People often come to me and ask what their business would be worth if they sold it. The truth is, particularly when we’re in the middle of a pandemic-fuelled recession, there is no simple answer to this.
Accountancy textbooks teach you (well, taught me) that the value of a business is usually anything between your business’s net asset value and the present value (discounted for inflation) of future cashflow. The first is pretty certain, the latter is subject to a whole host of assumptions, and so, there’s likely to be a higher margin of error.
This is likely to be expressed as a multiple of your business’s earnings before interest tax depreciation and amortisation (commonly referred to in the industry as EBITDA – but you, like me, probably know this as profit).
The net asset value of the business is the value of any assets owned by the business, cash and monies owed to the business minus any amounts owed by the business.
For example, if your business ceased trading today, sold its assets and paid off its debt, then the amount left is the net assets. This is the minimum that the business will be worth and you should be familiar with this term from your balance sheet.
Why sell the business?
Loads of businesses around the UK are in financial distress right now following the economic fallout from the coronavirus, and it’s easy to understand why some owners are asking for valuations.
Quite simply, if the business has run out of money and investors are unable or unwilling to provide any further injections of cash it might be a wise time to think about selling up.
In such circumstances, the company may be in administration and the shares themselves can be purchased for as little as £1, with further capital then required to pay off the creditors that had called for the company’s winding-up. Extensive restructuring would often be needed in this case to turn the business around.
The other most common reason for selling a business is to retire. The virus has put a few things into perspective for some people I speak to, and I can see why the prospect of selling a business to fund retirement holds appeal.
Who would you sell the business to?
Usually, you can sell your business to trade buyers or private equity investors. Some people find it difficult to swallow their pride and sell up to a trade buyer, as it’s basically allowing a competitor to buy them out.
Going down the private equity route involves a professional investment company taking a controlling interest, and likely a board position in your business.
It is likely they will finance the acquisition of your business with high levels of debt. For this reason, private equity investors will target businesses with strong, predictable cashflow to service this debt.
Private equity firms, in theory at least, bring a great deal of financial resource and management expertise to your business, and so the ability to unlock latent potential.
However, they typically have an agenda to sell your business within five years of deploying their capital. This can be a perverse incentive and carries the potential to kill your company’s culture – at the detriment to both customers and employees.
Why would somebody buy a business?
For an investor, the case for buying a particular business is likely to revolve around a few factors. Obtaining access to, or a share of, a certain market is certainly one. In some cases, investors even buy a business to seek access to specific customers.
Then you have investors who seek to boost technological or operational capabilities through purchasing a business. Just look at Receipt Bank’s acquisition of Xavier in June 2020 for evidence of that.
Businesses with great potential for growth, and the income that comes with it, are particularly attractive propositions to investors. But always remember a business is worth what a buyer is willing to pay for it.
If the value of your business is a multiple of the EBITDA, maths (of all things) tells us there are two ways to increase the value of your business – increase the EBITDA; or increase the multiple (simples!).
The sector in which your business operates will help determine its value. For example, I doubt many investors will be sniffing around hospitality firms at the moment after the way the virus continues to affect that sector. At the other end of the scale, a booming video-gaming business might be attractive to investors as more people stay indoors to shield from COVID.
Having a recognisable brand is not to be underestimated, either. Buyers are usually more willing to pay the going rate for businesses with a good reputation or a significant market share – particularly those they think they can scale-up to boost their return on investment.
Then you have all of the financial side of the business. What’s the value of any outstanding contracts or committed revenues? What are the profitability ratios, and how do those tie in with average customer value? If all of those are positive, it will boost the value of any business.
As you can see from my brief ramblings, there really is no simple answer when it comes to valuing a business. Each case is judged on its own merit.
Talk to us today if you want a valuation of your business, whether you plan to sell up or are seeking to raise external investment.