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 is an information memorandum document?

An information memorandum is an important document when it comes to selling your company. It gives any potential buyer an overview of the company that is being sold and it provides the necessary information a potential buyer may need in order to decide whether they want to pursue a purchase.

A business may have built up a lot of useful trademarks or patents over time and this may add to its value, therefore it’s important to ensure they’re part of the memorandum. Also, key members of staff who may have distinct roles and skills within the business will need to be noted together with any sales and marketing procedures (for example, key paths to market, sales funnels etc.) and actual sales figures by product or service.

Accounts is an important part of the memorandum, too and it’s important to include at least three years’ past accounts with adjusted net profit.

As you can see, this document will include a lot of detail that could be of interest to competitors, so it’s important that it’s only provided to potential buyers who have signed a non-disclosure agreement (Ventura will take care of this, as would any business broker worth his/her salt).

How do I go about selling my company?

The most common question asked of any business broker looks simple – “How do I go about selling my company?” Unfortunately the answer very rarely satisfies because it really depends on what kind of business it is.

We’ve put together a whole set of documents that explain it, starting here: https://www.venturabusinessbrokers.co.uk/selling/initial-considerations/ but I’m sure some people when asking are really not that interested in the process, they’re more concerned with working out the initial steps, I mean, it’s not like you can pop your company on eBay, is it?

Well actually, yes, it can be. I’ve seen adverts in local post offices where people are trying to sell their still-running, on-going business and that’s absolutely fine. You’ll obviously have to deal with Companies House and HMRC to make sure all the technicalities are worked out, but if you’re willing to take the risk, you’re quite at liberty to sell your business to whoever you want for whatever you can get for it.

But is it safe?

I suppose the issue comes down to experience and knowledge. Any potential buyer (well, one that’s doing due diligence) is going to want to go over your accounts in fine detail. They’ll want to see your balance sheet, profit and loss, all you records of sales and orders and probably more information than you normally have just lying around the office. This person is about to make a huge investment and so wants to make sure their hard earned cash isn’t going to be wasted.

Again, most of this depends on the business you’re in. If you have a lot of recurring custom then the purchaser is going to want to know why. Do people come back time after time because of the prices are good? Is it a personal issue such as they like dealing with the owner personally? Are there any reasons that depend on the current owner? If the owner then goes, will those sales go, too?

As a seller you need to be ready for these types of questions and you have to have good answers. It may, at the end of the day, prove to be far more economical to engage with a business broker from the start and have confidence that all this can be taken care of by people who know what they’re doing and have a lot of experience in exactly this area.