Posts Tagged ‘what are my small business shares worth?’

I guess the simple answer is: “Are you keen on buying or do you just want to know?” It is ironic that the net worth of self employed Canadians is largely un-calculated. The value of a proprietorship is essentially it’s goodwill. This means the net present value of its customer list. The value of shareholder equity can be calculated but some assumptions need to be made.

For a CCPC (Canadian Controlled Private Corporation) the shareholder equity section of the balance sheet is reported at book value only. One way to compute your net worth is to look at the “Cash Generated By Operating Activities” section of the Cash Flow Statement. You should go back 3-5 years. Your accountant can prepare this statement if it isn’t readily available. Now what?

The cash generated by operating activities is otherwise called your cash profit.  Then perform the following additions/subtractions to the cash profit:

  • Add back amortization (a non cash accrual)
  • Add back any accruals for income taxes (non cash accrual)
  • Deduct management (ownership) salaries and benefits.
  • Deduct family salaries and benefits (if you have family members in the business)
  • Deduct any other perqs that your business may cover for you.

The resulting (adjusted) cash flow from operations is (or should be) a larger number.

Do the same exercise back 3-5 years if you can.  Then average the adjusted cash profit.

This cash profit (average) is capitalized by 3x the average cash profit.

This is a fair valuation of your business equity.

It may be a surprisingly large figure. It should give you pause for reflection. Two queries should come to mind:

  1. How do I begin to monetize some of my net worth right now? Can I draw a dividend in lieu of a partial salary?
  2. How do I protect the equity in my business or pass it on to family members?

Good questions indeed.