Valuation guide
Factors affecting the valuation of a Business
Finding motivated buyers for your business requires an appreciation and a clear identification of which factors will be most valued by a prospective purchaser.
Selling a business is primarily a sales and marketing activity. In looking to maximise value it is necessary to look beyond the balance sheet and understand the chemistry that makes the Company what it is. This is particularly important once having identified and commenced negotiations with an interested party as negotiations are likely to progress faster and positively when dealing with the right purchaser.
There are many factors that can impact on value, in particular the type of buyer and the potential synergies that exist with your own company.
- Other broad factors that can have an impact would be;
- Trading or Investment
- Is the business a going concern
- Is the business being wound up or in an insolvent situation?
- What underlying tangible assets does the business own
- Is there substantial tangible assets like freehold properties
- Any intangible assets such as goodwill
- What is the age of the business
- A more mature business/ established business provides a greater comfort zone and credibility to its value
- What are the sustainable profits?
- Profits that are stable over 4 or more years, providing a stronger basis for future profits
Other factors which may affect the commercial value of the business may include;
- Day-to-day involvement of the business owners
- How the business operates without the owners day to day involvement.
- The business is much more valuable to a potential buyer if, generally, the owners of the business are not involved on a day to day basis through the efficient operation of systems, which means the potential purchaser does not have to put anyone in personally or become too embroiled in the business.
- The general economic climate and the state of the particular industry in which the company trades and the position of the business within it.
- Management stability
- The stability and importance of key employees and management is very important. If the business relies heavily on one particular employee, should the relationship deteriorate the business would be at high risk.
- Systemisation of the Business
- The capability to access and utilise relevant information at any time, is a vital tool.
- Relationships with customers and suppliers
- Frequently, key business relationships provide the most value to a prospective purchaser. If the business is dependent on a few major customers then inevitably there is a higher risk than if there is a more even spread of business within its customer base.
- Risk
- The more risk from a prospective purchasers position is likely to be reflected in a lower value. To make the business less risky and subsequently more valuable then by ensuring the business is fully systemised and that key relationships with customers, suppliers and employees are protected in some legal form such as contracts increases the level of comfort for a buyer.
- Legal Comfort
- The legal, financial and commercial due diligence process is very important and the comfort provided by the subsequent warranties and indemnities can make a big difference to the price a buyer will pay. The more secure the warranties and indemnities then the higher likely value reflecting the lower risk. With no warranties then value is likely to be much lower as there is significantly greater risk to the buyer of losing all of their investment.