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No matter who you plan to sell your business to, valuation is at the core of any transaction. Unless a valuation can be agreed between the parties, the deal will not happen and is therefore fundamental to your decision-making.
Valuations are not an exact science and involve an element of subjectivity. The true test is what a willing buyer is prepared to pay and what a willing seller is prepared to sell for. Our experienced team can assist you in assessing a value for your business.
Typical valuation process
Whether you require a valuation to assist with negotiations, or for tax purposes in relation to an EMI scheme, the steps followed in the process will be mostly the same and are outlined below.
How can you increase the value of your business
Align your business
Whether you’re planning to sell your business to your employees, private equity or trade, identify who the buyer will likely be and shape your business accordingly.
Reduce risk
You may rely on a particular (group of) customer(s), which is also known as concentration risk. Think about diversifying and mitigating this risk if possible.
Processes
Ensure the right processes are in place for storing and recording information. The more (up-to-date and accurate) information you can show, the higher the confidence in your business.
Management team
Will there be any gap in skills once you leave the business? Having the right senior leadership team in place is key to ensuring a smooth transition and succession.
Business valuation key terms
EBITDA – Earnings Before Interest, Taxation, Depreciation and Amortisation
Valuation multiples based on EBITDA are very common, and often this is what potential investors are acquirers are most interested in.
Enterprise Value (“EV”) – This represents the total value of a company, regardless of how it is financed. EV is often calculated by applying a multiple to EBITDA or revenue.
EV is equal to the fair value of equity plus net debt less the cash balance as of the valuation date.
Equity Value – The value of a company that is available to its shareholders. This is the Enterprise Value plus all cash and cash equivalents, short and long-term investments, and deducts all short-term debt, long-term debt, and minority interests.
Multiples – A value that can be applied to EBITDA or revenue to arrive at the Enterprise Value.
To work out your unique multiple, you need to accept that there is some subjectivity and guesswork involved. Unfortunately, there is no set way of finding a designated multiple. Instead, we recommend a few basic rules of thumb:
- Research your industry. What multiples have similar businesses to yours recently sold for?
- Are there any publicly quoted comparable companies?
- How healthy is your business’s financial history?
- Is it stable enough to command a higher multiple?
- What situation will the business be left in once you leave (if you are selling)?
- Do you have any guaranteed/contracted income over the next few years?
- How loyal is your customer base, and how strong are your supplier relationships?
Normalised or Adjusted EBITDA – EBITDA should be adjusted if any exceptional revenue or costs have been included. This could include adding back one-off legal fees or normalising directors’ remuneration if they are paid over or under market rates.
Often, this is done for various years, with a weighting given to each year’s adjusted EBITDA to provide a total weighting adjusted EBITDA.
Asset-Based Valuation – For an asset-based valuation, you would usually look at your most recent book net assets. Adjustments would be for any assets or liabilities that are over or understated when compared to market value. In addition, adjustments should be made to ensure all assets and liabilities have been included, for example, an estimate for your corporation or any depreciation that has not yet been posted.
This figure would usually be considered to be the minimum value.
Earnings-Based Valuation – For an earning-based valuation, a common way would be to value the business by calculating the normalised or adjusted EBITDA and applying an earnings-based multiple.
There may be variations to this depending on which sector you are in.