Straightforward M&A: the big questions
Q: What is my business worth?
A: What someone is prepared to pay for it.
While this is the honest answer, it is, perhaps, not very helpful if you are trying plan for a sale. So perhaps a better starting point would be to ask…
How will a potential acquirer determine the value of my business?
There are various methods the corporate finance industry uses to assess the value of a business, although they will invariably involve applying a multiple to a figure that is deemed to represent the financial performance of the business. While the most common method is a multiple of Earnings Before Interest Tax Depreciation and Amortisation (EBITDA), other approaches include calculations of Accounting Rates of Return (ARR), Internal Rate of Return (IRR), Discounted Cash Flows (DCF) and so on.
Different industries – different metrics…
Industry sectors often have unique market-specific valuation criteria that buyers use to benchmark businesses against each other. For example, in software/SaaS business sales value is often determined by a multiple of Annual Recurring Revenue, pharmacy company sales may involve prescription numbers, and insurance may use multiples of fee income.
Understanding how potential acquirers will value your business is an important step in determining what your business is worth. If the market says that a business of your size, in your sector is generally worth 5x EBITDA then this is a good place to start – the important thing that is often forgotten is that this is absolutely not where you should stop.
Presenting the business well…
Understanding the tools buyers use in valuation allows you to present your business in the best possible light, encouraging buyers to reassess and potentially increase their valuation from a technical and financial perspective. A robust financial reporting system, focusing on delivering timely and accurate trading updates, is crucial in supporting your business narrative.
Knowing the key metrics or Key Performance Indicators (KPIs) specific to your industry sector is essential. A business that comprehends and demonstrates these metrics through clear reporting and controls becomes more successful and appealing to prospective buyers (as well as helping you assess whether you are anywhere close to achieving your desired valuation outcome)!
At Entrepreneurs Hub, we emphasise that a deep understanding of a business’s financials is only truly valuable when it is coupled with an understanding of why your business is successful – either within its sector and/or due to its future potential. Outside of your company’s financial profile and trajectory this typically revolves around the following (amongst many other factors):
- Diversity and quality of your customer base,
- Levels of repeat / recurring sales,
- Barriers to entry or intellectual property,
- Reliance on the shareholder team (and willingness to aid transition),
- Operating infrastructure, systems, and processes,
- Scarcity value of the business.
All these factors have a bearing on value and deal structure (the amount paid on day one of the transaction completion versus any proportion which may be deferred or contingent on performance.
The truth about value!
And so we come back to value being what someone is prepared to pay for it. The various (desktop) valuation methods are a good starting point, but they have their limitations. The only way you will ultimately understand the value of your business is when it is properly prepared and presented to a carefully researched group of potential acquirers in a competitive bidding process.
A carefully planned competitive bidding process is where each potential acquirer’s motives and means for acquisition come into play and where, as a result, we see dramatically different valuations being placed on the companies we sell (the difference from lowest to highest bids frequently being a factor of 2-3x from lowest to highest).
Your first step in understanding the value of your business:
If you would like to gain an initial view on the value of your business, we would be happy to arrange a complimentary and confidential 30–60-minute telephone or video call with you. During this call (and based on the experience of many hundreds of business sales over the last 20 years) we will help you gain an initial view as to the potential value of your business and its prospects for a successful sale process. Any feedback we provide will be straightforward, honest, and actionable.
