Business Advice – Knot Ink Digital

Why is it so difficult to value a business?

March 15, 2022October 5, 2019 by Knot Ink Digital

You are your reviewing your personal situation and you need to value your business, for estate planning purposes or in case you are planning to sell the business. You see ten different valuators and everyone comes up with a different value of your business and everyone has a disclaimer saying that the actual selling price could be different. The true value of the business is what someone is willing to pay.

Until you find that person, you never know what the final price will be. When you sell your house, if you live in a subdivision, many houses are either identical or very similar, the lot is the same, the front elevation may look different but the house is very similar. One house may have a few more upgrades and you can factor that into differentiating the two houses. It is much easier to value a house because you can compare it to the house that sold in the same neighbourhood.

When if comes to a business, no two businesses are identical. You have have a franchise with identical name, price of products etc but no two locations have the same value – why? Each location is unique, the traffic count could be different, the product mix could be different, the average purchase price and average sales per customer can be different. What is the same between these two businesses – the name and nothing else. One location could be making money and another could be losing money, they cannot be valued the same.

Many years ago I saw a fast food franchise, it was in an office building. Two main tenants of the building moved out but were still paying the rent because they were unable to sublet the space. As far as the landlord was concerned, the building was fully occupied however the head count in the building was down by 50% because of so many vacant floors in the building. As a result of the lack of people in the building, the fast food restaurant was struggling and ultimately went bankrupt.

Consequences of using withholding taxes as cashflow instead of paying the government

March 14, 2022June 21, 2017 by Knot Ink Digital

Times are tough and suppliers are slow paying. You have bills to pay, the bank is not lending you more money but you have collected sales taxes from customers, you have paid your employees their net pay but you have not remitted the withholding taxes to the government, should you dip into those funds and use them for running the business? The answer is no, you should not dip into the trust money. You collected it on behalf of the government and if you use their money, there are significant penalties that will result.

The government tax authorities are not lenient when you use their money. They may lien your company, seize bank accounts and create havoc on the operations of the business. I have seen a company not pay sales taxes to the government over an 8 year period. The government placed a lien on the business for unpaid sales taxes and interest. The owners stated how can the government do that, we worked so hard to build up the company and they are trying to close it down. Whose money was used to build up the company? It was not theirs. The bank would not lend them money, no one would so there is the temptation to use money in your possession and hope
to deal with the problem later. The government may be able to go after the directors of the company personally to pay the trust money collected by the Company and not
remitted.

Valuation of a Business

March 15, 2022January 21, 2015 by Knot Ink Digital

If you sales are dropping and costs or rising, owners unfortunately will end up having to reduce or eliminate their salary. Fluctuating the owners’s salary should have no impact on the valuation on the sale of a business. Most investors will look at normalized earnings to value a business.

Normalized earnings are usually calculated backwards, starting with the net income reported on the financial statements. Add back all personal expenses and I typically add back the owners salary.

Then I reflect a salary for what you would have to pay to replace that owner. if the owner is taking only $20,000 in salary but you determine that you would have to pay say $65,000 for an independent person to replace the owner, then you would reduce normalized earnings by $45,000. If there were no other adjustments except for the salary adjustment, you would drop the reported income by $45,000 in my example above ($65,000 which you consider normal less $20,000 actually taken out by the owner).

Is your business worth as much when the owner dies?

March 15, 2022October 27, 2013 by Knot Ink Digital

What happens if the owner of the business dies prematurely, is the business worth the same or did the value of the business just decline? Does the estate have to sell the business immediately or can it run without the owner? How important is the owner to the business. It also depends on the type of business that you own. If you own a consulting business and you have no other staff, when the owner dies, there may not be much value left in the business unless you are able to sell the customer list and the customers go to the new consultant.

If you own a retail store, the clients may come to the store for the products therefore the passing of the owner may or may not affect the sales of the business. If the business is larger and has staff or products which can continue the sales of the business, the business may continue to succeed even though the owner is not longer involved.

Controlling costs to increase profits before selling your business

March 15, 2022May 19, 2013 by Knot Ink Digital

The goal of many business owners is to maximize profits which can be done by increasing prices or decreasing costs. Many companies have tried to do both but concentrate on minimizing prices. First they reduce staff levels or they may automate and change the manufacturing process to achieve efficiencies. Others have outsourced manufacturing to foreign countries.

On April 29, I wrote a blog about manufacturing in China – is there an advantage or it is becoming too expensive and in a few years, manufacturing will be returning back to North America. I read in a local newspaper yesterday that a Canadian company was moving their manufacturing plant back to Canada because China was becoming too expensive. My predictions were correct but the timing was much faster than I originally thought.

The stock markets and the financial markets believe that outsourcing to a foreign country is far cheaper than producing in North America. It is for some products but those which are very automated processes, there is not a lot of labor costs in the cost of the goods sold. Businesses go to China and the Far East to save on labor costs. As processes are becoming more automated, the savings that businesses incur keep getting smaller. The costs of transportation, the cost of having to have your inventory in a container on the water for four weeks means that your working capital is tied up, you cannot go just in time delivery easily because you have to fill up an entire container.

Tiger Woods – does his image taint his advertising sponsors?

March 15, 2022July 17, 2012 by Knot Ink Digital

Everyone has been reading about the extracurricular activities of Tiger Woods lately, one of his advertisers has pulled a product line with his name on it, others have stopped all current advertising campaigns with Tiger Woods. If they were to use Tiger Woods in their current advertising, does that mean that they support or approve/endorse of his conduct? If they continue on sponsoring him, does that mean that they pretend that it never happened?

In the end, in my opinion, this will blow over and this will be forgotten. Tiger Woods may be the greatest golfer of all times. As long as he will eventually be able to go back to the golf circuit and continue winning, he will continue to draw crowds. In reality, are the golf fanatics really concerned about his indiscretions of his personal life. Up until recently, no one knew very much about his personal life.

He kept that very private and we now know why. If his personal life did not matter before, will it matter in the future? Yes, it will come out that there are many people involved, yes, that will affect his ability to be a public figure in the short term but eventually, this will all be available for the public to scrutinize, then what. The public will go back to admire his golf talents and will not care about his personal life again.

Why is normalized income so important when selling a business?

March 15, 2022February 18, 2012 by Knot Ink Digital

When you sell a business, everyone wants to know how much money does it make? Although that may seem like a very straight forward question, the answer is not that straight forward. Private business owners typically put in many personal expenses through their business, they may income split with family members, they may put a variety of other expenses through that will not be a required expense for the new owner. The definition of normalized earnings is the earnings that should be enjoyed by the new business owner after he/she acquires the business?

The items which are considered normalized earnings are often disputed by the buyer and seller because the value of the business is dependent upon the definition of profits/normalized earnings of the business. What is an extra expense to one person may be normal to another. Clearly paying a salary to a family member who is not working in the business is not a normal expense and would be added back.

I have seen people say that I went on a business trip and say it was personal. They claim that they saw one client in another city then continued on a holiday – is that personal or business? I knew of another who was a member of a buying consortium and the members would meet once a year in their respective countries. They discussed business for an hour or two, was the trip business or personal?