Entrust Accounting & Advisory Services
Business Finance is focused on how businesses deal with funding, capital structure, and investment decision making.
Business Finance looks at:
Maximizing the shareholder value through financial planning both short and long term and the implementation of different strategies.
There are several reasons why someone might want to know the business valuation that "could be" attached to their company. I say "could be" since the purpose of the valuation influences the valuation outcome..
Companies with negative equity could be worth millions of dollars, and a highly profitable company might be worth less than the company's net assets. In the first case, the owner is in start-up mode with a patent. In contrast, in the second case, a company is operating in an environment where regulations will put the company out of business.
Understanding the intended purpose of a valuation will lead to the use of different tools in determining a business value.
Business valuation encompasses more than financial number-crunching and analysis. Many non-financial drivers add or remove value from a business. Many of these drivers are company-specific and, in most cases, controllable by the owner.
BUYING OR SELLING
Sellers want the highest price they can get for their business. Buyers want to buy a business for as little as possible. When buying or selling a business, especially a smaller business, the key driver to determining an amount for the value of a business is risk.
When somebody buys your business, they are not buying past performance; they are buying the businesses future cash flows. Cash-flow is everything!
The most popular method used to value a purchase of a company is Discounted Cash Flow (DCF) analysis. This method creates a valuation of all future cash inflows and outflows and expresses it in todays dollars – what is the future worth today.
Other methods include, but are not limited to, Earnings Multiples and Comparative Values of recent transactions.
Financial institutions are more interested in the liquidated value of tangible assets less the claims against those assets. Tangible assets are physical; they include cash, inventory, vehicles, equipment, buildings, and investments. Financial institutions are primarily concerned about assessing the risk associated with a company and arriving at a conclusion that the company has the wherewithal and resources to cover the loan and interest payments.
In the event of default, the lender requires assurance that the net tangible assets available are sufficient to recoup the loan to mitigate against losses. Liquidated value is a value one could expect to receive in the event of a forced liquidation or "the quick sale."
For tax planning for Estate and Succession Planning purposes, the company's valuation needs to be adequately documented and well supported. For tax purposes, the valuation of a property will occur at fair market value (FMV).
If, when determining FMV, one is expected to include goodwill value, then the FMV is based on future cash flow expectations and an anticipated purchaser's expected return rate.
Since Estate and Succession Planning is not conducted at arms-length, it is essential to obtain an objective, well-documented valuation. Failing to do so could result in the CRA conferring benefits to new shareholders and assess them accordingly.
FINANCIAL STRATEGIES FOR BUSINESS OWNERS
Cash ultimately flows through to the owners of a company. There are three major ways in which this can happen: Wages, Dividends, and/or Capital Gains. Each of these have their advantages and disadvantages.
Canada's tax system employs a concept of "Tax Integration". Tax integration's goal is to subject the taxpayer to the same or similar total tax rate once it reaches the individual taxpayer level. The function of tax integration is to avoid double taxation. Strategies considered for tax integration are mostly addressing whether one should take a salary or dividend from their company. The answer is: It depends.
Drawing a salary allows you access to CPP as a source of retirement income, Maternity or Parental Benefits through Employment Insurance, and deductions from net income for RRSP contributions.
Income from dividends saves on CPP and EI contributions, corporately and personally. Through Tax Free Saving Accounts, and Individual Pension Plan, you can save significantly more than you would under current RRSP rules.
If an owner sells all their shares in a Canadian Controlled Private Corporation, for 2020, $883,384 of the capital gains are subject to the Lifetime Capital Gains Exemptions. For all capital gains over the $883,384, fifty percent (50%) of the excess gains will be taxed at your highest marginal tax rate.
For most owners, the business can represent up to 80% of their personal net worth. Most business owners look to their business to provide a significant source of funds towards their retirement. There are many professionals who can help manage a high net-worth client's investible assets; however, there are not too many professionals who can help the client improve the value of their largest asset, their business.
Like selling real estate, you must stage your company for sale and unlike selling real estate, it could take years to create the momentum that will result in the highest valuation.
Entrust Accounting and Advisory Services will provide a holistic plan that will:
Review personal goals and objectives to determine what you financially need from your company
Assess current valuation under various scenarios
Develop a company operational and financial strategy that will deliver the value required
Work with the business owner and the company the yield the highest possible return for the company.