CHRIS DUNCAN
As seen in Truck LoggerBC Fall 2024
BRITISH COLUMBIA – Logging contractors are facing numerous challenges—whether they operate in BC’s Interior or coastal regions. Low log and lumber prices, policy uncertainty and sustained high inflation in the face of high interest rates have had major impacts on costs, operating expenditures, and the cost of debt. You may be wondering how these market shifts impact the value of your company.
How does the current market impact valuation?
Contractors are feeling the impact of an industry in flux. Some businesses are excelling in the current market; however, this doesn’t mean they aren’t feeling squeezed, even while experiencing solid top-line results.
Higher inflation is driving up input costs and extended receivables are in-creasing the need for more working capital. The highest bank rate since 2001 and the resulting higher lending costs are also causing a direct impact to the bottom line.
So how does all this volatility and uncertainty impact the valuation of your company? Unfortunately, there is no clear-cut answer that applies to every business and there are multiple factors to consider.
Why would I need a valuation?
There are many situations where it is desirable to know what a private company is worth, including:
Transaction assessment
You may receive an offer to sell all or part of your company. Is the offer reasonable?
Corporate tax planning
Because the Canada Revenue Agency employs large teams of valuation professionals to audit tax-driven transactions, it is important to get the valuation component of the tax planning right.
Management buyouts (MBOs)
Whether buying in or being bought out, neither side of the deal wants to enter a transaction without some level of valuation certainty.
Shareholder disputes
Disagreements between shareholders can often lead to buyout situations where fair market value of an interest in a company needs to be determined.
Damages quantification
If a company has been unjustly harmed, they may be subject to mate-rial financial losses including a loss of company value. Determining fair market value before and after an event can be a critical component in determining total damages.
Succession planning
It is highly recommended that the parties involved have an accurate understanding of fair market value when planning for the next generation or planning to use the maximum lifetime capital gains exemptions.
How complex is a valuation?
For contractors, a valuation can be reasonably straightforward. In these cases, valuations are generally based on an asset valuation approach and there tends to be limited goodwill. Quite often the largest driver is the value of a con-tractor’s equipment. Valuation becomes more complicated when there is goodwill from contracts or other rights to harvest.
EBITDA – Earnings before interest, tax, depreciation and amortization
Simplistic approaches to determine value such as quoting multiples of EBITDA or revenue may be a helpful place to begin calculating value. However, it is highly unlikely that this alone will provide an accurate valuation. Some reasons for this are as follows:
• Historical transaction multiples will vary considerably.
• Where there are two similar companies and one has significantly more assets, the multiples will usu-ally be materially different because asset-heavy companies tend to have lower risk.
• A company with long-term contract-ed revenues will often have a higher multiple than a company bidding on every job.
• A company operating across a wider geography with numerous customers may have a higher multiple than a company with geographical and customer concentration.
• A company with historically volatile EBITDA may have a lower multiple than a company with historically stable EBITDA.
Determining an accurate measurement of EBITDA and applying an appropriate multiple for your company will result in a supportable level of goodwill.
Getting maintainable or forecast EBITDA right
During a valuation, the valuator will review your income statement from the perspective of a purchaser. They will consider a number of adjustments—including whether the owner’s salaries are at market, if the owner is paying rent at market, or if there are any owner-related expenses that should be added back. These are called normalizations to earnings and are a critical step in presenting an accurate picture of a company’s historical and potential earnings.
Normalizations such as the adding back of owner-based expenses will increase historical EBITDA and could increase the value of your company. This process also allows for more transparency to a buyer if a sales process is being considered.
The multiple and implied goodwill
Determining the appropriate multiple is a complicated process.
An additional complication is under-standing if the company’s implied good-will, derived from the earnings times the multiple, is reasonable.
Goodwill is usually a catch-all term for a company’s pure goodwill and all its intangible assets, including customer relationships, brand, and contracts. Ad-ditionally, not all goodwill is commercial; sometimes it relates to a particular person whose departure from the company could result in reduced financial performance.
An experienced valuator will work to identify the components of goodwill and intangible assets to the best of their abili-ties and ensure the goodwill amount, if any, aligns with their understanding of the company and operations.
Chris Duncan, CPA, CA, is National Leader, Forestry & Forest Products Services, MNP
