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Valuation – “What is the Value of My Business”, How is it Valued?

How much would you pay for your own business?

How do advisors answer a business owners question “what is the value of my business, what will we get for it”? The easiest way to answer is to ask the owner how much they would be willing (truthfully) to pay for their own business? Very often there is a significant gap between what the owner (and market is prepared to pay) and what the owner wants.

Investors, whether financial or trade buyers, are all expecting a return on their investment. This return is adjusted for business risk and growth prospects and largely determines the prices buyers are willing to pay.

“What is the value of my business” – Price Expectations

Often if an owners price expectation is higher than what would be a “suitable” market value, owners may have many caveats particularly where recent performance has not been stellar, such as “the business is better than that”, “if I had more money to spend”, “we had one bad year”, “staff has been an issue”, “a new competitor has impacted margins”, “government is not helping”… Yes these are all reasons for the price being where it is, below expectations, and unfortunately not where you may want it and will be factored into the offer price.

However where a company has been performing well and prices are discussed against opportunities “we are growing at double digits every year”, “we have this unique product”, “there is a large untapped market”, price negotiations are a lot easier.  These comments are important but there still may be an unmet price expectation between what the owner desires and the market is willing to pay and ultimately a sale is not achieved.

What is the value of my business?

Business Valuers

There are many companies that specialize in business valuations and many methodologies are used to establish a value. However, in the main these valuations are financial models which are not fully aligned with market expectations. They are generally more useful for court ordered valuations or where an independent third-party valuation is used to establish an agreed value for exiting shareholders for an unlisted business or a discrete entity/division of a listed company. 

Strategic Valuation

Most people who invest in mid market businesses are investing for strategic reasons, a geographic expansion, gaining hold of a new product or market, key staff, building scale, removing a competitor and many other reasons. Typically buyers understand that the value of the business is based on its stand-alone historical performance and will have an understanding of the value it brings them in the future. Naturally they will not want to pay for the future value that they bring to the business and typically base their offers on historical performance.

Multiple Bidders

The key to drive up the price in all business sales is to have more than one bidder! Competitive bids can more than double or triple the sale price or deal value and in every instance a competitive bid process will lead to an improved deal value, deal structure and outcome for the seller. A properly managed sale process will ensure that there are a number of concurrent bidders ensuring the best price and deal outcome. 

Simplify the Valuation

Valuations are often undertaken with extensive and intricate spread sheet analysis, as important as they are, they rely on key input variables with future assumptions including growth, margin, expenses, head count, cost of debt (interest rates) and many other factors. These variables are difficult and tricky to get right. To address the difficulty of accurate forecasting, some buyers use scenarios for modelling a “base case” an “upside” and “downside” cases. What should these modelling variables be; a continue growth in revenue of say 10% to 20% per year or a downside reduction of 30% (say GFC downside), what then? How do you factor in risk when asking “what is the value of my business”?

Skilled owners, buyers and investors typically will gain a good understanding of the business by asking a few key questions and often their analysis is no more than a single page based on historical performance without intricate modelling. They will focus on the major business drivers, markets, key staff, technology product and service differentiation and historical revenue and margins.

Business Story

It is important to be able to articulate the value of the business simply and succinctly and to understand and communicate the value drivers, earnings and future opportunities. “What is the value of my business” is largely determined by the “story” of the businesses future combined with historical performance.
 
Make sure that when you sell your business and ask “what is the value of my business”, you are able to articulate a clear explanation of the business story, have a clear understanding of your price expectation and have a sound sale process.
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Author: Jonathan Seddon 01/10/2014 Filed Under: Motivational, Sell, Strategy Tagged With: business sale, Valuations

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