Assessing the value of a business is often a combination of financial calculations and personal judgment based on the evaluator experience of similar transactions and a variety of adjustments to reflect differences in business models, environment, regulations, markets etc.

A small business is only worth what somebody is willing to pay for it. That introduces the notion of the value to the buyer as opposed to the intrinsic value of the business. Potential buyers who can see some synergies with the business will probably pay more for the business. Examples of synergies include cost reduction due to increased economies of scale, access to distribution channels enabling cross selling, access to new technologies, access to valuable brands etc.

Unfortunately the assessment of the synergistic value has always been extremely uncertain. Various acquisitions turned into financial disasters simply because most of the expected synergies never materialized. Research have shown that in large corporations, most of the enthusiasm for large acquisitions is mostly driven by executives seeking more power.   The larger the corporation, the larger the power of executives and their pay.

In the small business arena, most valuations are based on the companies history of profits not on the possible synergies. This is mostly because small business buyers are conscious of the high uncertainty in the small business environment. Why would somebody pay for the potential the the business might have. Small business buyers buy a business because of its potential but they only pay for its past results.

However, this doesn’t mean that a business with a bright history but a bleak future will still sell based on its history. The future is still the principal element buyers use in their decision to purchase a company.

Valuing a business before deciding to sell it is certainly a good decision. However, a business seller should understand the various limitations of business valuation and should remain flexible to the market reaction to his listing.

Three unique aspects make selling a business in Toronto much easier and more lucrative than in most other cities in North America:

• Ethnic diversity of its population: Diversity is good for business and can make markets much more liquid (frequent transactions). Different ethnic populations have different perceptions of happiness and different needs, so a business that doesn’t fit with people from a particular ethnic background might be an excellent fit for another ethnic background. For example gas stations and convenience stores require long hours of work and provide a relatively low return on investments. In spite of these disadvantage, these businesses are in great demand especially from recent immigrants. A number of recent immigrants lack language skills to operate a business with high social interaction so they perceive this type of businesses as ideal. Moreover the lack of job opportunities leave them with few other options. And finally sometime larger families provide buyers with a cost effective labour advantage.

• Immigration: Canada is one of the very few countries that is very open to immigration. One of the possible options for new immigrants is the purchase of a business that employs Canadian residents. This option is however underused since most immigrants use other options available. Moreover, immigrant coming to Canada are more entrepreneurial  by nature (otherwise they would not have risked everything they have to come to Canada). Very frequently, they choose to buy a business quickly after realizing that their future as employees might not be as bright as they expected.

• Concentration of population: A large market is generally more liquid than a smaller one. The number of business owners desiring to sell and potential individuals and/or companies looking to buy increase the possibilities of matching buyers’ and sellers’ needs.  As a good analogy, finance professionals know that large capitalization (total company value in the stock market) companies  have more liquid stocks than small capitalization companies.

For all these reasons, it’s mach easier to sell a business that is located in Toronto than a business in a small town in North America. Furthermore, even business valuations are higher in Toronto. Liquidity increases price. A buyer will offer a higher price if he/ she knows that it will be easier to sell the business if it ends-up been not what they expected it to be.

Unfortunately, not all business sellers take advantage of  the Toronto advantage when they sell their businesses. If the business is not exposed to the market for a reasonable time with adequate advertising then it will not sell for the best possible price. unfortunately, business owners selling with no professional help end-up leaving a lot of value on the table.

As a first approach, we suggest that a business owner contemplates these questions:

• Why would you sell your business?
• Are there other options available?
• What is your plan after selling your business?
• What price do you expect to sell your business for?

This introspective thinking will help the owner decide whether selling the business is the way to go. Owners can also  seek professional help from business brokers. I receive frequent questions from potential business sellers who are in the early stages of their decision. In many cases my advice to them is to explore their other options since selling their business appears not to be the optimal solution. Surfing the Internet searching for blogs and websites providing information about the business sale process can also be very helpful in understanding the preliminary concepts.