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.


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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.


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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.


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I’ve decided I want to sell my company – what now?

Sell my company!

If you’ve decided that you want to sell your company, then by far the best thing to do is to engage a business broker who can help you make sure everything is in place, get you the right price for it and ensure the process moves smoothly.

There are several distinct stages to selling your company which we go through on our page here, but here’s a little bit more detail so you can be sure you’re doing the right thing.

Fact finding

Any business broker will want to do some fact finding to ensure they know exactly what the company is about, whether it’s in a condition to sell and whether, indeed, the broker wants to get involved. This usually takes the form of a face-to-face meeting but sometimes it can be done by telephone conference.

Be prepared for a lot of questions and if possible have your accounts available. Most importantly, be clear as to why you want to sell your business. It’s not just the financial, regulatory or system-based reasons but your emotional reason can be just as important and can make the different between a smooth and difficult transition to new owners.

Feedback

After some time to consider, we’ll then give you our opinion on the value of the business and whether we have any other relevant information. We may give you some advice on what to do to make your business more saleable or valuable. It’s at this time you will make a decision – will you sell or not? We obviously don’t want to force you into a decision but we can help if you have any questions.

Formal Instructions from client

We will need to you sign our standard broker agreement which will give us the instructions to proceed on your behalf.

Information Memorandum

An Information Memorandum will be drafted for your approval. You can read about them here : https://www.venturabusinessbrokers.co.uk/information-memorandum-document/

Marketing

We now get to the business of marketing your business. We will have already developed a profile of the most likely type of buyer. We tailor the specifics depending on the client’s business and market accordingly. We may advertise in the press, approach potential trade buyers or even purchases registered with us. Either way, confidentiality is key and all potential purchasers are closely vetted and will need to sign confidentiality agreements before they get to see any of your information.

Meetings

We’ll get a list of potential purchases and then arrange for you to meet all the suitable ones.

Offers for your company

The purchases will make all offers via us and we will discuss these with you as they come in. We’ll also handle the negotiations although we will be led by your instructions at all times.

Agreements

After much negotiation a price will be agreed together with a structure of the sale. This is very important because some purchasers require that the current directors stay around for skills transfer or to help with the smooth transition of the business. It’s important that all involved understand their roles moving forward. When all agreements are in place, we will create draft “head of terms” to be signed buy both you and the purchaser.

Buyer due diligence

Buyers obviously don’t just wade in and purchase companies without finding out a little bit about them. The purchaser will probably now want to go into a little more detail about the company they’re buying so they understand more about it.

Instruction of legal advisors

When both parties are happy and have signed the head of terms, we can then go ahead and contact the legal advisers.

Progress

Throughout the entire process and certainly at this part of the sale, we will keep both parties updated with information about what’s going on. Regular contact will be kept at all times as the sale reaches completion.


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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).


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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.


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Have you got a good reason to sell?

Selling a business that you’ve built up over years is never a decision to be taken lightly and it’s likely that many thoughts will be going through your mind as you weigh up the pros and cons. Making a rash decision . We’ve dealt with many businesses who have decided that it’s time to sell so over the next few weeks we’ll cover in detail some of the points that need to be considered.

Do you have a good reason to sell?

Very often there will be a very good financial reason to sell a business. It could be that the company has built up a lot of value and the directors (or one of the directors) decides they want to realise some of that value and convert it into cash. This is especially common where the directors are nearing a retirement age or have maybe had a change in family circumstances such as marriage or divorce. Everyone’s reasons are different but the prospect of a financial lump some can be quite compelling.

For others the reasons may be more personal. A falling out with other directors, or even the fact the business is failing and there’s a hope that someone else can make it work, they’re all valid reasons for wanting to sell, however each has its own problems and you’ll need to approach the sale through a fact-driven process and as much as possible, keep emotion out of it.

The most important thing to be aware of is that you must be totally honest with yourself and understand exactly why it is you want to sell. Prospective buyers (the best types, anyway) will know what to look out for and if there’s any sniff of a problem, they’ll notice.

For example, if the business totally depends on the current director or owner to run then they’ll know this straight away. A business must ideally run independently of the directors in order to be saleable. Sometimes the buyers may stipulate that a current owner stays on for a certain amount of time to ensure an efficient knowledge transfer and if your reason for leaving is emotional and you are intending to be out quickly, this could completely alter your plans. However for some, staying on and getting a salary after selling may be a relief.

Our advice?

Ensure you know exactly why you’re selling up. Be honest with yourself and understand the effect this may have on your business and any other directors. Make all of the reasons clear to any perspective buyers and above all, don’t hide anything that could affect the sale.

 


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