DealCast Episode 2 | KPMG | CA
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Maximizing Value for Private Companies

DealCast Episode 2

Webcast originally aired on Friday, September 30, 2016


President, KPMG Corporate Finance Inc.

KPMG in Canada


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DealCast webcast


At any one time, as many as one-in-three Canadian small business owners are looking to sell their companies as a part of an exit strategy. Experts argue, however, that the thinking surrounding a possible sale should take place well before the entrepreneur actually decides to bring the gavel down on an auction.

That is because privately held companies need to ensure that processes and information systems are already in place to make the transaction as smooth and as financially rewarding as possible.

For public corporations, installing such structures is part-and-parcel of maximizing shareholder value. Private firms, however, are too often run by “gut instinct”, with scant historical information and uneven management in place. Such informal procedures can serve the company well in its start-up and operational phases but could reduce the company’s value when it comes time to sell.

In fact, the goal of these systems should be to make the existing owners redundant to the continued operations of the company. After all, the proprietor is looking to leave the firm; thus buyers are unlikely to fully value the enterprise if its best asset is heading out the door.

Instead, privately held firms need to recognize the two main filters buyers use to calculate an offer price:

  1. How much cash flow the company generates on an ongoing basis, and;
  2. The return needed to compensate for the risk that these cash flows will continue into the future.

In order to answer concern #2, management has to understand various aspects of the business, some of which might have been neglected during the building phase – factors such as the quality of existing assets, the value of the company’s brand or reputation within the industry and whether its existing customer base is overly concentrated.

Owners also need to understand the importance of advisers in the sale equation. Entrepreneurs sometimes sell the business on their own, a situation that can lead to a lower transaction price than if the owner sought out experienced help.

Management needs to have a good grasp on the industry, the pool of possible buyers, potential synergies with merger partners and barriers to entry in their sector. Such knowledge should result in a targeted approach to seeking buyers and a healthy degree of deal tension, crucial to generating a robust auction process and ultimately maximizing the business’ sale price.

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