Selling your business
Maximise the value of your fortunes

It's never too early to work out a strategy for exiting your business. Planning is the key to securing a successful business sale. Sellers who haven't prepared may even find themselves receiving less money for their businesses than those who have planned. When a business is sold, any well advised potential buyer will typically wish to undertake a full due diligence process in order to obtain as much information as possible regarding the business they are seeking to acquire. It is common practice to undertake a 3 to 5 year grooming period in order to present a business favourably and thereby achieving the maximum return on a sale.

A valuation will be required as a starting point for negotiations with a prospective buyer. While there is a ready made market and market price for the owners of listed public limited company shares, those needing a valuation for a private company need to be more creative. Various valuation methods have developed over the years.

“Earnings multiples” are commonly used to value businesses with an established, profitable history. Often, a price earnings ratio (P/E ratio) is used, which represents the value of a business divided by its profits after tax. To obtain a valuation, this ratio is then multiplied by current profits. The calculation of the profit figure itself however will depend on circumstances and is likely to be adjusted for relevant factors.

Another method is “discounted cash flow” which is generally appropriate for cash-generating, mature, stable businesses and those with good long-term prospects. This more technical method depends heavily on the assumptions made about long-term business conditions. The valuation is based essentially on a cash flow forecast for a number of years forward plus a residual business value. The current value is then calculated using a discount rate, so that the value of the business can be established in today’s terms.

Valuations based on an “entry cost” reflect the costs involved in setting up a business from scratch. Here the costs of purchasing assets, recruiting and training staff, developing products, building up a customer base, etc are the starting point for the valuation. A prospective buyer may look to reduce this for any cost savings they believe they could make.

An “asset based” valuation method is typically most suited to businesses with a significant amount of tangible assets. The method does not however take account of future earnings and is based on the sum of assets less liabilities. The starting point for the valuation is the assets per the accounts, which will then be adjusted to reflect current market rates.

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