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What’s it Worth?

If you’re thinking about selling your business, it might seem obvious to start by establishing how much it is worth. But ‘value’ is a concept not unlike beauty: it can be perceived quite differently by different people.

So when thinking about value, let’s start by eliminating an urban myth. The valuation of your business isn’t what it is worth. A business valuation is not unlike having your house valued; it provides you with some parameters, but no buyer may come along. And even if one does appear and they offer you the sum the house is being marketed at (and it’s very likely they will want to negotiate), it’s quite likely that they will still need to raise the money to pay for it.

may-02So you may be wondering, why bother with a valuation if every transaction on a private company sale is, in effect, a horse trade?

To continue with the house sale analogy, if you are serious about selling your home you could always put it up for auction and see what bids you may or may not get. The problem with this approach is that if you do get a bid, you cannot be sure if it’s in the right ball park unless you have a certain amount of property expertise.

Sure it’s a market bid, but could you do better if you put the property on the open market? This way you may feel more comfortable with the bid you get. And if you had your property valued by at least one, and maybe several estate agents, when you do receive a bid that is in the right ballpark as the valuations, you are likely to feel more comfortable in accepting it.

That’s also why having your business valued before you go to market is a good idea. For one thing the buyer is likely to have gone through a similar process, and so both sides should be on the same page.

Of course, the business may be worth less or more, dependant on whom the buyer is. A trade buyer will always have the opportunity to take advantage of synergies that an MBO team cannot secure. And a real premium can be scored if you are fortunate enough to find a buyer who is desperate to win the deal to gain some competitive advantage, whatever that may be.

In addition, this whole situation can be enhanced yet further if a number of bidders or all are vying for the opportunity. In these situations, a good adviser can create an advantageous ‘deal fever’ atmosphere.

There are many technical ways of valuing a business, including multiples of profits, net assets plus goodwill or paybacks using complicated DCF models. Some industries, such as the insurance sector, use multiples of incomes as the norm. Where it becomes a little more complicated is if the business is in an early stage, or if it is one that generates revenues from selling licences or IP. In these cases you can project forward an anticipated income stream and profits, but as someone once said to me, this is a bit like fairies at the bottom of the garden: we would love to believe it, but until we see them…

In these cases it is still important to undertake some sort of technical valuation, but to be open- minded in how that value may be realised. In other words, in these circumstances it is much more likely that a deal will be done on an earn-out basis.

Finally, is it worth having your business valued even if you’re not considering selling it? The answer is almost always ‘yes’. For one thing, it will give you a line in the sand as to the value of your asset and might spur you on to enhance this further. Alternatively, you may be pleasantly surprised and move forward your sale plans…

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Jo HaighJo Haigh is CEO and founder of fds, with bases in London, Birmingham and Yorkshire. An experienced dealmaker, Jo specialises in putting together the right deal at the right time and in the right format for growing businesses throughout the country. She has bought and sold over 400 companies in the last 25 years specialising in owner-managed companies.

She is also a Visiting Fellow at The University of Leeds and the author of The Keys to the Boardroom – How to Get There and How to Stay There.


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