In part 3 of the blog series, we discussed how best to prepare your business for sale.
Just how much is your company worth, and how is it calculated?
Whilst valuation is not for your legal team, our corporate lawyers at FDR Law work closely with your accountancy team in relation to the valuation and the price mechanism for the sale.
There are various methods to value your business before you begin marketing it for sale.The sector in which you operate and nature of your enterprise will determine how best to value your company.
The basic valuation of your business is the sum of the tangible and intangible assets less any debts and other liabilities. The actual valuation in the eyes of the buyer is subject to other factors.
Is it worth paying a premium to remove a key competitor from the market or to expand an existing customer base; does the purchase of your company bring integration or employment problems that act as a discount to the basic valuation?
Many businesses have tangible assets, whether property, machinery or other equipment, which can contribute to the overall valuation or depress it. If, for example, expensive equipment is out-dated and requires replacing, a buyer will factor into the price the capital expenditure requirement.
Multiples of earnings can also form the basis of your business’ value if it is generating a sustainable profit. The key here is a proven track record. A history of profit growth will give a buyer confidence in a valuation based on a multiple of profit. A one-off spike in profitability at the time of a sale is unlikely to be regarded as a valid basis for calculating a valuation.
Cashflow can also be used to generate a value, with projected future cash flow discounted and considered less valuable than achieved revenue. Both of these valuation methods often suit mature businesses.
As a starting point, businesses can test their value by considering how much it would cost for a rival to create a similar enterprise. Trained staff, assets, a customer base and well-received products mean a business is well placed to achieve a good price based on this entry-cost valuation. However, in some industries, there is a clear benchmark of value, such as the number of outlets in a chain in a particular sector, which will create a more linear approach to valuation.
Valuations of individual businesses can also be heavily influenced by the consensus opinion about the outlook for the sector in which it operates.
If you are considering an exit then you should engage your professional team as early as possible and liaise with your accountant as to valuation.
If you want more information regarding selling your business, please contact our Head of Corporate, Margaret Evans at margaret.evans@fdrlaw.co.uk or call Margaret or our commercial team on 01925 230 000 or visit the website at www.fdrlaw.co.uk
**This article does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest. Specialist legal advice should always be sought in any particular case **