B
alance sheets, reputation, uniqueness, are all
factors of getting that value for your business that will let you invest in
that beachfront house in the tropics. But the important thing that will be
critical to successfully selling, will be the price.
Price that the purchaser and you, the seller,
will accept… You may have some idea of valuation. This may be justified and
substantiated through extensive research, or third-party advice, or possibly
they are an aspiration, ideals and not justified and totally unrealistic…
We hear the amazing stories in the news of start-ups being valued at billions of dollars without making
a cent and companies being acquired
for billions of dollars. Only recently media company Disney acquired 21st
Century Fox for $71.3bn, FIS' announced $43
billion acquisition of processing giant Worldpay and we heard about Larsen
& Turbos’ hostile bid for software company Mindtree for $1.6bn.
Sadly, business owners should not be
influenced by such tantalising business transactions, not all businesses are
worth nine zeros... What kind of transaction is available to you, a Cash
Purchase, a mix of Cash and Shares, a Term Loan, an Earn-Out or a Merger, all will
be dependent on your business health and your potential acquirers’ hunger for
your business?
The valuation of any business, be it a sole
trader, small business, medium sized enterprise or a multi-national corporation
is not subjective, nor is it all objective. There are some historical and traditional
metrics and methodologies used to give that elusive target valuation during the
preliminary discussions, workshops and deep dives into the company’s
commercial, technical and financial mechanics. This maybe refined and adjusted
during the due diligence, either higher or lower, depending on what comes out
during this extensive business review period.
Profitability at the time
of purchase will be one of these metrics. Looking at just the current year of
sale/purchase, will not give a true representation of the business and the
year/two years before and the projected revenue for the forthcoming year/s,
will be very important in this calculation of profitability. Revenues, not Profits are the more likely metric with
cash flow playing a significantly, more important role in valuing a
business. Any business owner can strip
out costs to make a business profitable, but it’s likely the business has no
long-term commercial viability.
The critical investment factor is determining the intrinsic
value of a business and paying a fair or bargain price.
Warren Buffett
The type of purchaser of your business will
also impact the valuation. Is it an
individual, a wealthy family office, a public company, a private company, a
venture capitalist, a competitor or a supplier?
Purchasers looking to come in, clean up and
sell on, will lower the valuation as much as is feasible to ensure maximise margin
and profitability when they move the business short term down the line.
Investors building a large portfolio may not
have a full detailed understanding of your business, domain or capabilities, nor
the capabilities to do so, and will likely use traditional metrics/valuations
to compare your business. They will make assumptions on what a similar company
in their own market definition in the past have been valued at.
A trade sale, where a synergistic company may acquire
your business to strengthen its product portfolio or bolster its customer base. Your business may provide a quick and
effective in-road into new geographies, industries or business verticals. Your
business may increase skilled resource availability in specific domains and
geographies.
Does this acquisition provide needed technology
and international property (IP) to enhance the purchaser existing products and
services? Is it acquiring a strong recognised
brand in the marketplace? Will it remove a strong competitor? There are many
more reasons where strategic acquisitions may add an additional valuation
metric on top of the more traditional methodologies used.
Quantitative, Qualitative, Subjective, Objective, …
Quantitative aspects,
such
as historical performance, earnings multiples for similar public companies,
recent sales of similar businesses, etc., contribute to the metrics and
calculus.
Qualitative factors,
such
as management strength, protection/capability against competitors, monopoly or
high/difficult barriers to entry, recurrent income, etc. contribute to the valuation.
Subjective influences,
such
Employee churn/turnover, customer satisfaction, robustness of customer contracts,
critical partners/suppliers
Objective stimuli,
including customer acquisition and retention
costs, profit margins, overheads, IP, reoccurring revenues, length of customer
contracts, assets, liabilities such as loans, trading currency, number of
corporations/affiliations, pending court cases, patent/IP protection,
compliance and regulatory risks, the list of KPI’s and check-points can be
extensive.
At the end of the day, the overall market is one of the judges and a
heavy influencer of a company’s worth. The only way for that potential value of
a company to be recognised in a sale is through many conversations that will
occur with prospective purchasers and investors. This will determine the level
of interest in the business and also provide a ‘litmus paper’ indicator of
feasible value expectations.
Many of the usual methodologies for valuation are
listed below and maybe used in singularity or in a combination to achieve the
most effective valuation:
Market
Value Business Valuation
- comparing
your business to similar businesses that have sold. This business valuation
method only works for businesses that can access sufficient market data on
their competitors.
Asset-Based Business Valuation
- simply considers your business’s total net
asset value, minus the value of its total liabilities, according to your
balance sheet. Are you are a Going Concern or a Liquidation Value
ROI-Based Business Valuation -
depends on the market to determine how long
will it take to recover the original investment.
Discounted Cash Flow Valuation -
based on projected cashflow adjusted or discounted to its present value.
Capitalization of
Earnings Valuation
- calculates a business’s
future profitability based on its cash flow, annual ROI, and its expected
value.
Multiples of
Earning Valuation
- estimates a business’s
maximum worth by assigning a multiplier to its current revenue. Multipliers
vary according to industry, economic climate, and other factors.
Book Value Valuation
determines the value of the business’s equity (assets minus liabilities) as described
on the business’s balance sheet
At the end of the day a company and its likelihood
to be acquired, and the valuation offer accepted by yourself, is based on if
your company is still being seen through ‘rose tinted glasses’ by potential
acquirers after the due diligence, prospectus review, meetings with senior
management and trawl through the numbers and projections, and if they hold
water.
Starting on the road for acquisition if undertaken properly, will not be a quick
process. The need to get the company in shape is going to be needed. The
M&A team will be the ‘personal trainers’, the people that will look to get
the business in shape, working alongside senior management to optimise, shine
and buff the business to give it the best representation to the market. Making sure the ‘shop window’ is properly
dressed and ready for viewing could take many months. Business owners will need to swallow some
pride and listen to this external advice, this advice will be to ensure that
the business is maximising its potential and ultimately benefit the owner.
Valuation comes down to common sense. In the case there is a divide, chasm
or gulf between valuation and price expectation from yourself, then creativity
becomes involved. Deal structures such as cash and shares, earn-outs, tie-in of
senior management, etc., can be introduced.
All have positives and negatives in the risk of a successful business
acquisition.
If you are asking for a high and unreachable price
for your business it is most likely you actually do not want to sell your
business at this time. You have either a
misunderstanding of the company acquisition process or you believe that you can
make more from the sale in a year/two years’ time. If this is the case do not
put yourself through the corporate acquisition process and the acquisition due
diligence process, it takes precious time away from your business operations, it
diverts you from revenue generating activities, it takes resource commitment
and will cost money.
Selling a business is no small feat for the owner,
or the mergers and acquisition experts that will support you through such a
transaction. Do not take lightly the
need to be 100% committed in undertaking this. If you have any slight
hesitancy, a nagging doubt, a stop before you start down the long, arduous
bumpy road of acquisition.
Lateral Alliances offer professional and dependable consulting for all aspects of your company. From initiating and supporting marketing strategies, including PR, web design, graphic design, event management, social media, business development, recruitment, sale, right through to business and exit strategies, we have the skills and experience to support your business. We are a 'hands on' organisation, who prefer to get deeply involved in your business and challenges, not hide behind aimless discussions.
Insightful business thinking...
