Selling your Business

Overview

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There is no single answer to the question "what is my business worth?".

Therefore, we normally give a range of possible values - as it will be worth a different amount to different people at different times.

The highest prices are paid in situations where people compete against one another for businesses. It is not possible to guarantee competition in each transaction, and therefore the basic fundamentals of value generation must be relied upon.

The fundamentals that add value are increasing profits and strong underlying assets.

Losses, debts, overdrawn loan accounts and similar will all detract from market value.

In order to arrive at a range of market values for your business, you need to consider:

• Profits and earnings
• Multiples
• Deal structures

Profits and earnings

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There are lots of different but valid valuation methods Purchasers use when valuing your business. Sophisticated Purchasers can use discounted cash flow models, or a multiple of sales, replacement cost and opportunity cost and of course the separable value of the net assets.

For private owned businesses, that have a value of up to £10m, the most common valuation method is the price earnings or PE ratio.

This is also the method most used by banks to benchmark whether a Purchaser is overpaying for an acquisition. The price earnings ratio will be adjusted for surplus assets or debt to arrive at an overall valuation.

What is meant by "earnings"?

Your current profit and loss account reflects how you run your business. This may not be run in a way that maximises profit, as you may for example not want to pay large tax bills.

When selling a company you must adjust the declared profits of the business for those factors which distort - upwards and downwards the maintainable or underlying profits. Purchasers will normally use operating profit before interest and tax.

In general, a Purchaser's confidence will grow if adjustments to profit streams are minimised - this means you have good visibility of the returns your business delivers.

Examples of adjustments to earnings can be for non-market salary levels, benefits paid under your ownership that would cease with a new owner, or one off trading items.

Purchasers will often average two year trading histories, as consistent profit performance attracts a premium and builds confidence in your business - there is nothing that scares Purchasers more than a "hockey stick" in profit growth in the year before sale.

Most Purchasers will ignore one-off stellar profits as unsustainable.

Multiples

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Once you have the maintainable earnings for the business, the valuation can be obtained by applying a multiple to those maintainable earnings.

Multiples vary enormously. There are several factors that can effect the multiple for your deal.

Long term planning can alter some of the characteristics of your business to generate value. Stable recurring business, growth - upward trends in sales, margins and profits, no customer concentration, longer term written contracts with suppliers and customers and substantial order books reduce risk to a Purchaser.

These factors increase the visibility, quality and sustainability of earnings, and therefore they increase the multiple of earnings people will pay for your business.

Deal Structures

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Your deal will have at least two of the following types of consideration included within it:

• Cash at completion - when the ink is dry you get this cash. Sometimes, subject to confirming certain matters, a retention may be applied by a Purchaser - for example net assets as at the completion date. Retention monies are normally released within forty five days of completion.
• Deferred consideration - or monies that are payable to you but are paid over a period of time or "on the drip".
• Contingent consideration - often called "earn outs" - or monies that are payable to you but are contingent upon future events - for example contingent upon gross margin in the year after sale.

You will be expected to complete some form of handover, and the handover period may well be shorter than the period for which the contingent consideration is generated. Great care needs to be taken on structuring this element of any deal.

You will be the lucky exception if you get an all cash deal.