You can make your market research as simple or complex as you want. Simple things like asking customers how satisfied they are or looking at data about the people in your area can help. Or you can do more complicated research with the help of professionals. No matter your budget, time, or experience, some form of market research can help you make better decisions for your business.
Market research in Canadian business valuation is an important component in assisting the valuator in understanding the target company’s industry. This research will provide important feedback on current trends. It will also assist in identifying risk factors that tie to a multiple. Lastly, it can provide insight as to what the market will bear as a price in completed transactions of businesses in the same industry.
Why Conduct Market Research?
Market research helps you gather the information you need to make smart decisions about your business. It’s essential for things like starting a business, coming up with new ideas, growing your business, and dealing with the four important aspects: product, price, place, and promotion.
- Product: Market research helps you make your product or service better by finding out what your customers want. This includes things like how it works, how it looks, and how you can provide good customer service or warranties.
- Price: It helps you decide on the right price for your product. You can look at what your competitors are charging, what profit you want to make, and what customers are willing to pay.
- Placement: Market research helps you choose where to sell your product and how to get it to customers in Canada. You can compare different locations and types of stores (like retail shops, online stores, or wholesale) to figure out the best place to sell.
- Promotion: You can use market research to figure out the best ways to reach your target customers in Canada. This includes advertising, social media, and building a strong brand.
Market research also helps you avoid surprises. While your gut feeling and experience can be useful, facts and research give you a more accurate picture of your market.
By doing research regularly, you can keep up with changes in the economy and the people who might buy your product. You can also adapt to new rules and technology.
Industry Trends
When someone is figuring out how much a business is worth, they can use special reports from places like IBISWorld or Statista. These reports give important information about the industry the business is in, like who the big players are, what’s affecting the industry, how well it’s doing, and more.
Knowing these things helps the person doing the valuation understand the industry better. This means they can make a more accurate report about how much the business is worth.
Understanding industry trends, or where the industry is headed, is really helpful for predicting how much money the business will make in the future. If a business can see these trends and take action early, it can stay ahead and do well. Investors like businesses that do this because they see the business as having good growth potential and making money in the future.
Risk Factors
Improving value is based on the concept of mitigating risk. Risk valuation is a sophisticated element within Canadian Business Valuations, tied to the target company’s cash flow. Risk is an accepted part of operating a business, it cannot be avoided. It can only be minimized to the best of the owner’s capabilities. This can be done by researching key business drivers and making the business well-prepared to handle any volatility in those drivers.
A valuation of a specific company will look at risk factors from multiple avenues and determine how prepared the company is to deal with them. A company that has been more successful in mitigating its risk will have a lower capitalization rate and in turn a higher multiple. This ensures the target company will have a higher overall value.
The business valuator will work in conjunction with the business owner to discuss various factors of the company and determine how risky the company is. Various financial ratios can help determine risk.
Liquidity Ratios:
Current Ratio: This ratio measures a company’s ability to pay its short-term liabilities (debts due within one year) using its short-term assets (assets that can be converted into cash within one year). It is calculated by dividing current assets by current liabilities. A higher current ratio indicates better short-term financial health.
Quick Ratio (or Acid-Test Ratio): Similar to the current ratio, the quick ratio assesses a company’s ability to meet short-term obligations. However, it excludes inventory from current assets since inventory may not be as easily convertible to cash. It’s calculated by dividing (current assets – inventory) by current liabilities.
Activity Ratios:
Inventory Turnover Ratio: This ratio shows how efficiently a company manages its inventory. It’s calculated by dividing the cost of goods sold by the average inventory during a specific period. A higher turnover ratio generally indicates better inventory management.
Accounts Receivable and Payable Days: Accounts receivable days (also known as Days Sales Outstanding) measure how long it takes for a company to collect payment from customers after a sale. Accounts payable days measure how long a company takes to pay its suppliers. Both ratios are calculated by dividing the respective balance by daily sales or purchases.
Solvency Ratios:
Debt-to-Equity Ratio: This ratio evaluates a company’s financial leverage by comparing its total debt to shareholders’ equity. A high debt-to-equity ratio may indicate higher financial risk, as it means the company relies more on borrowed funds.
Debt Leverage Ratio: Similar to the debt-to-equity ratio, this ratio measures the proportion of debt in a company’s capital structure. It’s calculated by dividing total debt by total assets. A higher debt-leverage ratio signifies greater reliance on debt financing.
Profitability Ratios:
Gross Profit Margin: This ratio assesses how efficiently a company produces goods or services by comparing its gross profit (revenue minus the cost of goods sold) to revenue. It indicates the percentage of sales retained as profit after covering production costs.
Net Profit Margin: This ratio measures overall profitability by comparing net profit (after all expenses, including taxes and interest) to revenue. It provides insight into the company’s ability to generate profit from its operations.
Return on Assets (ROA): ROA evaluates how effectively a company uses its assets to generate profit. It’s calculated by dividing net profit by average total assets. A higher ROA indicates better asset utilization.
Return on Equity (ROE): ROE measures the return on shareholders’ equity investment. It’s calculated by dividing net profit by average shareholders’ equity. A higher ROE signifies better returns for shareholders.
Comparing these financial ratios for a target company to industry benchmarks or peers can help assess its financial health, efficiency, and risk management practices. This analysis aids in understanding how well the company is mitigating various risk factors and can impact its overall valuation.
Completed Transactions
If you are looking to sell your business, a valuation can provide an owner some understanding of what that business is worth to assist in the negotiations process, however, the only way to determine an actual price is typically to engage in a process to sell your business. The price is the amount paid by the buyer to the seller. Meanwhile, calculating the value is a more theoretical, mathematical exercise. Despite the complexities in determining the value of a business, it remains a useful starting point for negotiations and obtaining financing.
Most valuations are completed under the notion of “fair market value.” This is defined as “the highest amount of cash at which a business would change hands between a willing and able buyer and seller, in an open and unrestricted market when neither is forced to buy or sell and when both parties have reasonable knowledge of the facts.”
Price often differs from value for various reasons. Some of these reasons are that buyers are often unique, emotions can sway either party, strategic or synergistic factors may exist, the financial structure of the deal, or simply the length of time it takes to complete the transaction.
Market research can be done using a database of completed transactions to learn specific details about these deals. These details include the price of the transaction, revenue of the target company, earnings of the target company, and industry of the target company. These details can further describe the differences between the value placed on a business and the price it ultimately sold for. This helps educate the seller in seeing the difference between value and price.
Conclusion
Through market research, businesses can make informed decisions about their products, pricing, distribution, and promotion strategies. It empowers them to adapt and stay ahead in a dynamic and ever-changing market environment.
In the Canadian business landscape, where diversity and complexity reign, market research remains an indispensable ally, ensuring that businesses are well-equipped to thrive and succeed, both now and in the future. It is not merely a valuable tool; it is the compass that guides businesses toward the path of prosperity and growth.
Partner with Robbinex
Marketing of a business requires the careful creation of an Offering Memorandum that emphasizes the future strengths of the business, its markets, customers, employees, and suppliers, remembering that true value lies in future earnings. A one-page de-identified Factum is created for distribution to the Robbinex buyer database.
Robbinex’s proven three step process includes creating a Seven-Step Marketing Plan™ to research, target, approach and attract the best buyers available.
Author: Robbinex
