Myth 1:  The value of my business can be generally determined by using an earnings multiplier of my industry. ie. 3 times EBITDA

This is the most common myth. The earnings multiplier can be useful to get an overall general value based on the industry, but it doesn’t apply to all businesses within the same industry.  For example, your neighbourhood grocery store will not have the same earnings multiplier as the Safeway grocery chain.  Other factors of value such as supplier influence or technological superiority will also have an impact on the company’s value compared to its peers in its industry. Further, sometimes outside 3rd parties — such as the CRA, IRS, banks, courts, trustees, and other interested parties —  will not accept industry multiples to determine value.

Myth 2: Once I have an appraisal done the value will remain constant from year-to-year or period-to-period.

Businesses are not like the Canadian government savings bonds, there is competition, business environment changes,  new suppliers come into an industry if it’s profitable enough, some suppliers decide to divest of themselves, some competitors give up on certain product lines, while others join the market because they think they can make more money than some of its competition.

Businesses by their very nature are dynamic, not static and given this their values can easily change from year to year.

Myth 3: Valuation methods and approaches produce an absolute value.

The truth is, if you were to have 5 business valuators value the same business, all 5 will come up with a different value.  That is because each analyst may use different methods, approaches, discount rates, risk levels, and other variables to estimating the value.  But, if the valuator uses sound valuation methodology and approaches then you can assume the business valuation will be reasonable.

Myth 4:  We can have our accountant or lawyer do a valuation.

While these professionals seem like a good resource for assessing the value of your business, they may not be equipped with either the skill, qualifications, or experience to conduct the valuation process properly.  Even if they do have proper credentials for valuing your business you may want to reconsider having them perform the valuation.  The reason is there is a built in conflict of interest, since they will have an on-going interest in your business after the valuation study is completed, so there is a likelihood the value they derive for your business is biased, either high or low in favor of what you are hoping the outcome will be.

Myth 5:  The Financial statements of the company are good enough to determine value.

A company’s financial statements are the basis for a business valuation, but there are many other factors that affect value.  Some of these include : the competition, industry, economy, organizational structure, management, its capital assets, where along the business/product life cycle, as well as many other factors can affect the value of a business.

So you can see that in the process of a business valuation there are many factors which can determine the value attached.  These business valuation myths don’t use proven methodology, and best practices in determining value.   Taking the wrong approach on valuing your business can cost you a lot in terms of time, by prolonging the sale or financing process or money by not having an objective 3rd party opinion which are used to help settle law suits or prevent financing on time and on desirable terms.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

• Small businesses could be helped by a CFO, on a part time basis and that’s a virtual CFO or in person CFO could do.  The company size could be for 1 person to as large as 100 person firms.
  

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Marketing and advertising is one item you shouldn’t cut from your expenses budget as according to research, companies which continue to promote themselves in downturns do better than their competitors once the economic downturns have subsided.  Here’s a list of 5 ways to promote your organization:

1. Send out promotions with your customer invoices, either electronically, fax, or mail.
2. Create a Facebook page for your company.
3. Give free workshops on your products or services.
4. Create a video for your business and upload it to Youtube.
5. Network in new circles and ask for referrals from your old customers.

What’s important to remember is that it’s still important to promote your organization in tough economic times and if you’re not comfortable doing some of these things then get someone else in your organization to do it.

Written by Richard Wong, CMA   rwong@firstchoicecapital.ca

Cash flow is important anytime, but especially in today’s economic environment of tighter credit.  We know today that the credit crunch has affected the economy and that banks are now able to pick and choose who they extend credit to, how much credit they extend, what conditions they extend it to, and how they can pressure you the CEO, CFO, or owner of the business into improving your financial results to comply the banking arrangements.

Here are 5 hints to Improving Cash Flow:

1. Invoice ASAP & Follow up next day to double check client has received the invoice

• Get in the habit now of invoicing as soon as the job is done and getting it into the hands of the customer electronically, either by fax or email or if handwritten invoices spend the time after delivery to now write the invoice earlier in the day before delivery, rather than “I’ll invoice you later.” Most accounting software from Simply Accounting & QuickBooks to Microsoft Great Plains, Sage ERP, to Oracle and SAP the email invoices feature can simply be turned on.

• Now considered a best practice, be proactive you don’t want to find out 30 days after the invoice date that the customer hasn’t received it.  Customers may find this irritating at first, but you can always tell the customer that you are just trying to ensure they are happy with the product or service they received and that there aren’t any issues with the invoice.  You can say that you’re trying to improve your customer service at this time.

2. Ask for a Retainer or Deposit

• Depending on the industry or whether it’s a new client or old this is one worth trying as if you can get a deposit for goods/services ordered then paid in installments is better than waiting for the payment to come 30 days after the job or product has been delivered.

3. Offer Cash Discounts for Quick Payment

• If you haven’t offered a cash discount for payment within 10 days, ie. 2% 10, net 30 means that the customer gets a 2% discount off the total invoice if  “they pay within 10 days only” or the customer has the standard of paying within 30 days.
• Think of it as a sales discount you’re willing to give to be able to get the money in your hands earlier rather than someone else’s hands.

4. Become a Pit Bull of Receivables (Keep after them!)

• Start reviewing your aged receivables reports weekly if you don’t have a Key Performance Indicator system (KPI’s for short) and seeing if you have late paying customers how late they are get your receivables people to start action right away by either emailing them right away then calling them the next day.  Some customers need to be reminded, that’s why if you’re proactive and invoice right away and follow up to ensure they have received the invoice and processed them you’ll have to do less collections work in the end.
• Why wait, it’s your money?

5. Pay Invoices Only When Due

• Review those vendor contract terms to see when those invoices are actually due for payment rather than paying them right away because you want to get them out of the way.
• Setup online banking payments so you can schedule when payments are due and you are able to download electronic information to your accounting software.

In summary, these are some quick things to implement to improve your cash flow and also at the same time improve your customer service and satisfaction.  Protection of cash should be the CEO’s biggest concern nowadays and any ways to improve the order to cash cycle should be attempted.

Written by Richard Wong, CMA     Email: rwong@firstchoicecapital.ca

Cash flow is one of the most important things to keep an eye on at any time, but especially in difficult economic times.    Think about suppliers to Nortel and the auto industry wanting to get paid earlier than usual and you understand how these suppliers are trying to stay on top of their cash flow.  Here are 5 things you can do to conserve your cash flow.   If you’re a small business or multi-national conglomerate the need to conserve cash is important in these times.  Equity funds and venture capitalists are hoarding cash waiting for the right opportunity to invest in those opportunities which fit their profiles at this time.

1. Prepare cash flow projections going out at least 2 years.

• It’s better to be proactive, to understand what happens if your cash flow drops a few per cent andbe able to take action early.

2. Review and tighten credit policies

• Review the payment histories of late paying customers and see if they’re stretching their receivables with you.
• Start flagging late paying customers and re-do credit checks on them.  Credit is a privilege, the restaurant industry is very quick to change their credit to C.O.D. if customers don’t pay on time, other industries could use the same policies.

3. Invoice for services provided or goods delivered when they’re complete, don’t wait, the extra few days or week adds up.  Start emailing and faxing invoices instead of snail mail.

• Follow up the next day after invoices to double check customers have received their invoices.  Waiting till the end of the month to check on invoices will delay payment.

4. See if you can extend suppliers’ terms to over 30 days.

5. Renegotiate contracts with banks, landlords, telcom carriers, etc. especially if the contracts are coming up for renewal within a few months.

In summary its easier to spend money than to collect so its even more important today to try to conserve cash and collecting accounts receivable is paramount today.  By tracking your cash flow it easier to make sure you don’t get unpleasant surprises.

Written by Richard Wong, CMA  rwong@firstchoicecapital.ca