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.
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”?