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Do you know what your company is worth?

Valuation is a challenge for many private enterprises. But owners of private businesses can benefit from knowing their worth

No one is more concerned about the value of a Private Company than its owners. But while they may have an intuitive idea of their company's worth, they can't look to the stock market for external validation. Deloitte's practitioners show private company owners how a comprehensive Valuation of their business can kick-start the process of understanding and building a company's worth. 

Most owners of private companies don't envy the complex and time-consuming reporting obligations of publicly traded companies. However, the executives of public companies do have one advantage over their private company counterparts: a commonly recognized assessment of their company's valuation based on share prices. Valuation may not be as straightforward for private companies — but it is vitally important for owners concerned about the future.

"Valuation means more than stating a company is worth so many times earnings. Neither revenues nor profitability alone provide a reliable indication of value," says Terry Noble, a Chartered Business Valuator and the national leader of  Private Company Services for Deloitte.

 "Good valuation specialists ultimately show how value can be increased. An effective valuation can be the beginning of a value-enhancing process."
— Terry Noble

"There are many other factors to consider, including tangible and intangible assets, financials, profitability and capital structure, and how the company compares to industry norms. Good valuation specialists take a total picture of the company's value — and ultimately show how that value can be increased. So an effective valuation can be the beginning of a value-enhancing process."

"Business owners might initiate the valuation process because of a pending sale or merger, or to provide information for profit-sharing programs, management buyouts, or tax and succession planning," says Luc Lafontaine, a practitioner in Laval. "But in all cases, the key issue is: What makes my business valuable now and in the future?"

Indicators of a higher business valuation
Finding out the answer to that question is an eye-opening exercise for many private company owners. On many levels, valuation is tied to a successful business strategy. A privately held company is likely to have a higher value if it has:

  • A history of growth and strong prospects for future growth
  • Sustained profitability
  • A recognizable brand
  • Protected intellectual property or clear ownership of significant intangible assets
  • A solid client base that is not overly dependent on one major customer or tied to the owner-manager
  • A strong balance sheet that demonstrates good cash flow, good margins and high-quality assets
  • Particular expertise in a niche industry, especially if this creates barriers to entry
  • And most importantly, an experienced management team with a proven track record and a vision for the future

Enterprise Value Map looks at the total picture
When conducting a valuation of a private company, Deloitte specialists employ their seasoned perspective based on thousands of engagements — and they also bring some compelling tools like the Deloitte Enterprise Value Map. "This is a visual approach to identifying what specific activities and processes in the organization contribute to value," explains Noble. "Not only does it point out the winning activities, it identifies things the company might be doing to erode its value." For example, Noble adds, "Owners of private companies sometimes make the business too dependent on their own involvement, and don't empower the second level of management enough."

"When you consider the amount of capital chasing private companies and the fact that many private companies have succession issues, the odds are they'll be faced with some type of transactional situation in the near future. So it's imperative for business owners to gain an understanding of the company's value," says Doug McDonald, a partner based in Toronto. "Without understanding what their business is worth, owners may be significantly restricting their options." And that's a valuable lesson for any entrepreneur.

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