How to value a business – when selling a company

8 key steps to valuing your business – when selling a company.

Vendors and purchasers will often go through a very different through process when considering value.

There is no standard model of valuation. The traditional methods of profit multiples, asset value and discounted cash flow all their place but the market value arrived at by using these tools is often very different to the view taken by a purchaser.

Here’s eight key areas to take into consideration:

Past Performance

Any buyer will want to look at how your business has performed in the past so they can make a judgement on how it may perform in the future.

Time

Has the business been around a long time? Does it have longevity? A company that’s been around for many years isn’t necessarily one that will continue to grow, however if it’s survived recessions in the past then this may be an indicator of its general strength and resilience.

Customer base

Does the company your selling have a loyal customer base that keeps buying? Will they stick around when the business is sold?

Balance sheet (liabilities and assets)

The accountant will want to make sure the balance sheet is in good order. Companies can look good on the surface but due to due diligence should be carried out to ensure it’s working well under the hood.

Profitability

Is the company profitable? A company can have a great turnover but if they’re not turning sales into profit, are they worth asking price?

Competition (and market share)

Are you buying the market leader? If the company is at the top in its particular market then it could be worth more.

The Sector

Is the sector on the rise or on the wane? Technology changes rapidly, is this company’s products likely to be made obsolete in the next decade – or sooner?

Management

Are the current management the backbone of the company? Are they likely to take a lot of people with them when they leave? This could be critical to the company’s on-going success.

What are the common pitfalls when selling a business?

The best way to avoid any pitfalls at all is to go to an experienced broker. There will be a charge, obviously, but making a mistake when selling something of such high value could be disastrous and having the best advice at hand is always the way to go and could save you a fortune in the long-term.

But even so, when selling a business you need to be aware that it’s not always plain sailing and very often you can find yourself selling a business for much less that you wanted. This can be very annoying, especially when you’ve built up your business over many years and you’re hoping to be able to do something with the proceeds. This happens to many people and should be avoided at all cost. So what are the main pitfalls and how can you avoid them when selling a business?

In this particular blog we’ll talk about pricing and getting the best price for your business.

One of the main issues here is that some people, when selling a business and want a quick exit, will go for an early offer from somewhere local. This may help you if you’re not too bothered about how much you’ll walk away with, but in general it’s often best to wait to get a number of bids in. Also, look for interest further afield. Regardless of what you think your business is worth, someone else may actually see that it’s worth a lot more to them.

For example, let’s say you make a blue widget that helps radio reception for digital radios. You have the design patents, the manufacturing and the distribution all set up for the UK. A local company selling the radios themselves may feel it’s worth buying you as a value-add to their business and value your business accordingly. This might not be much as they have already reached a high level of sales and probably see sales eventually dropping off.

However, another company further afield doesn’t have radios, but it does have a major distribution channel in the USA. They see the chance of selling your product to many millions of people and so the value suddenly becomes a lot higher. Of course, they’re not going to wade in with a massive price offer, but you need to see what they’re going to do with your business, what their plans are for the future and try to work out what the forward value is therefore going to be. This will give you some idea of how much your business is worth.

So, the first rule of selling a business is “don’t rush”. Take your time, get the best offer and even though any buyer will be doing due diligence on you, make sure you do the same to them.

Should I use a UK Business Broker?

Selling your business is not something you venture into lightly and so you need to make the very best choices possible when it comes to the processes. Choosing a business broker is obviously a good way to go because they will have the experience necessary to ensure everything runs smoothly but now the Internet is ubiquitous, information and ‘advice’ is everywhere, but can it be trusted?

The simple fact is, there are many business brokers to choose from but your first choice should really be to choose one that is at least local to you, if not just around the corner then certainly in the same country unless they can demonstrate a clear understanding of local laws and procedures.

For example, if you were a UK company hoping to sell to another UK company then you should ideally engage a UK business broker – put simply, they will know the ins and outs of the local marketplace. If you were selling internationally, then it would probably make sense to have two brokers on board, one from the UK and one from the target country.

Whatever you do, always check their credentials and ensure they have a good track record and understand your business and market well.