Take a deep breath before hearing what somebody else – an adviser or purchaser, for instance – thinks your business is worth. You might just be in for a shock.
That’s the fact of the matter. Unfortunately, acquirers don’t always see the blood, sweat and possibly the money you’ve put in to making it successful. Equally, they can’t bank on the potential and growth you believe it promises. They might not even think the business is as unique as you believed it was. And there’s always a chance that you’re not completely au fait with the process of valuing a business.
All of these factors contribute to one universal truth: owner-managers almost always believe their business is worth more than it really is. And while a certain amount of subjectivity has to come into it, the result is that buyers aren’t always prepared to stump up what you would really like.
This doesn’t mean you are necessarily wrong. It means that ultimately you have to accept the price somebody else is prepared to pay – or not sell.
VALUATIONS ARE KEY
“The valuation is pretty fundamental,” says Howard Leigh, managing director of Cavendish Corporate Finance. “There’s no point in starting the sale exercise if your perception of value is completely different from that of the market.”
The best way to find out if you’re on the right track is to bring in advisers. Pick two or three accountancy or corporate finance firms, who would like you as their client, and ask them to place a price on the business. This is more of a starting point. Much like selling a house it gives you a ‘ballpark’ figure. It’s then up to you to understand and challenge the valuations. “Your price expectation shouldn’t be a million miles from reality,” says Rob Donaldson, head of M&A and private equity at accountancy firm Baker Tilly.
Despite his firm offering formal valuations (which in some circumstances are useful), he advises potential vendors of businesses not to bother. “It’s not worth spending the money on a formal valuation,” he says. “It’s tens of thousands of pounds wasted. No buyer will look and think ‘that’s alright then’. Having a formal valuation doesn’t guarantee a deal will happen and if it doesn’t you’ve exposed the business.”
He counsels “taking a view on the price and running some numbers”, adding that the price will be what the buyer thinks they can stretch to. It sounds fairly negative, but a big part of selling is being realistic and going to market with a price target that is achievable. “One of the transactions we were involved in was a survivor from the dot com era,” begins Christopher Jenkins, senior partner of accountancy firm Wingrave Yeats, “and having spoken to people during the good times they thought their company was worth twice what it was. We had to bring it down to a sensible figure.”
Advisers can place an approximate price on the company at your first meeting, but they are unlikely to commit formally to it as there are too many variables that could swing it either way. “Good advisers won’t value a business,” says Clive Sanford, chief executive of corporate finance house Magus Partners. “It will give entrepreneurs unrealistic expectations and six months down the road they will remember what you told them. It’s like going down a cul-de-sac and is one of my personal bugbears.”
Donaldson adds that any view on value must take into account other non-financial factors. Critical to that is how ‘sexy’ and how ‘fragile’ the business is. For sexiness, is there something dramatic happening in your market and are you at the forefront? And for fragility, do you depend on one or two key staff or suppliers? Are you particularly reliant on one or two customers? Or are you dependent on something, such as technology, that could soon be out of date? To get a clearer idea, advisers are likely to throw these questions at you.
If you do opt for a formal valuation, it’s likely to take two or three weeks. And there could be some value in making it official if you run a family business, for example, and are selling to other shareholders. “If it’s a trade buyer or a venture capital firm though they’re likely to be very sceptical,” says Donaldson. “Most trade buyers will have an internal team (if a plc) or advisers (if private) who will form their own idea of the value.”
HONESTY IS THE BEST POLICY
It’s no wonder you’re positive about your business. But don’t over-egg it. Cavendish’s Leigh is used to dealing with clients who accentuate the positive. “They tend to tell advisers the plus points,” he says, “and forget, or perhaps decide, not to mention any negative aspects, such as the arrival or growth of a major competitor, a key director leaving, or the threat of litigation against you. The more honest you are, the more honest the valuation will be.”
Donaldson adds that potential bidders will often scour the trade press and check the share prices of public companies in their sector, pick the most highly priced deal and use it as a benchmark.
VALUATION METHODS
There’s more than one way to skin a cat, and many ways to value a business. Valuations based on earnings are the most common. These are usually calculated as a multiple (called P:E) of earnings (profit after tax). The multiple will be higher for growing companies and where future profits are more reliable. Typically, quoted companies trade at higher multiples than private companies, and a minority stake in a private company is worth considerably less than a majority stake. Very sexy companies, with expectations of considerably higher profits in the future, can sell for multiples in the teens or even higher.
