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There are four basic methodologies to determine fair market value:

1. Asset-based valuation– Assets of the business are valued, including inventory and hard assets such as equipment, machinery, furniture and fixtures. The book vale on the financial statements is not a realistic indication of current market value. This approach can be highly subjective and often provides a minimum value of the business as it does not take into consideration future profitability expectations and the value of intangible assets such as brand value and intellectual property.   
    
2. Industry rules of thumb– Over time many business types in standard industries have developed a common expectation of value, often based on a multiple or percentage of gross revenue. This can be misleading to use on it’s own and should most often be used to confirm other valuation approaches. It is often surprising however that the results of further valuation methods often result in a value very close to the rule of thumb.
    
3. Comparable transaction analysis– Valuation is based on multiples paid for comparable companies acquired in the market in recent years. While it is impossible to find any two businesses that are the same, a substantial amount of data on the sale of very similar businesses can often be found. This approach is most useful in establishing a reasonable range for a multiple of earnings and includes premiums paid for change of control and synergies.
    
4. Discounted economic cash flow method(preferred) – The objective of this method is to determine what the expected economic benefits stream is worth in present day dollars, given the risks associated with owning and operating the business. In other words, the purpose is to estimate the cash flow likely to be received and adjust for the time value of money. Because of this method's solid financial theory foundation, it is often favored by experienced investors and by business valuation professionals. Business value is calculated using inputs that include:

• A stream of economic benefits, such as net cash flows
• A discount rate which establishes the required rate of return on the investment
• An expected gain from the disposition of the business at the conclusion of the ownership period, or the long term value

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An earn-out is a way for the buyer to pay part of the purchase price on the future performance of the company. The buyer pays a portion of the purchase price upfront, and pays the rest if and when the company meets specified goals. Earn-out periods tend to be spread over several years (usually 2-3 years). Typically 15% to 30% of the total is contingent on an earn-out, but it can be as high as 50% in some cases. Earn-outs can help sell a business when buyers and sellers cannot agree on value. The earn-out is a mechanism to share the future risk so the seller is rewarded if the company does well and the buyer can mitigate some risks if earnings fail to materialize. Earn-outs are common where success depends on a small group of key employees, where the assets acquired make up a small portion of the transaction, or where the majority of the value is based on future growth.

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To avoid the unnecessary stress and issues that can arise from telling your employees about selling, it is normally best to inform your managers and employees about the sale immediately before or following the closing. In some cases you may need to reveal the fact the business is for sale to select managers or employees earlier in the selling process. There is no right or wrong in the timing of disclosing your intention to sell your business; it all depends on your business and the type of relationship you have with your staff.

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There are a number of things you can do to help us sell your business. These include:

• Effectively managing all aspects of the business as usual 
• Staying focused on improving the business
• Ensuring all key documents are accurate, kept up to date and readily available
• Providing us with required information in a timely manner
• Keeping business facilities clean and in good repair
• Identifying and removing any assets that are not part of the sale
• Being accommodating to meet with prospective buyers and as forthright as possible in responding to their question

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It is common for buyers to want to work closely with the previous owner for a number of months until they learn the key aspects of running the business. A typical transition period is three months, but this can vary and also include access to the seller at an hourly rate to answer questions for a number of months after the sale. The specifics of the terms of transition depend heavily on the buyer’s previous experience in the industry and on the type and complexity of the business. Most sellers want their business passed on to the new owner in manner that will ensure a successful continuation of what they built. Additionally, terms of sale are often built into the purchase agreement, such as vendor financing, that provide an incentive for the seller to work closely with the buyer to help ensure the business is a success.

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Buyers come from all kinds of backgrounds and can have very different perspectives on valuing a business. It is important to be patient and not overreact to initial offers. An astute buyer will structure his/her offer to get the best possible price and terms, downplaying potential rewards from the business and emphasizing the risks. Offers typically are received in the form of a non-binding letter of intent which contains subject clauses, such as a review of customer lists, financial statements and company records, obtaining a satisfactory lease and a transition period for the seller to work with the buyer.

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We normally recommend that buyers looking for vendor financing pledge sufficient collateral independent of the business to properly back up the loan. The collateral should be acceptable to you, your lawyer and your accountant.  This approach may turn off some buyers who insist that the business itself should be able to generate sufficient cash flow to repay your loan and provide an income to meet their needs. But if your business is in high demand we can often negotiate these kinds of favorable terms. Alternatively, your loan is secured against the business itself and your interest is protected by confirming evidence of indebtedness, such as shares held in escrow, a mortgage against real estate or a promissory note. Keep in mind that while there is always risk and no absolute guarantees, providing vendor financing can often secure the highest price for the business and is a viable and common approach to selling.

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To be meaningful we must first clearly define “earnings”. Earnings can be defined as “after tax net income”, “earnings before interest and taxes” (EBIT), “earnings before interest, taxes, depreciation, and amortization” (EBITDA), and a “modified EBITDA”, or “seller discretionary earnings” (SDE). SDE is often referred to as “owner's benefit” or some other reference to “discretionary” cash flow.

EBITDA is a measure of a company’s operating cash flow based on information from the income statement. It is calculated by looking at earnings before the deduction of interest expenses, taxes, depreciation and amortization. EBITDA helps remove the distortionary accounting and financing effects on company earnings, making it a good way to compare companies within and across industries. EBITDA is a useful measure best used for companies with significant assets or with a significant amount of debt financing.  It is not as useful for small companies with no significant loans.

It is common tohear business values expressed as “X times earnings”. However, it is important to distinguish that this uses historical income rather than future income projections. The most useful earnings definition to use is determined by the amount of discretion an owner has over business expenses. Large publicly traded companies have oversight mechanisms on expenses in place and reconstructing earnings is most often unnecessary. It would be appropriate to use actual net income or EBIT as a definition of earnings to establish a value and applying a multiple of those earnings. Where business owners have unrestricted control over expenditures with no oversight, it is appropriate to “reconstruct” or “normalize” true earnings of the business and use a “discretionary earnings” (SDE) definition to establish a value.

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First we prepare marketing material such as a one page Teaser that provides a high level summary of your business opportunity without revealing who you are. A detailed Confidential Information Memorandum (CIM) is then prepared to present your business in the best light and answer most questions buyers will have.

Then we use a direct marketing approach to market your business through our large database of qualified buyers as well as internationally. We may also list your business in a variety of business sales web sites to reach global markets and use networking and other business contacts we have to target the right buyers. Marketing is always done very confidentially to protect your business. We use Non-Disclosure Agreements with potential buyers before important details such as the CIM are sent. We also selectively pre-screen buyers to ensure they are qualified and have the assets and financing available to purchase.

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On average it takes 9 to 12 months to sell a business (from the very beginning to closing). The time required to complete a sale depends on many factors including the industry, business price, business condition, the type of business, the economy, marketing conditions and your willingness to finance all or part of the purchase price. Some businesses sell much sooner or take longer depending on many different factors. CK Global Solutions can review these factors with you and help you identify your best options.

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1. CK Global Solutions assessment – “Is your Business Ready to Sell?”
2. Decision to sell
3. Listing agreement signed
4. Key business documents and financials reviewed
5. Marketing plan development
6. Implementation and promotion
7. Reporting and regular status updates
8. Buyer liaison and introductions
9. Intent to purchase and due diligence
10. Documents and legal work
11. Sale completion
12. Completion of any post-sale transition and terms

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We typically require 3-5 years of financial statements as well as your financial plan/budget for the upcoming year and your current business plan.  An asset list is also commonly needed.  (NB. You should also list any assets to be excluded from the sale).  It is also preferable to provide Review Engagement financials as opposed to Notice to Reader.

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CK Global Solutions protects your confidentiality through the use of Non-Disclosure Confidentiality Agreements and by pre-screening buyers for their financial capacity and sincerity in purchasing a business. For additional information, read more in the FAQ: How will my business be marketed and in our Selling Your Business page.

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To maximize the fundamental value of the underlying business, common value drivers are:

1. Good and improving cash flow and earnings
2. A realistic growth strategy
3. Operating profit margins at least as good as the industry average
4. Stable and motivated management team and staff
5. Operating systems that improve sustainability of cash flow
6. Contractually recurring revenue from licensing, warranties or regular maintenance
7. A well diversified customer base
8. Effective financial controls
9. A diversified product mix
10. Differentiating your products and services from competitors
11. Having solutions to industry barriers to entry, such as licenses, permits, regulatory    approvals, trademarks, patents and zoning variances
12. Normalizing your owner expenses to show true profitability of the company
13. Becoming an expert in your industry
14. Facility appearance consistent with asking price
15. A great website that markets and represents your company well

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1. Understand the Goals and Objectives
2. Communicate with Owner and all Key Stakeholders
3. Plan for Contingencies
4. Value the Business
5. Assemble the Multi-Disciplinary Team
6. Personal Financial Plan and Analysis
7. Maximize Value   
8. Define the Exit Strategies
9. Implement the Plan

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Most definitely. According to a recent study prepared by the Canadian Federation of Independent Business, less than one third of small to mid size business owners are planning for their future succession. However, among those who have a succession plan, the majority are informal, unwritten plans, which have not been shared with the intended successor (whether an employee, family member, management, outside or industry buyer). CK Global Solutions, as transition planning advisors, can assist you in preparing your exit plan and goals for selling your business. This includes taking into consideration all aspects of the sale, directing you to the right professionals if required and generally assisting in implementing a successful exit strategy.

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There are seven basic strategies to exit a privately held business:

1. Sell to Third Party (Industry or Individual Buyer)
2. Transfer of ownership to Family Members
3. Sell to other Shareholders
4. Sell to Management (MBO or LBO)
5. Sell to Employee Stock Ownerships Plan (ESOP)
6. Go Public
7. Liquidate the Business