For many business owners, the end goal is to create something valuable that can be sold.
This may be to allow the owner to retire, or to pursue other interests or a sale may also be forced for health or family reasons. Generally though, ending your business ownership with a sale will generate more of a return for you than simply winding up the company and this makes it an attractive option for owners.
Ian Rotsey, Founder and CEO of Consolido Limited, one of our trusted business partners, outlines the main considerations for anyone thinking about selling their business.
What is my business worth?
For most business owners, a sale of a company is something that they will only do once or twice in their life which means the process of a sale transaction is unfamiliar and can be overwhelming.
One of the first questions that owners want an answer to is “what is my company worth?”
This apparently simple question can be one of the most contentious elements of a business sale and can also be a source of disappointment to the owner dreaming of receiving great riches as reward for their years of hard graft if they have not prepared their business for the sale and/or do not understand what a buyer will consider as valuable about your company.
How to go about valuing your business
As with the purchase and sale of anything, the value of a business is ultimately what the buyer is willing to pay for it and what the seller is willing to accept for it.
The value can also be different depending on the purpose of the valuation – a valuation to buy shares from an existing fellow shareholder when they leave the business is likely to be different (more backwards looking and focused on the value created to date into which that shareholder has had an input) to that which an investor may accept (more forwards looking reflecting the expected value that could be created as a result of the investment to give the investor their return on the investment).
As such, a valuation completed by anyone (the owner themselves, a broker or a skilled third party with experience in valuing businesses) is only ever the starting point in a sale transaction.
Valuation is also an art, not a science. It is well worth spending some time and money on obtaining a professional valuation rather than relying on your own feelings about what you think the company may be worth or the whims of a broker who has an incentive to produce as high a figure as possible to entice you to sign with them.
An experienced valuer of businesses will generally give you a range of values within which they feel the appropriate sale price falls and it will then be down to the buyer and the seller to decide between them what price (which may even be a number outside the range provided by the valuer) and deal structure will be acceptable to all parties.
Let’s start with a few simple facts about the value of your business:
- Prospective buyers will place no value on how hard you may have worked over the years – they will look at the financial reality of the business as it stands today.
- Your accounts need to be in order – if your accounts aren’t up to date, this may be reflected in the amount a prospective buyer is willing to pay.
- You won’t be able to take all the cash out of the company before the sale. Any prospective buyer will want to check there is enough working capital in the business to pay its suppliers and ensure business continuity.
How to prepare your business for a sale
It can take a couple of years to prepare a business for sale if you want to maximise your sale price. This can include building up the Balance Sheet strength, ensuring that processes are running smoothly and efficiently and that your books and records are in good order. People seeking to understand the value of your business will generally look for the last 3-4 years’ worth of financial statements and they will be looking for good, consistent performance and a stable Balance Sheet. Of course life happens and there will inevitably be something over that time period that does not reflect the normal trading performance but as long as you can sensibly explain what happened (and it is not indicative of a more serious underlying problem within the business) it should not be an issue.
Clearly, deriving and agreeing a value for the company is only the first step in the sale process and it can be hugely beneficial to those inexperienced in the world of company sales to have someone by their side to help them through the potential pitfalls of agreeing a deal structure, financial, legal and other due diligence, agreeing the terms of the SPA and other deal documents and then post-completion matters. The process can be stressful so having a knowledgeable and experienced advisor supporting you through it will take away some of this uncertainty and should also help you to realise a better return for your years of hard work.
Consolido works with many businesses on both sides of company sales and can help to guide you through the process from the point when you first start thinking about selling to after the champagne corks have popped.
We would be delighted to discuss your options with you, and you can reach us via our website – www.consolido.co.uk/contact – or on 0203 488 2642.