1. Succeeding at succession: establishing
the value of your company
November 2011
In a recovering economy, listing. It is even true if you have yet to to assess business value. Income approaches,
articulate your succession planning goals. for instance, calculate a discounted cash
succession planning is rarely That’s because the establishment of a flow (which uses projected financial
top of mind for business sustainable business model can help you performance to evaluate how a company
owners. More often, privately achieve a wide range of business and will perform over time) to determine the
personal objectives—from maximizing the net present value of a business. Asset-based
held businesses—which sale price of your business, minimizing approaches determine value by adding the
include family enterprises, taxes and creating ownership opportunities sum of the parts of the business to arrive at
investor- and entrepreneur- for key employees, to maintaining an a net asset value. There are also market-
ongoing role in the business, sharing in based approaches that determine value by
owned businesses and
future growth or leaving a lasting legacy. comparing a business to similar companies
professional firms—focus Value enhancement also plays a critical within its industry.
on enhancing cash flow, role in succession planning. To structure a While these represent the primary
reducing costs and managing tax efficient exit, set up a funding approaches to business valuation,
mechanism for successors, justify future variations exist depending on the context
day-to-day operations. cash flow projections or maximize the for the valuation (e.g., financial statement
proceeds of a sale, you need to establish reporting, tax planning or transactional
On some level, this focus on short-term the value of your business. In essence, purposes). Valuators also typically take a
survival makes sense. After all, according understanding your value drivers is the wide range of factors into account when
to a Grant Thornton International first step to reaching your succession establishing value, including:
Business Report (IBR), 49% of planning goals—whether you intend to • financial history and business forecasts
organizations have seen a shortage of keep the business in the family, transition • industry and market trends
orders and reduced demand.1 Yet, despite to management or sell to a third party. • management structure and skills
seeming logical, this type of approach puts • tangible assets, including real estate
privately held businesses at risk of being Arriving at the magic number • intangible assets, including goodwill,
blindsided by the future. Given the importance of value to strategic supplier relationships, name
To avoid this risk, you need more than decision making and to succession planning, recognition, patents and trademarks,
a short-term plan. You also must lay the one would imagine that every business proprietary technology, etc.
foundation for long-term growth by owner would know the value of their
strengthening the value of your business. company at any point in time. However, Notably, each valuation approach is likely
This is true whether you aim to pass the that isn’t always the case. This is partly to establish a different value for the
business on to the next generation or you because arriving at business value is as business, and each of those values would
plan to sell, merge or pursue a public much an art as a science. be correct. This is where the “art” of
At the “scientific” end of the equation, business valuation comes in; where value
Grant Thornton International Ltd, International Business
1 professional valuators use various methods becomes the price the market will bear;
Report 2009, www.internationalbusinessreport.com

2. where a willing buyer and a willing seller trimming expenses, strengthening internal
find equilibrium. processes, introducing new products,
For instance, if you plan to sell your expanding to new markets or investing
business to a third party, it’s likely you in other strategies to drive profits, growth
will want to maximize the sale price. To and sales. Each of these is important
accomplish this, you need to present a regardless of the strategic succession
compelling vision of what the business objectives.
could become under someone else’s In short, business owners need to
ownership rather than a historical think about their ownership in the
perspective of how you arrived at the business in the same way they would
current state. You then need to generate consider any other investment they hold—
competition among potential buyers and by maximizing the value of this asset
tap into the intangible emotion that comes according to their income or growth
with a bidding process—the fear of losing. requirements.
“To maximize profits and A compelling story and competing bidders Keep in mind, too, that there are
value upon a succession, are more likely to result in a price that is tradeoffs to make. One business owner
significantly above any scientific value. may value the continued health of the
privately held businesses Conversely, if you are transitioning to company and the happiness of the
should start planning for a family member or employee, you may workforce to such an extent that he or
succession several years in prefer a valuation that reflects what the she is willing to take less money out upon
business and your successors can afford. retirement. Another owner might place
advance. Don’t wait for a Too high a valuation may hamper their such a premium on maintaining family
year of super profits, or a ability to buy into the business. Too low management of the business that he or
year of weak performance, a valuation may leave exiting shareholders she might pass over more qualified
without sufficient future cash flow. successors—a decision that can affect the
to plan an exit. Start early,
As both of these cases make clear, long-term value, profitability and viability
so you can transition on valuation is not an exercise that should of the business. Given these variables, it’s
your own terms, while you be confined to estate planning or sale no surprise that many privately held
scenarios. Instead, owners of privately business owners lack a clear understanding
are in control.”
held businesses need to understand how of their organization’s value or value
Kay Gray
their value drivers can affect both short- drivers.
Grant Thornton LLP, Canada and long-term performance and take the
necessary steps to enhance the viability of Understanding your value drivers
the business over time, and both improve In any strategic process, it is essential for
and preserve its value. This could include business owners to understand the factors
cleaning up your balance sheet, ensuring that enhance business value. When
you have the right management in place, properly identified and managed, value

3. drivers can help you improve cash flows, that model in other locations or markets.
attract investment capital, strengthen your Proven business models also help to
compensation structures and differentiate mitigate risk, which can improve value.
yourself from the competition.
Management and systems: Business
Because these activities can shift
value generally also hinges on the strength
business value in a relatively short period
of a company’s systems and a management
of time, it’s incumbent upon privately held
team. Strength and depth of team beyond
businesses to be aware of the elements that
the founder can be critical.
typically drive value:
To strengthen these various value
Track record: Business value is affected drivers, privately held businesses typically
by a company’s history of sales, growth need to find ways to enhance cash flow
and profitability. It also varies depending while minimising risk. Companies that
on a company’s cash flow and its profit hope to maximise value upon succession
margins relative to industry peers. should consider planning at least three to
five years before a transition. For their
“Leading business can often
Market factors: At any point in time,
part, companies interested in growing the manage their value drivers to
certain sectors tend to be viewed with
greater importance than others. Your
business over time would do well to improve cash flow and
manage their value drivers on an ongoing
business’ value will be influenced by the minimize perceived risk. For
basis – whether or not they have yet
sector in which you operate, as well as
developed a succession plan. example, running alternate
your ability to capture market share and
compete effectively.
scenarios lets you focus on
Maximising value: lessons learned
the things you can control
Value proposition: Another driver of Once you understand your value drivers,
value is a unique value proposition that you should be able to form an unbiased and be cognizant of the
clearly sets you apart from your opinion of your organization’s value. In things you can’t control that
competition. It is worth noting that this reality, however, this rarely happens. you need to mitigate.”
type of intangible value driver is very hard Business founders often link the value of
to replicate. their companies to the time and effort it Tony Markwell
took to build the business, which Grant Thornton, Australia
Unique assets/intellectual property:
frequently results in an over-estimation of
Organizations with an established brand,
the company’s worth. This is also true of
patents and/or proprietary technology or
privately held business owners who have
processes can generally use these assets to
received unsolicited bids, especially where
drive value.
they do not have a strategy for selling the
Business model: Value typically varies business. In other cases, owners hesitate to
depending on the strength of your commit to a firm value because they are
business model and your ability to adapt simply not ready to exit the business.

4. Despite these concerns, experience the company’s best interests and the
shows that privately held businesses must owners’ best interests. In many cases,
be nimble and strategic if they hope to businesses reach a point where they
achieve their succession planning goals. require additional capital just at a time
With more than 30 years’ experience when shareholders are looking for ways to
helping privately held businesses establish reduce their personal risk. This tension can
value upon succession, Grant Thornton make businesses vulnerable to value
has learned several key lessons to foster destruction and threaten the company’s
success. long term viability.
If you are experiencing this challenge,
1. Know what to expect
it’s important to decide on your priorities.
Although succession planning specialists
If the business is more valuable to
help businesses transition to a new
someone else than it is to you, it may
ownership framework on a regular basis,
be time to consider selling. If it is more
most business owners engage in succession
only once. As a result, many privately held
valuable to you than to someone else, “There is never one value for
business owners do not know what to
perhaps you should maximize current a business. Valuation shifts
income and consider transitioning to the
expect upon exiting their business.
next generation. Either way, keep in mind
depending on its purpose –
Owners may not understand how
that your business is ultimately just one whether you’re setting up a
much after-tax cash flow they require
upon retirement. They may be unclear
asset in your portfolio. By establishing charitable trust, determining
value independently, you may gain the
on how to compensate their employees
outside perspective you need to decide if
a remuneration structure or
upon transition. If they feel successors lack
you would prefer to hold or sell it. selling to a third party.
sufficient training, they may worry about
the company’s future viability. If they are 3. Be honest about your weaknesses While value tends to fall
engaging in a sale, they may be hesitant to Privately held businesses with a history of within a range, it can be
share sensitive information with potential strong performance tend to predict future different depending on the
purchasers or respond to extensive growth with reference to the past.
information requests. For these reasons Unfortunately, this tendency can create a
situation and goal.”
and more, it’s important to work with false sense of invincibility. Because
Bill Kingsley
experienced professionals who can prepare independent succession planning Grant Thornton, United States
you for what to expect upon transition professionals look at your business with an
so that you can meet your succession unbiased lens, they can often pinpoint
planning goals. risks that threaten the company’s ongoing
viability. For example, something you
2. Decide on your priorities
perceive as a strong customer relationship
As privately held businesses mature, they
can be viewed just as easily as a customer
may begin to experience tension between

5. concentration risk, particularly if a 6. “Professionalise” the business
significant percentage of your sales are tied Yet another strategy for enhancing value
to this customer. upon succession involves putting systems
Privately held businesses that heed this and processes in place to ensure your
warning may be able to exit their business business runs as professionally as possible.
on an upswing. Those that ignore the There are a range of activities to help you
message, however, risk suffering an achieve this goal—including developing a
irretrievable loss of value. formal business plan, bolstering your
management team and constituting an
4. Recognise the power of innovation
independent board of directors. You
Anyone who has established or built up a
should also ensure that the business
business understands that growth is rarely
operates on a standalone basis by
achieved without innovation—and
implementing formalized and documented
innovation requires some measure of risk.
systems and processes. By working with
To ensure their organizations are
positioned to pursue growth opportunities
professional advisers, you can identify the “The earlier you articulate
as they arise, business owners should
strategies and processes that can help you your strategic vision, the
best emphasize value.
adopt processes and systems that better it is for your business
encourage innovation and reward
Helping you enhance value value. With a strong outlook
measured risk taking within the context of
an enterprise risk management framework.
Given current economic realities, privately for the future, you can avoid
held businesses in all sectors are looking
5. Strengthen your management team for ways to strengthen their performance.
reacting to circumstances
One way to strengthen business value is to That’s why it has become increasingly and instead can position
ensure you have the strongest possible important to work with professional your business to reach its
management team in place. If you plan to advisers who can help you understand
scale back your involvement in the
full potential.”
how to control your value drivers.
business, professional managers can Whether you would like to improve your
Alejandro Chiappe
maximize sustainability by running the cash flow, reduce business risk, strengthen Grant Thornton, Argentina
business in your absence. Strong business your internal controls, revise your
value can also help you attract and retain compensation structure or explore your
essential management resources. In exit options, Grant Thornton LLP can
addition to giving external managers an help. As a result, you will be positioned to With our global reach, proven track
incentive to join a privately held business, gain access to a wider range of succession record, integrated suite of services and in-
a high valuation can encourage highly planning options. From estate and tax depth knowledge of privately held
skilled family members to maintain family planning to transaction advisory and businesses, our practitioners truly act as
ownership, even if they have other wealth management, we can help you your trusted guides to help you navigate
available career options. build an effective transition strategy. the succession planning process.

6. About Grant Thornton in Canada
Grant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and
public organizations. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has more
than 4,000 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose
member and correspondent firms operate in over 100 countries worldwide.
This list represents the countries and territories where Argentina Finland Kuwait Saudi Arabia
Grant Thornton International member firms currently Armenia France Lebanon Serbia
have operations. April 2010. Australia Georgia Luxembourg Singapore
Austria Germany Macedonia Slovak Republic
Bahamas Ghana* Malaysia Slovenia
Bahrain Gibraltar Malta South Africa
Belgium Greece Mauritius Spain
Bolivia Guinea Mexico Sweden
Botswana Guatemala Moldova Switzerland
Brazil Honduras Morocco Taiwan
Bulgaria Hong Kong Mozambique Thailand
Cambodia Hungary Namibia Tunisia
Canada Iceland Netherlands Turkey
Cayman Islands India New Zealand Uganda
Channel Islands Indonesia Nicaragua Ukraine
Chile Ireland Norway United Arab Emirates
China Isle of Man Oman United Kingdom
Colombia Israel Pakistan United States
Costa Rica Italy Panama Uruguay
Croatia Jamaica Philippines Venezuela
Cyprus Japan Poland Vietnam
Czech Republic Jordan Portugal Yemen
Denmark Kenya Puerto Rico Zambia
Dominican Republic Korea Qatar
Egypt Kosovo Russia
Find out how our professional advisers can help you establish, improve, preserve and transfer your business’s value. To contact a
local Grant Thornton adviser near you, please visit our Web site at www.GrantThornton.ca/contact_us
www.GrantThornton.ca
© 2011 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved.
The information contained herein is prepared by Grant Thornton LLP for information only and is not intended to be either
a complete description of any tax issue or the opinion of our firm. Changes in tax laws or other factors could affect, on a
prospective or retroactive basis, the information contained herein. You should consult your Grant Thornton LLP adviser to
obtain additional details and to discuss whether the information in this article applies to your specific situation.
A listing of Grant Thornton offices and contact information can be found on our Web site at www.GrantThornton.ca