see the terms, owner's
discretionary income, seller's discretionary income, seller's discretionary earnings, free cash
flow, seller's discretionary cash flow or owner's cash flow. BE CAUTIOUS! These are terms that
people feel they can trust, but in fact they are often very misleading. You may also see the term
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) this is a legitimate
term, but only when used in the right context.
If these terms are used in relation to the sale of a small business, someone (usually the buyer) can
be easily misled. The managers of banks and other financial institutions have been misled by
these terms so often that their head offices are often very skeptical about financing the purchase
of any small business.
OWNER'S DISCRETIONARY INCOME: This term will often be used by those trying to sell a
franchise. They will show you a number like $75,000 per year, or perhaps even $90,000 for
owning and operating something like a plumbing franchise. What they do not make clear is that
the $90,000 per year is BEFORE the owner/manager/PLUMBER is paid. Depending on where
you live a plumber will probably make $65,000 to $85,000 a year just by going to work every
day.
17

25 Factors Affecting Business Valuation
If the people selling the franchise were being truthful they would use the term “Normalized Net
Income” that would show the profit after everything, including the owner’s wages, were paid out
at fair market value. If the fair market value of the plumber's/owner's wages were $70,000 the
true profit figure would be $20,000 not $90,000. The perpetrators are generally white shirt and
tie, and go to great lengths to convince buyers they are professionals, and in a dark way, that is
true.
“Free Cash Flow, Owner’s Cash Flow and Owner’s Discretionary Income” are all 'weasel' words
used in the process of separating buyers from their hard-earned money.
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) Some industry
groups think it is okay to include one owner/manager wage in EBITDA, which results in the
same misleading situation. You therefore must be very careful in the context that EBITDA is
used, most especially if dealing with small business and the numbers are being explained by a
deceitful sales person or owner.
EBITDA is generally used as a measure of a company’s operating cash flow based on stated
earning from financial statements BEFORE interest, taxes, depreciation and amortization.
https://www.entrepreneur.com/encyclopedia/owners-salary
Here are some searches you may want to do to confirm the conclusions above.
normalization of financials in a business valuation net income after normalization owner’s
income included as company earnings.
18

Factor 4: Research & Development (R&D) ÷ø Y

our really R&D gone? was Generally, written NOT.
off on your taxes. Is the R&D
Research and Development in most western nations is written off for tax purposes in the income
statement/profit and loss. For tax purposes this is reasonable and lawful.
For the purpose of valuation this is not so true. The value of the R&D did not disappear in the
year it was written off. Most often it is added to an existing base of R&D and will be added to
again in the next year. It is my opinion that the useful lifespan of R&D is somewhere between 5
and 12 years in some industries; in others, the R&D is accumulative, meaning that it keeps on
growing. For the purpose of valuation R&D c o u l d be accounted for in the balance sheet as an
intangible asset. This means that depending upon the individual business, the valuator will need
to make a judgement regarding lifespan of the R&D and possibly adjust the balance sheet to
correspond.
I am not the only one to come to this conclusion. Millions of shareholders of public companies
and investors in private companies believe this is true. This is why companies like Uber and
Airbnb have such high valuations. People are investing, not because these companies are making
a lot of profit, but because the investors believe in the R&D. For public companies, Amazon for
example; not yet returning a lot of profit but certainly a company with lots of R&D that people
believe in by the
19

25 Factors Affecting Business Valuation
billions of dollars. I’m not sure how many billions of dollars of proof I would be expected to
produce, but one could compose a very large list of both public and private companies where the
share price or valuation is based upon the perceived value of the R&D.
Unless purchased, Brand is the result of R&D and marketing within. When R&D is part and
parcel of a brand, the R&D often has an accumulative value. Uber would be worth much more
than the accumulative value of their R&D, as would most companies who have developed things
and are successful. Stability and growing sales are key to the measure.
Certainly, with any kind of software company, the R&D is of immense value but it may not be
shown in the balance sheet. There is a reasonably simple way of looking at this. Many small
business owners have both an operating company and a holding company with identical
ownership. The holding company generally holds the real estate and possibly other hard assets.
The operating company runs the business and pays the holding company fair market value rent
on the real estate or other hard assets. The key is, it must be done at fair market value.
For purpose of valuation consider that there is a development company and an operating
company. The development company does the R&D and then sells the R&D to the operating
company. Now you have a measured and identifiable intangible asset with a receipt that can be
placed into the balance sheet as an asset and depreciated over time, instead of being a direct cost
this year in the income statement.
There are some tax rules in different jurisdictions for all of this according to the Association of
Chartered Certified Accountants in the UK.
20

25 Factors Affecting Business Valuation
http://www.accaglobal.com/gb/en/student/exam-support- resources/fundamentals-exams-study-
resources/f7/technical-articles/rd.html
Under International Accounting Standards (ISA) 38, regarding R&D an intangible asset arising
from development can be capitalized if an entity can demonstrate all of the following criteria:
the technical feasibility of completing the intangible asset (so that it will be available for use or
sale), intention to complete and use or sell the asset, ability to use or sell the asset, existence of a
market or, if to be used internally, the usefulness of the asset, availability of adequate technical,
financial, and other resources to complete the asset, and the cost of the asset can be measured
reliably.
UK has slightly different interpretations. (See link above)
NOTE THAT WE VALUE R&D FOR VALUATION PURPOSES NOT TAX PURPOSES.
SOME OF THE ABOVE WOULD BE OF INTEREST TO THOSE WISHING TO RAISE
MONEY AND WANTING TO LEGITIMATELY SHOW VALUE IN THE COMPANY.
Some very bright people have done a lot of research on this subject:
Read the background on them first: http://www.valens-research.com/about/background/
21

25 Factors Affecting Business Valuation
Now, read what they have to say about capitalization on the balance sheet:
https://www.valens-research.com/rd-investment-not-expense-capitalizing-rd- impacts-understanding-corporate-
profitability/
https://www.theguardian.com/business/2017/apr/15/tesla-electric-cars-sparks- fly-wall-street-valuation
22

Factor 5: Shareholder ÷ø

Agreement
S
hareholder all shareholder matters agreements agreement in are the legal basis for dealing with a
business. Without a legally binding any dispute can become a seriously costly matter. Minority
shareholders are probably the most at risk in a situation where there is no legal shareholder
agreement. Just ask any minority shareholder who has been involved in a dispute.
There have been situations where minority shareholders thought their 10% interest in a million-
dollar company would be worth $100,000 this is not necessarily true.
When, how, and how much you might recover as a minority shareholder could be half, unless
there is a strong legal shareholder document to support your claims. Inversely, majority shares
have the possibility of being worth more. Potential for protracted legal wrangling could cause a
valuator to come with a lower value than would otherwise result if a proper legal shareholder
agreement was in place. There are different sorts of “shotgun” clauses that can be included in
these shareholder agreements. Payouts can be over a number of years, so the company can afford
to pay someone out.
23

25 Factors Affecting Business Valuation
A shareholder agreement that was detrimental to the remaining shareholders could result in a
much lower value as well. Have a lawyer you trust review any shareholder agreement before you
sign. Google “shareholder agreements” to find anything you are in doubt about.
24

Factor 6: Value ÷ø

of Employees C

runchbase Intelligence trading data shows firms (AI) t h a t hands at valuation working with
Artificial are being funded and numbers representing ten million dollars per employee (USD).
Crunchbase.com is not an academic journal but they are the world’s only relevant source of data
on large tech buyouts and funding is updated on a daily basis. Tens if not hundreds of millions of
dollars in new deals are posted daily. www.crunchbase.com is free to view.
QHR - Canadian Company, Kelowna, British Columbia, Canada sold in fall of 2016. QHR sale
($170,000,000 sale with 200 employees) = $850,000 CDN per employee and rather strongly
makes the case that skilled employees are worth something.
Established Web Design and Digital Ad Agency For Sale
South Florida, Florida UNDER OFFER (recent 2017) Asking Price: $1,245,000 (USD) Furniture
/ Fixtures included Sales Revenue: $780,000 (USD) Cash Flow: $303,000 (USD) Asking:
$155,000 per employee
25

25 Factors Affecting Business Valuation
This is not to say that every company is worth millions per employee, but it is important data to
reference. The push for high wages in the restaurant industry is causing the restaurant industry to
automate. The employees that are valuable are those who are working on the automation and
artificial intelligence robots that will replace the restaurant employees.
Most businesses will fall somewhere in between. Doing the research and understanding the
proper measurement for each individual business is a critical exercise in any accurate business
valuation. There is a lot of room between zero and ten million dollars for employee value.
Employees and contract workers are generally both considered when doing business valuation.
26

Factor 7: Value Distribution and Client Base ÷ø D
id supermarket built you around ever shelf product wonder at eye placement. why level?
products There Planogram is a appear whole defines industry on the

the what, where, and how much
in retail merchandising. Manufacturers, wholesalers and distributors invest a lot in getting proper
visibility on the retail level. The end buyer can also be considered as part of the client base. It
can take many years to build a client base that will go looking for the product you want to sell.
For the purpose of valuation, one must be able to measure the retail purchaser, the retailer, the
wholesaler and distributor. How much time and money would be spent to replace what has been
achieved? This is why companies buy other companies instead building from scratch.
We should point out that not every factor affecting value is relevant in each individual valuation.
One must know what factors are important to measure and what factors are irrelevant for each
subject business.
27

Factor 8: Value of Supply Chain ÷ø F
irst: old into Russian Imagine Canada. military yourself Your company rifles, as the ammunition,
owner is a supplier of a company and to related retailers importing items and also has an online
store. Your supply chain is from the Ukraine. This is about as unstable as it can possibly be with
the current geopolitical situation, and you are unable to get product. This leaves a very big dent
in your business and it is not going to be hard to measure the value.
Second: Imagine yourself as the exclusive Canadian importer of several well know Asian food
brands. Sales are strong, and everyone is happy. The ties are strong and go back 35 years. This
will take a lot more work to measure than scenario one.
Most valuations will be somewhere between these two extremes.
28

Factor 9: Internet Footprint – Social Network ÷ø L
ook relevant commerce at your searches? website? website. How What How many are well the
views does details?
it does place it get? on Google Is it an for e-
Additionally, there are all of the social networking sites. Facebook, Twitter, LinkedIn, Google+,
YouTube, Pinterest, Instagram, Flickr, Reddit, Snapchat, WhatsApp, Quora, Vine,
StumbleUpon, and Digg are some of the more popular social media sites.
What percentage of your sales are e-commerce on your own website?
Do you sell e-commerce on other platforms such as Amazon or AliExpress?
If you are a service company what percentage of your business comes from the internet? If you
run a retail store, how much of a role does your website and/or social media play in your
customer's decision to come to your store?
Even if this is not a relevant factor it may still be worth considering because you, or someone
else, can change this to make it better. This is where the measurement comes in.
29

Factor 10: Dominance ÷ø
in the Marketplace M

ention That search is ketchup engine product and domination and most most people people in the
will marketplace. will think think of of Mention Google. Heinz.

That is domination of a service in the marketplace.
Most businesses will not be in such a fortunate situation. Some companies will have 25% or
perhaps 75% of the market within a certain geographic area. If so, this will certainly increase the
valuation.
A fishing license or a dairy quota would have some dominance effect.
There have been issues with cities who issue taxi licenses promising in effect dominance, then
the licensees have been “interrupted” by a technology called Uber. The hotel industry is similarly
concerned with Airbnb and similar services.
A dominance situation that a valuator will commonly come across is an exclusive lease for a
service or retail category in a specific geographical area, something like an airport, university, or
shopping centre. Profits are almost locked in for such situations so of course the value is higher
as long as the lease is long-term. In some cases, the long-term lease might be the most valuable
part of the business.
Dominance is not always a relevant factor affecting value.
30

Factor 11: Processes and Procedures Agreements, Licenses ÷ø

and Other Intangible Assets U

nless proprietary patented it is a franchise, every company has their own processes and
procedures or something that is with a long expiry date. A registered brand or other intangible
assets must be measured.
For example, a successful retail bakery in an urban centre with its own proprietary processes and
procedures that result in a product that retail clients choose to purchase on an ongoing basis. This
is a huge consideration for value. The measurement of some of this is often a ratio depending
upon market share or penetration, and the means to deliver via employee base. Most franchises
today are not doing something so unique, but have simply put very tight processes and
procedures into what would often be considered a simple service. Think lawn services, hair
salons, tanning salons, pet grooming, sewer pipe cleaning, fencing, car cleaning, car
maintenance, and computer repair for just a starter list. Keep in mind some franchises have a
defined end date and the franchisor may have no obligation to renew a franchise.
Processes and procedures do not stand alone. There must also be documentation which we refer
to next. There is a whole section of this book where we show you a template that can be used to
document the processes, procedures, and systems of a company.
31

Factor 12: Company ÷ø

Documentation
I
magine documents procedures, that all you and aspects have systems a fully of are your
completed documented. business. operations All It is the done manual processes, so well that
that your business runs as smoothly when you are away as when you are home.
Imagine that you run the same business that is just as profitable; but where nothing is
documented. As long as everyone is healthy, all is well. You can’t be gone for weeks, perhaps
not even for days without the need to be in constant communication.
The first option offers security of income not only for the owner, family and employees but also
security of continued service for the clients. The owner could protect his family from his/her
untimely death by having life insurance that is readily available for most business owners.
Adequate disability insurance for small business owners is generally too costly and usually not
even available. That leaves the owner, family, employees, and clients all at a lot of risk. The
more of the operations manual you have completed, the better you have protected the future for
yourself and all of those around you.
Not all of this would be on a computer, but rather printed out with spaces for computer
passwords, banking information. Where are the spare keys? Important client and supplier
information. The list is comprehensive.
32

25 Factors Affecting Business Valuation
All of the information on each employee's job needs to be documented and regularly updated.
This is especially important for the founder of a small business to leave a paper trail for the
family to follow. This insures the business will continue if something happens to key players.
A buyer will pay a lot more for a well-documented company than one where the owner says; “I
will train you.” Sure, and what happens if the owner has a heart attack the day after the sale?
Documentation is so important; a template for making your own small business operations
manual is included at the end of this book to give our readers added value.
33

Factor 13: Industry ÷ø
Averages
I
ndustry valuations. comparable. averages One Air must conditioning are make not a relevant
factor for all business sure the comparable data is truly companies in Miami, Florida are not
comparable with air conditioning companies in Seattle Washington.
Many valuators use comparable sales as a major consideration, but this can be very inaccurate as
the sales figures don’t tell you if terms were given, how much net profit was recorded for the
preceding years or if owner’s wages were included in the profit. Costs can vary significantly.
Unless you are talking about franchises, no two businesses are totally comparable, in fact most
are very different. Being careful to measure data that is truly apples to apples is most important.
Industry averages can provide a guideline. It must be understood that industry averages include
both winners and losers and are too broad to provide any sort of accurate measurement for a
specific business. In some cases, industry averages will be important but in cases where the
business is more unique, the industry averages will mean much less.
34

Factor 14: Lease ÷ø
Terms
A
business limitations leasehold with improvements, on its no value. lease, Costs reopening, or a
lease ending soon, has of relocating could include transferring utilities and associated fees, new
equipment and fixtures, to name a few. A strong renewable lease is going to enhance the value of
a profitable business. However, a strong long-term lease can choke an unprofitable company. If
you sign such a long-term lease and if something else happens (your supply or client base
evaporates), you are in a lot of trouble and the lease obligations might offset a lot of inventory
that is paid for, your company could be rendered almost worthless due to lease obligations. Also,
remember that your landlord is not obligated to renew your lease or let you out of a lease you
have signed.
Reading the lease carefully is an important factor in business valuation. When you are
considering purchasing a business you better know the terms and conditions of the lease you will
be taking over. You might want to be renegotiating the lease prior to purchase to make sure you
have enough time to make the purchase worthwhile. The reputation of the landlord matters a lot.
35

25 Factors Affecting Business Valuation
A long-term lease negotiated in Calgary just prior to an oil price downturn can have the effect of
making the company worthless to a prospective buyer. In other cases, a long-term lease at a
locked in rate can be more valuable than anything else in the company. Lease terms need to be
measured carefully in a business valuation.
36

Factor 15: Leasehold ÷ø

Improvements
L
easehold classifications improvements and are often valued have along three with distinct
equipment.
value
Value within an “operating business” Value as “equipment in place” even if the business is not in
operation, but a reasonable new lease can be negotiated
Leasehold improvements and equipment may only be worth “liquidation value” if the business is
not operating and you can’t negotiate or renegotiate a lease. Note that in “liquidation value” it is
important to calculate the cost of liquidation which could run from 20% to 45% of the total
received
If you are opening an upscale spa or upscale restaurant you can expect leasehold improvements
sometimes called your “buildout” to be between $300,000 to $1,000,000. In a business valuation,
one must consider the time left before renovations are necessary again. If for some reason the
franchise is lost, or the lease does not renew, your leasehold improvements may be of little value.
In most cases used equipment is worth very little without a lease.
For accurate valuation one must measure by the correct classification.
37

Factor 16: Equipment Tools, Vehicles ÷ø

and Other Hard Assets.
E
quipment with of the original equipment will cost generally is and most depreciated be often
listed neither in value. the of balance these Fair market numbers.
sheet along value
Equipment generally has two classifications:
equipment value within an operating business liquidation value
Equipment, in some cases, would be part of the leasehold improvements and could have extra
value as “equipment in place” provided a lease could be negotiated.
Equipment may only be worth liquidation value if the business is not operating. If this is the case
it is important to calculate the cost of liquidation, which could run from 20% to 45% of the total
received. It is important to know what measurement best suits the purpose of the valuation.
38

Factor 17: Inventory ÷ø I
nventory many inventory? mitigating will What generally would factors. be be How the valued
cost marketable at of cost, selling however is the the inventory remaining there are
at retail, wholesale, and

liquidation?
Inventory within an operating business is going to have more value than “inventory that is in
place” or value of inventory net of liquidation. Net liquidation might be 40% less than t h e gross
liquidation figure, to take into account the costs associated with the liquidation of the inventory.
Inventory value within an operating business may be very close to wholesale depending upon
marketability factors. One must understand what they are measuring and for what purpose to
make an accurate estimate of value.
39

Factor 18: Business Risk including Liquidity ÷ø A

sking situation all is of difficult the right and challenging.
questions and measuring each
Are you in an industry that is being disrupted or about to be disrupted? An example would be the
taxi business disrupted by Uber. Is your business niche heavy into manual labour that will be
replaced by robots and artificial intelligence? Are there new innovative processes and procedures
being developed that could replace what your company does? Could your industry niche be
outsourced to another country? Competition is of course always a concern unless you have
market domination through some kind of exclusivity arrangement. If you lost a big contract
could a lender call a loan and put you into a liquidity crisis? If a large contract could not or
would not pay, could your business find itself in a liquidity crisis? One must also look at liquid
investments as compared to investment in small business that is not liquid. This is a huge
consideration for most investors. Who wants to wait two years or a lifetime trying to get back
money that was invested? This is why ratios are so different between “liquid shares” that can be
easily sold in public companies and shares that might be hard to sell in a private business.
40

Factor 19: Currency Fluctuations and Geopolitical Considerations
÷ø C
onsider materials yet, you a are from Canadian in China Western with company Canada, pricing
perhaps importing in US Edmonton.
dollars. construction Worse
You just signed a long-term lease on a much bigger space. The next month OPEC decides to try
and take out the North American oil producers and the oil price tanks. The Canadian dollar tanks
along with oil. There is a government in place in Ottawa that is not Alberta or oil company
friendly. How do you think this would affect the value of your construction material
wholesale/retail operation?
When doing business valuation, it is best to be well-read on business and politics both at home
and abroad over a number of years. Understanding the right questions to ask and knowing what
is important to whatever niche business you are dealing with is essential.
Experience and wisdom cannot be taught.
41

Factor 20: Opportunity ÷ø N
ow processes, is all we of this can procedures, is go documented, back systems to and research
and how employees. well and does development, it How all work well
together? Risk may of course temper some of the opportunity enthusiasm in the final
measurement. Do you know the market trends and where your market niche is going and where
you are positioned within that market? When we measure the R&D, processes, procedures,
systems, documentation, employees, contractors, and how well all of these factors work together
we get an idea of the potential for the company.
Let us suggest you are an internet media company helping people to brand and market their
products and services. You have a young and talented team that has been building for six years
and are now starting to show significant profit after taking the redundancy out of the system.
The story could of course be exactly the opposite, the profit is in the past, older workforce, losing
market share and no R&D to support growth.
Asking the relevant questions and finding out what is going on within the company is the task of
the valuator. One does not know until they start the measuring process.
42

Factor 21: Leverage - Terms and Cost of Money ÷ø D

epending applicable.
on the situation, this factor may not be
The cost of money is not uniform. A large company may have cash on hand that they are
receiving almost zero return on. This makes their cost of capital much different than a small
business or individual who might have to pay market rates which could be 5% to 25% depending
upon each individual situation.
If your father-in-law has excess retirement money and is willing to support you in your new
business venture by loaning you $500,000 to $2,000,000 at 3% you have a huge market
advantage going in.
Another thing that can happen is a retiring business owner may decide you are a good manager
and he will finance the business at a very reasonable interest rate with almost no down payment.
The seller trusts the business is good and that you are a good manager. The seller might feel
more comfortable with some of his retirement money still left in the successful business he built.
Compare this to the situation where a buyer must find his or her own money for down payment
and borrow the rest at market rates that may be inflated to reflect perceived risk.
43

Factor 22: Minority ÷ø
Interest
M
ost private value people of company the think 40% that block valued if you is $400,000. at own a
40% of the shares in a million dollars that the

Not necessarily. It depends upon your
shareholder agreement and your ability to finance any litigation necessary to enforce that
shareholder’s agreement. There are judges that might consider your minority shares as only
being worth half.
Having a solid shareholder agreement and understanding who you are in business with can save
you a lot of pain in the future. As a minority shareholder, how are your dividends going to be
paid? Who governs that process? It is a lot easier to buy in than get paid out. There are
companies that actively seek to purchase minority shareholder positions at a low price with the
intent of negotiating better terms from the majority shareholders who may not want to face
protracted litigation against an experienced and well financed minority partner group.
44

Factor 23: Special Interest Purchaser ÷ø A
special assets advantage in interest place of the purchaser that efficiencies with is this a and
purchaser purchase economies can who take of already scale. further has

If there are significant
advantages such as elimination of competition, technology advantages, purchasing power
advantages, and a reduction in costs by sharing overhead, then the premium paid will be or could
be higher. The price could be much higher if there is more than one potential purchaser.
A purchaser who has insider knowledge and information that significantly reduces risk in the
marketplace could definitely be considered a special interest purchaser, in comparison to an
arm’s length, third-party buyer. In this definition, the working partners in a small business would
all be special interest purchasers. The owner/ partners understand the risks and relationships at
stake. Because nothing really changes, there should be high client retention and little risk to cash
flow and profit.
An arm's length third- party must always be concerned about relationships with both the supply
chain and client list.
45

Factor 24: Redundancy ÷ø

in Management
W
hat it operations documented? is the backup manual This plan should for and management part
all be of part and the of how an company existing well is
documentation. However, because this point is so important it must be covered again on its own.
The higher up the food chain in the company the more extensive we want the backup plan for
each management person.
What is the plan for everyone in management and how good does the valuator find it to be? Is
the operations manual remotely up to date with computer related passwords?
The valuator must measure what is available and compare it to what should be available.
46

Factor 25: Return ÷ø
on Investment
R
eturn be should considered on have investment first found and is the the last. “Normalized most
From important our financial Net factor Income” review, and must we if everyone and
everything was paid at market value.
We have measured the processes, procedures, systems, documentation, and employees. We have
looked at all of the other factors affecting value and we have weighed them up, balancing the risk
and opportunity factors. Now we make a determination of what is a reasonable return on
investment with all of the relevant factors measured and taken into consideration. Some very
large companies such as Amazon, have a very high stock price without earnings to justify. On
the other end of the scale would be service businesses in an industry that is being trashed.
The valuator must understand and measure accordingly.
47

Section 3: Operations: Manual ÷ø

Template
1.
Company Structure
2.
Products and Services
3.
Direct Employees, Contract Workers and Outside Contractors
4.
Licenses, Permits, Accreditation and Certification
5.
Business Suppliers
6.
Clients
7.
Office Procedures
8.
Business Procedures
9.
Business Equipment
10.
Office Equipment
11.
Emergency Equipment
1. Company Structure What is the legal structure of the company?
Proprietorship Partnership Incorporation Public
48

25 Factors Affecting Business Valuation
Ownership:
Names Percentages Shareholder agreement Where is the legal jurisdiction of the company?
Where are these documents stored?
Is this a franchise? If yes:
Where is the franchise agreement? What does it say about? o Length of time o Selling o Renewal
rights
2. Products and Services
Provide an overview of the products and/or services produced by the business
3. Direct Employees, Contract Workers and Outside Contractors
Who does the work? Where is the production of goods and/or services done? What control do
you have?
Direct Employees
Name, and other information Date of hire Salary, bonuses, and dividends Any extra perks? What
do they represent in the company? What roles do they play? What are their responsibilities?
49

25 Factors Affecting Business Valuation
Who do they answer to? Which people would be best able to replace them (often more than just
one person) In their own words, what exactly do they do? What confidential information does
this person have? Have they signed a confidentiality non-disclosure agreement - if no - why not?
Computer passwords and other such tech information. This needs to be handwritten on a page
with the person's name at the top and kept in a safe place “locked” with an additional copy at
your accountant’s and/or lawyer’s office. UPDATE REGULARLY.
Contract Workers and Outside Contractors
Name, and other information What is their job description? Include all responsibilities. What are
the terms of their contract? What special knowledge and information about the company do they
have? This includes relationships, proprietary information they maintain, and of course computer
passwords and other access codes
Professional Services Lawyer Accountant and/or Bookkeeper (taxes, payroll, etc.) Financial
Institutions Insurance Investment Advisors Credit Card Processing Collections Human
Resources Media Specialists
50

25 Factors Affecting Business Valuation
Consultants (including Business Valuator) IT Computer Hardware and Software Repair IT for
Internet presence including social media, domain registration and hosting
Daily, Monthly and Yearly Tasks
Regarding payments and other financial issues Full details required Details
Never store sensitive information into software programs that could get hacked. Have printed
copies that you have control of at your lawyer or accountant’s office. An inexpensive computer
and backup drive in your safe might be prudent.
Blue Collar Services
Provide complete details Security Plumber Electrician Janitorial Landscaping Delivery Other
4. Licenses to Operate
City business license Other geographic licenses Association and industry certifications and
licensing
5.Business Suppliers
Full list and documentation 51

25 Factors Affecting Business Valuation
6. Clients
Full list in order of importance and/or most profitable
7. Office Procedures
Opening and closing procedures Alarm system passwords and/or codes (need to be handwritten
and locked somewhere secure)
8. Business Procedures
Staffing Training Order processing and sales procedures Call comes in, document what happens
after that Customer service procedures Shipping and receiving
9. Equipment
List each piece Where are the keys? Who knows how to operate it? Who repairs it? Any quirks?
Insurance? Registration? Permits? Lease information
10. Office Equipment
List each piece Computers Passwords (handwritten and stored in a secure location)
52

25 Factors Affecting Business Valuation
Maintenance Where you purchase the consumables Lease information
11. Emergency Procedures
Full details including muster stations In case of fire In case of an earthquake
53

Conclusion ÷ø T
his mostly value. book Depending the should intangibles have upon helped the in you to
understand a business that reason or purpose that it is determine the that caused you to read this
book, you will determine how you utilize the information. If you are a business owner, this book
will have given you some clarity on what is valuable in your own business. Just by
understanding this you will know where you should invest your time.
If you put some time into developing an operation manual from the free template in Section 3,
you are likely to be gaining tens of thousands of dollars (or more) in value from documenting all
these things.
Lawyers, lenders, and accountants will know which clients will benefit the most from reading
this book and point them in the right direction.
Divorce litigants and others in dispute will better understand their own situation and be better
able to make decisions going forward.
I cannot teach wisdom. I cannot teach experience.
If, however, you are stable, motivated and feel you have enough wisdom and experience to
qualify, I am open to training associates anywhere in the world. www.pin.ca

 

Changes have been made to the Municipal Code Chapter 19, the by-law which governs the establishment and operation of Business Improvement Areas in Toronto. In July 2011, Toronto City Council adopted amendments regarding starting a BIA, the BIA polling processes, proxy voting, board eligibility and board governance Business Improvement Areas are encouraged to keep on top of changes in the by-laws, regulations, urban design issues and other items of interest affecting their operations.

Develop your business plan
Before starting your business
Here are some resources to help you decide if entrepreneurship is for you.
A business plan is an outline for the development, execution and control of a new or existing business. Visit any Enterprise Toronto small business centre for one-to-one consultation on business plan development
Register your business
Access in-person, one-to-one support for business registrations, name searches and incorporation at all Enterprise Toronto small business centres

 

RISK:
Looking from the insurance viewpoint and assessing risk to buyer.

HUMAN CAPITAL:
From the point of view of a resume broker; assessing the value of the
human capital involved in the business.


INTELLECTUAL PROPERTY AND PROPRIETARY PROCESSES:
Understanding, assessing and estimating the intellectual property and proprietary knowledge that is transferred with the business.  Change of ownership and management does matter.
INTAKE CONFERENCE:
This is a 2 to 3 hour conference call that can include as many stakeholders as required.
As no two businesses are the same, the questions will vary.
Below is a list of some of the areas that we will cover.

(1) Why: What is the purpose of the valuation?

(2) Who: Value with whom owning and managing the business?

  • Your current value with current ownership and management?
  • Value with a new business owner with less experience?
  • Value with buyer like you with similar business management experience?
  • Value with an upscale buyer who has the financial ability to build on what you have accomplished in your business?
  • These WHO questions make a huge difference to the final appraisal.

(3) Normalized Net Income: I must understand what questions to ask to be able to determine the real 'Normalized Net Income.' This figure is seldom what you see in your year-end accounting, which is generally calculated to determine the lowest amount of tax legally payable.

  • Owners and families are often overpaid or underpaid depending upon individual tax situations.
  • What would the owner have to pay someone to fill his/her position in the business?
  • There are about twenty more normalizing questions that must be answered and these can be different depending upon the answers given to previous questions. This is where experience counts.

(4) Leasehold Improvements: These need to be covered regardless of whether the building is leased or owned.
It is important that the right questions are asked in any comprehensive appraisal.

(5) Hard Assets: Determining fair market value.
Book value means nothing if we want to know the true value of the business.

  • Business Equipment
  • Business Inventory

(6) Intellectual Property: Copyright, Proprietary Processes, Business Operation Manuals. These are your operating manuals; the step by step instructions on how to run your business and how to train others to operate your business. This greatly affects value; positively if it you have them and negatively if you don�t have them, and much more negative if it would not be possible for you to have a practical manual that would allow for your business to continue if you were unable to function.

(7) Value of Cash Flow: This is calculated by finding the normalized net income then multiplying it by a ratio determined by risk, opportunity, and the intellectual property affecting the means to produce.

(8) Soft Assets: Do you have intellectual property that has fair market cash value outside of your business?

(9) Risk: What are the possible risks to your business?
No appraisal can be completed without properly understanding risk.

Ottawa
How to value an Ottawa business; the valuation or appraisal is a process.� Once we have all of the information we need, via the intake conference, your valuation report will be delivered to you in approximately two business days. We refer to our evaluation as a Value Statement.

25 Factors Affecting Business Valuation
Recent Activity on Crunchbase 181 Funding Rounds Added 130 Acquisitions Recorded $2.5B
Fundings Captured 12,087 Entities Updated
Make a list of the non-tangible things in your business. It will surprise, if not shock you.
http://www.kmworld.com/Articles/Column/The-Future-of-the-Future/The-world- of-intangible-asset-valuation-
110580.aspx
Another link - same conclusion. https://www.strategy-business.com/article/08302?gko=47f49 60% to 80% back in
2008.
Employees and client lists are not tangible assets - but try to run a business without one or the
other. What value does a business with a storefront have without a valid, renewable lease? You
might have a partner; without a solid, up-to-date shareholder agreement in place how secure is
your investment? Did you know that some franchises are for a specific time period, perhaps
twenty years? After that you may have only the salvage value of used equipment and leasehold
improvements. Your old location might be given to a new franchisee or the franchisor may tell
you that in order to continue, you need to move five blocks away into a new building and
completely rebuild the store in order to have a new twenty-year franchise agreement. What do
you think this sort of franchise is worth in the last four or five years of the franchise agreement?
10

25 Factors Affecting Business Valuation
What is a long-term lease in an airport worth to a high profit food franchise? Add to this some
exclusivity and see how that affects things. What about Research and Development (R&D)? The
R&D you keep investing in might be written off in the year it was done, but is it gone? Investors
in Google and Amazon say NO. Many learned people share the same opinion I do; I hope to
prove my points by showing you the profiles of accredited people who have written articles that I
believe strongly support and prove my position. If you don’t have a detailed, well written, and up
to date operations manual you are probably missing 25 percent of the value of your business.
Without a detailed map of what to do, your business cannot run for any length of time without
you. Who would want to buy a business without a good operation manual? Who would want to
lend money to a company without an operations manual that would allow the company to
survive even if the founder was gone? This is one of the reasons why financial institutions prefer
financing franchises over independent business startups.
I believe I have proven the point that seventy to eighty percent of the value of businesses
today is intangible.
11

Section 2 ÷ø
These are the 25 main factors affecting business valuation that must be measured in order to
evaluate a business. Most of these factors are intangibles. I will explain how and why these
factors affect the value of a company. My focus is companies valued at under 10 million dollars.
Factor 1: History Factor 2: Purpose Factor 3: Financials Factor 4: Research and Development
Factor 5: Shareholder Agreement Factor 6: Value of Employees Factor 7: Value of Distribution
and Client Base Factor 8: Value of Supply Chain Factor 9: Internet Footprint – Social Network
Factor 10: Dominance in the Marketplace Factor 11: Processes and Procedures Factor 12:
Company Documentation Factor 13: Industry Averages Factor 14: Lease Terms Factor 15:
Leasehold Improvements Factor 16: Equipment Factor 17: Inventory Factor 18: Business Risk
including Liquidity Factor 19: Currency Fluctuations and Geopolitical Considerations Factor 20:
Opportunity Factor 21: Leverage - Terms and Cost of money
12

25 Factors Affecting Business Valuation
25 main factors affecting business valuation continued.
Factor 22: Minority Interest Factor 23: Special Interest Purchaser Factor 24: Redundancy in
Management Factor 25: Return on Investment
13

Factor 1:

÷ø History

T
he of digging the value business into of a their business founders past, starts we when get with
they a the glimpse started unwritten the of what business. knowledge unique By
knowledge they had and what they were attempting to develop. What special talents did the
founders have? This can be a big help as we go through the rest of the factors, as we can
understand the “purpose” the founders had in mind when they started. In many cases, one will
find that there was an unfilled need and a plan to fill the need. History gives us a solid starting
point.
Here is a real-world example of history to the rescue:
Kraft Cadbury - History to the rescue. When Kraft took over Cadbury in 2010 it was not looking
pleasant as many Cadbury people were thinking Kraft would dilute the quality. Kraft
management went back into the founder’s history and showed how the two founders were very
similar. They were able to pacify the Cadbury people with the similar beginning information and
it was one of the smoothest mergers Kraft ever undertook. (Read the whole story)
https://hbr.org/2012/12/your-companys-history-as-a-leadership- tool
14

Factor 2:

÷ø Purpose

W
e determine the need valuation to what know is factors to the determine are purpose relevant.
value of the valuation to If the purpose of for the firm and establish a share price to facilitate a
new partner coming in, it is different than establishing a price for the purpose of a divorce
proceeding.
The divorce proceeding requires we establish a “fair market value” on the legally defined
“Effective Date of Valuation.” “Terms and Cost of Money” would not be a relevant factor
because no seller terms would be considered.
A valuation for the purpose of establishing value of shares for a partner coming in, would
certainly look at “Terms and Cost of Money” as a relevant factor affecting value. If the “buy in”
is 100% financed by the existing partner or partners and the “risk” minimized for the buyer, a
higher valuation is likely because of lack of risk.
If I am hired by a prospective buyer of a restaurant, the purpose of the valuation changes. I
would look at the value of the business to the current owner, but additionally I would be looking
at how the subject business would fit on the new proposed purchaser. In this way, the prospective
buyer can make an informed decision about making an offer to purchase. When we look at
purpose, this system requires that we ask the question, “value to whom?”
15

Factor 3: Financials ÷ø W
hen statements prevailing analyzing fair to reflect financial market only price statements
purchases that are one related and must expenses directly adjust the to at
the business.
We want to find out if the operation of the business is making money or losing money. We need
to know if there are redundant assets that need to be stripped out of the balance sheet. For the
purpose of a business valuation we want to look at the balance sheet and income statements.
(Income statements are sometimes called profit and loss statements).
We will need to normalize the information. Any underpayments, perks or advantages to anyone
including owners, friends, and family must be accounted for at fair market value. Once
everything is adjusted to “fair market” we have what would be called “Normalized Net Income.”
Depending upon the situation and purpose we may want to look at 2 to 10 years of financial
statements. If auditing is required I suggest an outside accounting firm for that process. The
delicate part for small business valuation is “discretionary income.”
16

25 Factors Affecting Business Valuation
What to count, how to measure, and what is the purpose.
Determining the “Normalized Net Income” is a real skill set and the first and most important step
in determining the value of your small business, any other term implying the same thing is
suspect. (Small business being less than ten million dollars in sales.)
If you are reading financial information about a small company and you see the terms, owner's
discretionary income, seller's discretionary income, seller's discretionary earnings, free cash
flow, seller's discretionary cash flow or owner's cash flow. BE CAUTIOUS! These are terms that
people feel they can trust, but in fact they are often very misleading. You may also see the term
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) this is a legitimate
term, but only when used in the right context.
If these terms are used in relation to the sale of a small business, someone (usually the buyer) can
be easily misled. The managers of banks and other financial institutions have been misled by
these terms so often that their head offices are often very skeptical about financing the purchase
of any small business.
OWNER'S DISCRETIONARY INCOME: This term will often be used by those trying to sell a
franchise. They will show you a number like $75,000 per year, or perhaps even $90,000 for
owning and operating something like a plumbing franchise. What they do not make clear is that
the $90,000 per year is BEFORE the owner/manager/PLUMBER is paid. Depending on where
you live a plumber will probably make $65,000 to $85,000 a year just by going to work every
day.
17

25 Factors Affecting Business Valuation
If the people selling the franchise were being truthful they would use the term “Normalized Net
Income” that would show the profit after everything, including the owner’s wages, were paid out
at fair market value. If the fair market value of the plumber's/owner's wages were $70,000 the
true profit figure would be $20,000 not $90,000. The perpetrators are generally white shirt and
tie, and go to great lengths to convince buyers they are professionals, and in a dark way, that is
true.
“Free Cash Flow, Owner’s Cash Flow and Owner’s Discretionary Income” are all 'weasel' words
used in the process of separating buyers from their hard-earned money.
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) Some industry
groups think it is okay to include one owner/manager wage in EBITDA, which results in the
same misleading situation. You therefore must be very careful in the context that EBITDA is
used, most especially if dealing with small business and the numbers are being explained by a
deceitful sales person or owner.
EBITDA is generally used as a measure of a company’s operating cash flow based on stated
earning from financial statements BEFORE interest, taxes, depreciation and amortization.
https://www.entrepreneur.com/encyclopedia/owners-salary
Here are some searches you may want to do to confirm the conclusions above.
normalization of financials in a business valuation net income after normalization owner’s
income included as company earnings.
18

Factor 4: Research & Development (R&D) ÷ø Y

our really R&D gone? was Generally, written NOT.
off on your taxes. Is the R&D
Research and Development in most western nations is written off for tax purposes in the income
statement/profit and loss. For tax purposes this is reasonable and lawful.
For the purpose of valuation this is not so true. The value of the R&D did not disappear in the
year it was written off. Most often it is added to an existing base of R&D and will be added to
again in the next year. It is my opinion that the useful lifespan of R&D is somewhere between 5
and 12 years in some industries; in others, the R&D is accumulative, meaning that it keeps on
growing. For the purpose of valuation R&D c o u l d be accounted for in the balance sheet as an
intangible asset. This means that depending upon the individual business, the valuator will need
to make a judgement regarding lifespan of the R&D and possibly adjust the balance sheet to
correspond.
I am not the only one to come to this conclusion. Millions of shareholders of public companies
and investors in private companies believe this is true. This is why companies like Uber and
Airbnb have such high valuations. People are investing, not because these companies are making
a lot of profit, but because the investors believe in the R&D. For public companies, Amazon for
example; not yet returning a lot of profit but certainly a company with lots of R&D that people
believe in by the
19

25 Factors Affecting Business Valuation
billions of dollars. I’m not sure how many billions of dollars of proof I would be expected to
produce, but one could compose a very large list of both public and private companies where the
share price or valuation is based upon the perceived value of the R&D.
Unless purchased, Brand is the result of R&D and marketing within. When R&D is part and
parcel of a brand, the R&D often has an accumulative value. Uber would be worth much more
than the accumulative value of their R&D, as would most companies who have developed things
and are successful. Stability and growing sales are key to the measure.
Certainly, with any kind of software company, the R&D is of immense value but it may not be
shown in the balance sheet. There is a reasonably simple way of looking at this. Many small
business owners have both an operating company and a holding company with identical
ownership. The holding company generally holds the real estate and possibly other hard assets.
The operating company runs the business and pays the holding company fair market value rent
on the real estate or other hard assets. The key is, it must be done at fair market value.
For purpose of valuation consider that there is a development company and an operating
company. The development company does the R&D and then sells the R&D to the operating
company. Now you have a measured and identifiable intangible asset with a receipt that can be
placed into the balance sheet as an asset and depreciated over time, instead of being a direct cost
this year in the income statement.
There are some tax rules in different jurisdictions for all of this according to the Association of
Chartered Certified Accountants in the UK.
20

25 Factors Affecting Business Valuation
http://www.accaglobal.com/gb/en/student/exam-support- resources/fundamentals-exams-study-
resources/f7/technical-articles/rd.html
Under International Accounting Standards (ISA) 38, regarding R&D an intangible asset arising
from development can be capitalized if an entity can demonstrate all of the following criteria:
the technical feasibility of completing the intangible asset (so that it will be available for use or
sale), intention to complete and use or sell the asset, ability to use or sell the asset, existence of a
market or, if to be used internally, the usefulness of the asset, availability of adequate technical,
financial, and other resources to complete the asset, and the cost of the asset can be measured
reliably.
UK has slightly different interpretations. (See link above)
NOTE THAT WE VALUE R&D FOR VALUATION PURPOSES NOT TAX PURPOSES.
SOME OF THE ABOVE WOULD BE OF INTEREST TO THOSE WISHING TO RAISE
MONEY AND WANTING TO LEGITIMATELY SHOW VALUE IN THE COMPANY.
Some very bright people have done a lot of research on this subject:
Read the background on them first: http://www.valens-research.com/about/background/
21

25 Factors Affecting Business Valuation
Now, read what they have to say about capitalization on the balance sheet:
https://www.valens-research.com/rd-investment-not-expense-capitalizing-rd- impacts-understanding-corporate-
profitability/
https://www.theguardian.com/business/2017/apr/15/tesla-electric-cars-sparks- fly-wall-street-valuation
22

Factor 5: Shareholder ÷ø

Agreement
S
hareholder all shareholder matters agreements agreement in are the legal basis for dealing with a
business. Without a legally binding any dispute can become a seriously costly matter. Minority
shareholders are probably the most at risk in a situation where there is no legal shareholder
agreement. Just ask any minority shareholder who has been involved in a dispute.
There have been situations where minority shareholders thought their 10% interest in a million-
dollar company would be worth $100,000 this is not necessarily true.
When, how, and how much you might recover as a minority shareholder could be half, unless
there is a strong legal shareholder document to support your claims. Inversely, majority shares
have the possibility of being worth more. Potential for protracted legal wrangling could cause a
valuator to come with a lower value than would otherwise result if a proper legal shareholder
agreement was in place. There are different sorts of “shotgun” clauses that can be included in
these shareholder agreements. Payouts can be over a number of years, so the company can afford
to pay someone out.
23

25 Factors Affecting Business Valuation
A shareholder agreement that was detrimental to the remaining shareholders could result in a
much lower value as well. Have a lawyer you trust review any shareholder agreement before you
sign. Google “shareholder agreements” to find anything you are in doubt about.
24

Factor 6: Value ÷ø

of Employees C

runchbase Intelligence trading data shows firms (AI) t h a t hands at valuation working with
Artificial are being funded and numbers representing ten million dollars per employee (USD).
Crunchbase.com is not an academic journal but they are the world’s only relevant source of data
on large tech buyouts and funding is updated on a daily basis. Tens if not hundreds of millions of
dollars in new deals are posted daily. www.crunchbase.com is free to view.
QHR - Canadian Company, Kelowna, British Columbia, Canada sold in fall of 2016. QHR sale
($170,000,000 sale with 200 employees) = $850,000 CDN per employee and rather strongly
makes the case that skilled employees are worth something.
Established Web Design and Digital Ad Agency For Sale
South Florida, Florida UNDER OFFER (recent 2017) Asking Price: $1,245,000 (USD) Furniture
/ Fixtures included Sales Revenue: $780,000 (USD) Cash Flow: $303,000 (USD) Asking:
$155,000 per employee
25

25 Factors Affecting Business Valuation
This is not to say that every company is worth millions per employee, but it is important data to
reference. The push for high wages in the restaurant industry is causing the restaurant industry to
automate. The employees that are valuable are those who are working on the automation and
artificial intelligence robots that will replace the restaurant employees.
Most businesses will fall somewhere in between. Doing the research and understanding the
proper measurement for each individual business is a critical exercise in any accurate business
valuation. There is a lot of room between zero and ten million dollars for employee value.
Employees and contract workers are generally both considered when doing business valuation.
26

Factor 7: Value Distribution and Client Base ÷ø D
id supermarket built you around ever shelf product wonder at eye placement. why level?
products There Planogram is a appear whole defines industry on the

the what, where, and how much
in retail merchandising. Manufacturers, wholesalers and distributors invest a lot in getting proper
visibility on the retail level. The end buyer can also be considered as part of the client base. It
can take many years to build a client base that will go looking for the product you want to sell.
For the purpose of valuation, one must be able to measure the retail purchaser, the retailer, the
wholesaler and distributor. How much time and money would be spent to replace what has been
achieved? This is why companies buy other companies instead building from scratch.
We should point out that not every factor affecting value is relevant in each individual valuation.
One must know what factors are important to measure and what factors are irrelevant for each
subject business.
27

Factor 8: Value of Supply Chain ÷ø F
irst: old into Russian Imagine Canada. military yourself Your company rifles, as the ammunition,
owner is a supplier of a company and to related retailers importing items and also has an online
store. Your supply chain is from the Ukraine. This is about as unstable as it can possibly be with
the current geopolitical situation, and you are unable to get product. This leaves a very big dent
in your business and it is not going to be hard to measure the value.
Second: Imagine yourself as the exclusive Canadian importer of several well know Asian food
brands. Sales are strong, and everyone is happy. The ties are strong and go back 35 years. This
will take a lot more work to measure than scenario one.
Most valuations will be somewhere between these two extremes.
28

Factor 9: Internet Footprint – Social Network ÷ø L
ook relevant commerce at your searches? website? website. How What How many are well the
views does details?
it does place it get? on Google Is it an for e-
Additionally, there are all of the social networking sites. Facebook, Twitter, LinkedIn, Google+,
YouTube, Pinterest, Instagram, Flickr, Reddit, Snapchat, WhatsApp, Quora, Vine,
StumbleUpon, and Digg are some of the more popular social media sites.
What percentage of your sales are e-commerce on your own website?
Do you sell e-commerce on other platforms such as Amazon or AliExpress?
If you are a service company what percentage of your business comes from the internet? If you
run a retail store, how much of a role does your website and/or social media play in your
customer's decision to come to your store?
Even if this is not a relevant factor it may still be worth considering because you, or someone
else, can change this to make it better. This is where the measurement comes in.
29

Factor 10: Dominance ÷ø
in the Marketplace M

ention That search is ketchup engine product and domination and most most people people in the
will marketplace. will think think of of Mention Google. Heinz.

That is domination of a service in the marketplace.
Most businesses will not be in such a fortunate situation. Some companies will have 25% or
perhaps 75% of the market within a certain geographic area. If so, this will certainly increase the
valuation.
A fishing license or a dairy quota would have some dominance effect.
There have been issues with cities who issue taxi licenses promising in effect dominance, then
the licensees have been “interrupted” by a technology called Uber. The hotel industry is similarly
concerned with Airbnb and similar services.
A dominance situation that a valuator will commonly come across is an exclusive lease for a
service or retail category in a specific geographical area, something like an airport, university, or
shopping centre. Profits are almost locked in for such situations so of course the value is higher
as long as the lease is long-term. In some cases, the long-term lease might be the most valuable
part of the business.
Dominance is not always a relevant factor affecting value.
30

Factor 11: Processes and Procedures Agreements, Licenses ÷ø

and Other Intangible Assets U

nless proprietary patented it is a franchise, every company has their own processes and
procedures or something that is with a long expiry date. A registered brand or other intangible
assets must be measured.
For example, a successful retail bakery in an urban centre with its own proprietary processes and
procedures that result in a product that retail clients choose to purchase on an ongoing basis. This
is a huge consideration for value. The measurement of some of this is often a ratio depending
upon market share or penetration, and the means to deliver via employee base. Most franchises
today are not doing something so unique, but have simply put very tight processes and
procedures into what would often be considered a simple service. Think lawn services, hair
salons, tanning salons, pet grooming, sewer pipe cleaning, fencing, car cleaning, car
maintenance, and computer repair for just a starter list. Keep in mind some franchises have a
defined end date and the franchisor may have no obligation to renew a franchise.
Processes and procedures do not stand alone. There must also be documentation which we refer
to next. There is a whole section of this book where we show you a template that can be used to
document the processes, procedures, and systems of a company.
31

Factor 12: Company ÷ø

Documentation
I
magine documents procedures, that all you and aspects have systems a fully of are your
completed documented. business. operations All It is the done manual processes, so well that
that your business runs as smoothly when you are away as when you are home.
Imagine that you run the same business that is just as profitable; but where nothing is
documented. As long as everyone is healthy, all is well. You can’t be gone for weeks, perhaps
not even for days without the need to be in constant communication.
The first option offers security of income not only for the owner, family and employees but also
security of continued service for the clients. The owner could protect his family from his/her
untimely death by having life insurance that is readily available for most business owners.
Adequate disability insurance for small business owners is generally too costly and usually not
even available. That leaves the owner, family, employees, and clients all at a lot of risk. The
more of the operations manual you have completed, the better you have protected the future for
yourself and all of those around you.
Not all of this would be on a computer, but rather printed out with spaces for computer
passwords, banking information. Where are the spare keys? Important client and supplier
information. The list is comprehensive.
32

25 Factors Affecting Business Valuation
All of the information on each employee's job needs to be documented and regularly updated.
This is especially important for the founder of a small business to leave a paper trail for the
family to follow. This insures the business will continue if something happens to key players.
A buyer will pay a lot more for a well-documented company than one where the owner says; “I
will train you.” Sure, and what happens if the owner has a heart attack the day after the sale?
Documentation is so important; a template for making your own small business operations
manual is included at the end of this book to give our readers added value.
33

Factor 13: Industry ÷ø
Averages
I
ndustry valuations. comparable. averages One Air must conditioning are make not a relevant
factor for all business sure the comparable data is truly companies in Miami, Florida are not
comparable with air conditioning companies in Seattle Washington.
Many valuators use comparable sales as a major consideration, but this can be very inaccurate as
the sales figures don’t tell you if terms were given, how much net profit was recorded for the
preceding years or if owner’s wages were included in the profit. Costs can vary significantly.
Unless you are talking about franchises, no two businesses are totally comparable, in fact most
are very different. Being careful to measure data that is truly apples to apples is most important.
Industry averages can provide a guideline. It must be understood that industry averages include
both winners and losers and are too broad to provide any sort of accurate measurement for a
specific business. In some cases, industry averages will be important but in cases where the
business is more unique, the industry averages will mean much less.
34

Factor 14: Lease ÷ø
Terms
A
business limitations leasehold with improvements, on its no value. lease, Costs reopening, or a
lease ending soon, has of relocating could include transferring utilities and associated fees, new
equipment and fixtures, to name a few. A strong renewable lease is going to enhance the value of
a profitable business. However, a strong long-term lease can choke an unprofitable company. If
you sign such a long-term lease and if something else happens (your supply or client base
evaporates), you are in a lot of trouble and the lease obligations might offset a lot of inventory
that is paid for, your company could be rendered almost worthless due to lease obligations. Also,
remember that your landlord is not obligated to renew your lease or let you out of a lease you
have signed.
Reading the lease carefully is an important factor in business valuation. When you are
considering purchasing a business you better know the terms and conditions of the lease you will
be taking over. You might want to be renegotiating the lease prior to purchase to make sure you
have enough time to make the purchase worthwhile. The reputation of the landlord matters a lot.
35

25 Factors Affecting Business Valuation
A long-term lease negotiated in Calgary just prior to an oil price downturn can have the effect of
making the company worthless to a prospective buyer. In other cases, a long-term lease at a
locked in rate can be more valuable than anything else in the company. Lease terms need to be
measured carefully in a business valuation.
36

Factor 15: Leasehold ÷ø

Improvements
L
easehold classifications improvements and are often valued have along three with distinct
equipment.
value
Value within an “operating business” Value as “equipment in place” even if the business is not in
operation, but a reasonable new lease can be negotiated
Leasehold improvements and equipment may only be worth “liquidation value” if the business is
not operating and you can’t negotiate or renegotiate a lease. Note that in “liquidation value” it is
important to calculate the cost of liquidation which could run from 20% to 45% of the total
received
If you are opening an upscale spa or upscale restaurant you can expect leasehold improvements
sometimes called your “buildout” to be between $300,000 to $1,000,000. In a business valuation,
one must consider the time left before renovations are necessary again. If for some reason the
franchise is lost, or the lease does not renew, your leasehold improvements may be of little value.
In most cases used equipment is worth very little without a lease.
For accurate valuation one must measure by the correct classification.
37

Factor 16: Equipment Tools, Vehicles ÷ø

and Other Hard Assets.
E
quipment with of the original equipment will cost generally is and most depreciated be often
listed neither in value. the of balance these Fair market numbers.
sheet along value
Equipment generally has two classifications:
equipment value within an operating business liquidation value
Equipment, in some cases, would be part of the leasehold improvements and could have extra
value as “equipment in place” provided a lease could be negotiated.
Equipment may only be worth liquidation value if the business is not operating. If this is the case
it is important to calculate the cost of liquidation, which could run from 20% to 45% of the total
received. It is important to know what measurement best suits the purpose of the valuation.
38

Factor 17: Inventory ÷ø I
nventory many inventory? mitigating will What generally would factors. be be How the valued
cost marketable at of cost, selling however is the the inventory remaining there are
at retail, wholesale, and

liquidation?
Inventory within an operating business is going to have more value than “inventory that is in
place” or value of inventory net of liquidation. Net liquidation might be 40% less than t h e gross
liquidation figure, to take into account the costs associated with the liquidation of the inventory.
Inventory value within an operating business may be very close to wholesale depending upon
marketability factors. One must understand what they are measuring and for what purpose to
make an accurate estimate of value.
39

Factor 18: Business Risk including Liquidity ÷ø A

sking situation all is of difficult the right and challenging.
questions and measuring each
Are you in an industry that is being disrupted or about to be disrupted? An example would be the
taxi business disrupted by Uber. Is your business niche heavy into manual labour that will be
replaced by robots and artificial intelligence? Are there new innovative processes and procedures
being developed that could replace what your company does? Could your industry niche be
outsourced to another country? Competition is of course always a concern unless you have
market domination through some kind of exclusivity arrangement. If you lost a big contract
could a lender call a loan and put you into a liquidity crisis? If a large contract could not or
would not pay, could your business find itself in a liquidity crisis? One must also look at liquid
investments as compared to investment in small business that is not liquid. This is a huge
consideration for most investors. Who wants to wait two years or a lifetime trying to get back
money that was invested? This is why ratios are so different between “liquid shares” that can be
easily sold in public companies and shares that might be hard to sell in a private business.
40

Factor 19: Currency Fluctuations and Geopolitical Considerations
÷ø C
onsider materials yet, you a are from Canadian in China Western with company Canada, pricing
perhaps importing in US Edmonton.
dollars. construction Worse
You just signed a long-term lease on a much bigger space. The next month OPEC decides to try
and take out the North American oil producers and the oil price tanks. The Canadian dollar tanks
along with oil. There is a government in place in Ottawa that is not Alberta or oil company
friendly. How do you think this would affect the value of your construction material
wholesale/retail operation?
When doing business valuation, it is best to be well-read on business and politics both at home
and abroad over a number of years. Understanding the right questions to ask and knowing what
is important to whatever niche business you are dealing with is essential.
Experience and wisdom cannot be taught.
41

Factor 20: Opportunity ÷ø N
ow processes, is all we of this can procedures, is go documented, back systems to and research
and how employees. well and does development, it How all work well
together? Risk may of course temper some of the opportunity enthusiasm in the final
measurement. Do you know the market trends and where your market niche is going and where
you are positioned within that market? When we measure the R&D, processes, procedures,
systems, documentation, employees, contractors, and how well all of these factors work together
we get an idea of the potential for the company.
Let us suggest you are an internet media company helping people to brand and market their
products and services. You have a young and talented team that has been building for six years
and are now starting to show significant profit after taking the redundancy out of the system.
The story could of course be exactly the opposite, the profit is in the past, older workforce, losing
market share and no R&D to support growth.
Asking the relevant questions and finding out what is going on within the company is the task of
the valuator. One does not know until they start the measuring process.
42

Factor 21: Leverage - Terms and Cost of Money ÷ø D

epending applicable.
on the situation, this factor may not be
The cost of money is not uniform. A large company may have cash on hand that they are
receiving almost zero return on. This makes their cost of capital much different than a small
business or individual who might have to pay market rates which could be 5% to 25% depending
upon each individual situation.
If your father-in-law has excess retirement money and is willing to support you in your new
business venture by loaning you $500,000 to $2,000,000 at 3% you have a huge market
advantage going in.
Another thing that can happen is a retiring business owner may decide you are a good manager
and he will finance the business at a very reasonable interest rate with almost no down payment.
The seller trusts the business is good and that you are a good manager. The seller might feel
more comfortable with some of his retirement money still left in the successful business he built.
Compare this to the situation where a buyer must find his or her own money for down payment
and borrow the rest at market rates that may be inflated to reflect perceived risk.
43

Factor 22: Minority ÷ø
Interest
M
ost private value people of company the think 40% that block valued if you is $400,000. at own a
40% of the shares in a million dollars that the

Not necessarily. It depends upon your
shareholder agreement and your ability to finance any litigation necessary to enforce that
shareholder’s agreement. There are judges that might consider your minority shares as only
being worth half.
Having a solid shareholder agreement and understanding who you are in business with can save
you a lot of pain in the future. As a minority shareholder, how are your dividends going to be
paid? Who governs that process? It is a lot easier to buy in than get paid out. There are
companies that actively seek to purchase minority shareholder positions at a low price with the
intent of negotiating better terms from the majority shareholders who may not want to face
protracted litigation against an experienced and well financed minority partner group.
44

Factor 23: Special Interest Purchaser ÷ø A
special assets advantage in interest place of the purchaser that efficiencies with is this a and
purchaser purchase economies can who take of already scale. further has

If there are significant
advantages such as elimination of competition, technology advantages, purchasing power
advantages, and a reduction in costs by sharing overhead, then the premium paid will be or could
be higher. The price could be much higher if there is more than one potential purchaser.
A purchaser who has insider knowledge and information that significantly reduces risk in the
marketplace could definitely be considered a special interest purchaser, in comparison to an
arm’s length, third-party buyer. In this definition, the working partners in a small business would
all be special interest purchasers. The owner/ partners understand the risks and relationships at
stake. Because nothing really changes, there should be high client retention and little risk to cash
flow and profit.
An arm's length third- party must always be concerned about relationships with both the supply
chain and client list.
45

Factor 24: Redundancy ÷ø

in Management
W
hat it operations documented? is the backup manual This plan should for and management part
all be of part and the of how an company existing well is
documentation. However, because this point is so important it must be covered again on its own.
The higher up the food chain in the company the more extensive we want the backup plan for
each management person.
What is the plan for everyone in management and how good does the valuator find it to be? Is
the operations manual remotely up to date with computer related passwords?
The valuator must measure what is available and compare it to what should be available.
46

Factor 25: Return ÷ø
on Investment
R
eturn be should considered on have investment first found and is the the last. “Normalized most
From important our financial Net factor Income” review, and must we if everyone and
everything was paid at market value.
We have measured the processes, procedures, systems, documentation, and employees. We have
looked at all of the other factors affecting value and we have weighed them up, balancing the risk
and opportunity factors. Now we make a determination of what is a reasonable return on
investment with all of the relevant factors measured and taken into consideration. Some very
large companies such as Amazon, have a very high stock price without earnings to justify. On
the other end of the scale would be service businesses in an industry that is being trashed.
The valuator must understand and measure accordingly.
47

Section 3: Operations: Manual ÷ø

Template
1.
Company Structure
2.
Products and Services
3.
Direct Employees, Contract Workers and Outside Contractors
4.
Licenses, Permits, Accreditation and Certification
5.
Business Suppliers
6.
Clients
7.
Office Procedures
8.
Business Procedures
9.
Business Equipment
10.
Office Equipment
11.
Emergency Equipment
1. Company Structure What is the legal structure of the company?
Proprietorship Partnership Incorporation Public
48

25 Factors Affecting Business Valuation
Ownership:
Names Percentages Shareholder agreement Where is the legal jurisdiction of the company?
Where are these documents stored?
Is this a franchise? If yes:
Where is the franchise agreement? What does it say about? o Length of time o Selling o Renewal
rights
2. Products and Services
Provide an overview of the products and/or services produced by the business
3. Direct Employees, Contract Workers and Outside Contractors
Who does the work? Where is the production of goods and/or services done? What control do
you have?
Direct Employees
Name, and other information Date of hire Salary, bonuses, and dividends Any extra perks? What
do they represent in the company? What roles do they play? What are their responsibilities?
49

25 Factors Affecting Business Valuation
Who do they answer to? Which people would be best able to replace them (often more than just
one person) In their own words, what exactly do they do? What confidential information does
this person have? Have they signed a confidentiality non-disclosure agreement - if no - why not?
Computer passwords and other such tech information. This needs to be handwritten on a page
with the person's name at the top and kept in a safe place “locked” with an additional copy at
your accountant’s and/or lawyer’s office. UPDATE REGULARLY.
Contract Workers and Outside Contractors
Name, and other information What is their job description? Include all responsibilities. What are
the terms of their contract? What special knowledge and information about the company do they
have? This includes relationships, proprietary information they maintain, and of course computer
passwords and other access codes
Professional Services Lawyer Accountant and/or Bookkeeper (taxes, payroll, etc.) Financial
Institutions Insurance Investment Advisors Credit Card Processing Collections Human
Resources Media Specialists
50

25 Factors Affecting Business Valuation
Consultants (including Business Valuator) IT Computer Hardware and Software Repair IT for
Internet presence including social media, domain registration and hosting
Daily, Monthly and Yearly Tasks
Regarding payments and other financial issues Full details required Details
Never store sensitive information into software programs that could get hacked. Have printed
copies that you have control of at your lawyer or accountant’s office. An inexpensive computer
and backup drive in your safe might be prudent.
Blue Collar Services
Provide complete details Security Plumber Electrician Janitorial Landscaping Delivery Other
4. Licenses to Operate
City business license Other geographic licenses Association and industry certifications and
licensing
5.Business Suppliers
Full list and documentation 51

25 Factors Affecting Business Valuation
6. Clients
Full list in order of importance and/or most profitable
7. Office Procedures
Opening and closing procedures Alarm system passwords and/or codes (need to be handwritten
and locked somewhere secure)
8. Business Procedures
Staffing Training Order processing and sales procedures Call comes in, document what happens
after that Customer service procedures Shipping and receiving
9. Equipment
List each piece Where are the keys? Who knows how to operate it? Who repairs it? Any quirks?
Insurance? Registration? Permits? Lease information
10. Office Equipment
List each piece Computers Passwords (handwritten and stored in a secure location)
52

25 Factors Affecting Business Valuation
Maintenance Where you purchase the consumables Lease information
11. Emergency Procedures
Full details including muster stations In case of fire In case of an earthquake
53

Conclusion ÷ø T
his mostly value. book Depending the should intangibles have upon helped the in you to
understand a business that reason or purpose that it is determine the that caused you to read this
book, you will determine how you utilize the information. If you are a business owner, this book
will have given you some clarity on what is valuable in your own business. Just by
understanding this you will know where you should invest your time.
If you put some time into developing an operation manual from the free template in Section 3,
you are likely to be gaining tens of thousands of dollars (or more) in value from documenting all
these things.
Lawyers, lenders, and accountants will know which clients will benefit the most from reading
this book and point them in the right direction.
Divorce litigants and others in dispute will better understand their own situation and be better
able to make decisions going forward.
I cannot teach wisdom. I cannot teach experience.
If, however, you are stable, motivated and feel you have enough wisdom and experience to
qualify, I am open to training associates anywhere in the world. www.pin.ca

 

Changes have been made to the Municipal Code Chapter 19, the by-law which governs the establishment and operation of Business Improvement Areas in Toronto. In July 2011, Toronto City Council adopted amendments regarding starting a BIA, the BIA polling processes, proxy voting, board eligibility and board governance Business Improvement Areas are encouraged to keep on top of changes in the by-laws, regulations, urban design issues and other items of interest affecting their operations.

Develop your business plan
Before starting your business
Here are some resources to help you decide if entrepreneurship is for you.
A business plan is an outline for the development, execution and control of a new or existing business. Visit any Enterprise Toronto small business centre for one-to-one consultation on business plan development
Register your business
Access in-person, one-to-one support for business registrations, name searches and incorporation at all Enterprise Toronto small business centres

 

  • How long is the business lease?
  • Are there reasonable options to extend the lease?
  • If the owner of the building also owns the business has the rent been paid at market rates?
  • Are you in a one industry area, or is the area changing?
  • Are industry trends your friend or enemy?
  • Are there any Government regulations?
  • Staffing?
  • Competition and pricing challenges?
  • Changes to accessibility? Road changes?
  • How good is the succession plan, and do you even have one?
  • Operations and Training Manuals - How complete?
  • Additional questions depending upon the answers given.

Once we have all of the information we need, via the intake conference, your valuation report will be delivered to you approximately one week from the time we receive the financials.

As you can well understand, no computer program, gross sales or other rule of thumb guessing techniques are going to be helpful for you in determining the real value of your business. In fact, these techniques could harm you. Valuation and appraisal is our full time business. We do a lot of business valuations.


 

Business Valuation For Your
Ottawa Business
Generally $1,000 to $5,000.
Call for exact pricing for your situation.

 


Eric Jordan, Valuator
Free consultation.
Call or email now!
1-800-606-0310
(613) 319-8535

116 Albert Street,
Ottawa, ON K1P 5G3 Canada

eric@pin.ca
Business Valuations / Appraisals
Certified by Valuator Eric Jordan, CPPA.
 Appraisals to Support Litigation

Qualified Expert Witness

 

 

PAYMENT BY VISA, MASTERCARD, AMERICAN EXPRESS or DISCOVER.

Visit our main website at www.pin.ca to browse our
business opportunities and homes for sale by owner.

 

REFERRALS / TESTIMONIALS


How to value an Ottawa business or price businesses in Ottawa using valuation and appraisal principles - $1,000 to $5,000

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