Should I continue to operate my business?Jean-Claude Desnoyers
Reassessment is very common for business owners. Often, entrepreneurs wonder if the profitability of their business is sufficient compared to the level of risk they take and to the investment in time and money they deploy. How do you know if you should continue to operate your business or whether you should hang up your skates? There is no absolute answer to those questions. A business valuation can be a good option to see clearer. A Chartered Business Valuator must consider the following factors in the process of valuating a business:
“The two basic approaches used to determine the fair market value of a business are the going concern approach and the liquidation approach. The going concern approach assumes that the business will continue to operate profitably or operate with a potential for future profits and positive cash flows. The liquidation approach ignores the future profitability of the business. It assumes the business will be wound up and the funds so realized will be either distributed to the owners or used in more profitable operations. […]”
– Section from a valuation report, JC Desnoyers
To find out if your business should be valuated as continuity going concern or under liquidation, here are some things you should consider.
Where do we start?
One of the first steps to determine if the business is profitable is to know its real profit. This analysis allows the owner to determine the actual profitability of the business. The business’ actual profitability can then be compared with a typical business in its industry. It may be appropriate to research the business’ industry standards.
Some signs may indicate problems to come:
- The owner has to manage the cash flow and sometimes must hold suppliers’ cheques until funds are available;
- The business does not have much liquidity;
- Profits are minimal or non-existent;
- The profitability varies considerably from one year to another
- Sales are decreasing or stalled;
If those problems occur, the analysis of financial statements can be an interesting exercise. It helps measure the risk factor. In light of this analysis, does the business continue to grow, stall or decrease? If it is stagnant or decreasing, is there anything that can be done to correct the situation?
At this stage, the business is seen as a single package. Ultimately, a business is an amalgam of investment projects. They are perhaps not all profitable … It is possible that some services, divisions or lines of products are profitable and others are not.
Consider the business in whole or in part
Analysis by line of products or services, or by division is relevant. Perhaps, a service is not performing at its full potential. It’s possible that another service requires too much of the budget. To successfully carry out this analysis, high-quality financial information is a valuable asset. Being able to see where the business makes and loses money can make the difference between deciding to continue or ceasing operations.
As a Chartered Business Valuator (CBV), I can say from experience that few business owners consider these points. Generally, the bank account statement and profits are the wake up call for entrepreneurs. A regular financial statements analysis allows to see problems that can come up and provide a quick turnaround before it’s too late. A full business valuation by a CBV tends to help in developing methods to increase profitability. Ultimately, when you contact a CBV to valuate your business it’s to get the fair market value. With the valuation, you will have a clearer picture and will be able to make an enlightened decision based on all of the relevant information.
To learn more about business valuation or to proceed with your business valuation, contact me. It will be my pleasure to contribute to your growth.