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Valuation or Business Insight Report – What is right for you?

October 21, 2019

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At Smythe Advisory, we are fortunate to have six qualified Chartered Business Valuators (CBV) that work on a variety of projects, including valuations, financing and M&A assignments. A significant portion of our work relates to the preparation of reports that provide our expert opinion on the value of shares, business assets or even losses sustained because of the actions of a party. These reports are used by the courts, tax authorities, shareholders and numerous other parties. As CBVs, we are required to prepare these expert reports in accordance with specific standards as laid out by our professional governing body, the Canadian Institute of Chartered Business Valuators. Not only are the standards required to ensure we best serve the public, they provide a consistent standard for third-party evaluation.

As business owners are frequently faced with circumstances that relate to the value of their business, it is not surprising that they will call us asking about business valuation reports. Oftentimes, after a short discussion, it becomes apparent they need more than just our opinion of the fair market value of the shares in the context of a hypothetical sale. Yes, they are interested in what the market price of their shares might be, but their immediate concerns are generally centered around how they can make their business more valuable or the issues they need to address if they plan to sell their business in the coming years. Alternatively, they might be interested in expanding their business and want to know the value in the context of raising capital or debt.

Unless it is clear they need a valuation report for a specific purpose, it has been our experience that they might need something else entirely. As a general term, we refer to this as a “Business Insight Report”. These reports deal with specific or general issues that a business owner wants addressed.

Let’s look at a specific example. At Smythe, we provide advisory services to businesses involved in the distribution of property & casualty (P&C) insurance. Our clients include insurance companies, brokers, wholesales and other P&C insurance participants. At least once a week, we get a call from a broker that is inquiring about having a business valuation done. While it would be easier to simply tell them about the process and provide a quote, we try to get a better idea about the issues they are dealing with and why they think a valuation might address them. Understandably, most brokers do not want to divulge too much about their business or motivations, so we start with a general discussion about their business issues. Ultimately, we are trying to understand certain key attributes about the business, including, but not limited to, the following:

  • Career stage of the owner;
  • Any special circumstances in the owner’s life that might compel him or her to take some action;
  • Total revenues, contribution margins, labor costs and profitability;
  • Composition of client base;
  • Composition of the balance sheet, including existence of debt;
  • Management structure;
  • Options to transition business;
  • Operating systems and level of organization and
  • What the owner really wants to achieve.

After this initial discussion, we might very well agree that a valuation report is appropriate and will proceed on that basis.

In other cases, it becomes apparent that the broker is considering options such as a full or partial divestiture, possible acquisitions or family transition. Although their initial interest in the market price of their business remains, there are other issues that led to the call. At this point, we can talk to the owner and, together, consider strategies and options available.

If the client wants to dig deeper, we start by looking at actual financial and operating data. Based on the review, we can provide insights into how their business fits into the market in terms of profitability, operations, marketability and areas for improvement. This Business Insight Report can be tailored specifically for the issues of concern, sometimes at a cost less than a valuation report. In the case of a P&C brokerage, the report generally looks at the following areas:

  • Composition of the book of business;
  • Comparison of operating results to industry benchmarks;
  • Comparison to industry top performers;
  • Current pricing environment for similar brokerages;
  • Discussion of financial metrics and financial strength;
  • Capacity to take on additional debt depending on circumstances;
  • Observations on areas to increase value, and
  • Outlining possible options in the short, medium and long-term.

While this is not a deep dive analysis, we have found that it helps business owners better understand their options.

As business owners are generally focused on running the day-to-day operations, planning for growth or making operating improvements for a possible exit often gets left behind. By identifying issues and working on them one at a time, it is surprising how quickly you can develop a workable plan.

If you are thinking of transitioning your business, or are curious as to what it is worth, please do not hesitate to contact one of our team members directly or click on our Get in Touch With Us button and we can determine whether a valuation or Business Insight Report is right for you.

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