Strezos notes that, in those years, average public price/earnings multiples were in
the 22 times range; they then plummeted to
half that or less in 2008–09. “Now, there’s a
lot more buoyancy and activity has picked
up and we’re getting back to pre-crash multiples, but they’re not yet what they were.”
However, that doesn’t mean owners can’t improve their odds of getting a good valuation.
Now, as then, most business valuators describe what they do as an art, not a science,
because their valuations can be affected by
so many factors outside of a vendor’s control—the volatile economy, the failure or
success of competitors, the health of senior
management and simply the fickleness of the
marketplace. Different valuators may well arrive at different valuations for the same business, using the same valuation parameters.
Nevertheless, the art is based on a standard
process that ultimately leads to arriving at a
value for a business.
According to Donna Smith, of Thunder
Bay, Ont.-based Bain Smith Business Valuation and Consulting Inc., that process begins with asking the prospective vendor for
a whole lot of information, such as financial
statements, corporate tax returns, shareholders, employees, financing, leases, suppliers,
franchise or customer agreements, listing of
the capital assets and their appraisals, ongoing or potential lawsuits, shareholder/man-agement salaries and bonuses and relevant
business plans and cash-flow projections
from the past few years.
“We also tour the facilities and get to
know both the owner and the business,”
Smith adds. “By the time we leave our first
meeting, we usually have a good sense of the
business’ critical success factors, the busi-
ness and industry risks, the key employees,
competitors, suppliers and customers, the
value drivers, the cash flows that can be
expected in the future, redundant assets, if
any, the owner’s and other non-arms length
parties’ roles and the existence of discre-
tionary, unusual or one-time items.”
Smith says she would also do some exter-
nal research, studying the industry, compe-
tition, market and economy and looking for
comparable market transactions.
Unfortunately, Strezos points out, owners’
expectations can get in the way of a realistic
evaluation. “Owners always overvalue their
business — it’s their baby, their passion — and
it takes someone like us to bring reality into
the picture.” That doesn’t mean owners can’t
go through some effort to bring reality closer
to their expectations.
A quick to-do list for improving the attractiveness of your company, says Strezos,
A quick to-do list for improving
the attractiveness of your company
✔ FOCUS ON product profitability to
increase your gross margins and your
✔ AIM FOR strong and positive cash flows
over the next few years.
✔ SET UP good barriers to entry into your
✔ MAKE SURE all your corporate contracts
are executed, up to date and nicely filed.
✔ SET YOUR legal matters in order.
✔ ENSURE ALL your filings are up to date,
such as tax, financial statements or other
Focus on product profitability to increase
your gross margins and your company’s prof-
itability. “You need a strong income state-
Aim for strong and positive cash flows over
the next few years.
Set up good barriers to entry into your
market space. “If it is difficult to enter your
market, that gives you a competitive edge.”
Make sure all your corporate contracts are
executed, up to date and nicely filed.
Set your legal matters in order—“you
don’t want any litigation to be going on.”
Ensure all your filings are up to date, such
as tax, financial statements or other compliance filings.
Strezos also stresses the importance of a
good capital management program. “Buy-
ers don’t want to lay out a lot of money right
away for capital assets. If you repair your
machinery, keep it in good order and, say,
replace it every five or six years, that will in-
crease the value of your business.”
First is to apply an ‘earnings before interest,
taxes, depreciation and amortization mul-