When preparing to sell your business, it’s a good idea to get your business valued as it can be a useful tool for strategic planning or the owner’s eventual exit.
It’s often thought that a valuation only takes place at the point of selling a business, and that a value is synonymous with the price paid on said sale.
However, price and value can be two very different numbers, and there are a number of reasons why, as a business owner, valuing your business is key to aiding either your own, or the business’s future.
A business valuation is essentially a ‘sober assessment’ of the current value of the business. It’s based on what the business is doing in its current state, using historic data and forecasts to calculate the current fair value.
Price can be defined as “the value agreed between a willing buyer and a willing seller”. The price of the business can vary significantly to the value depending on the buyer and the buying process.
As part of any buying process, it’s vital to bring in a number of viable purchasers to get multiple buyers – this is likely to increase the price achieved as the competition can drive the price up. Potential buyers are also likely to see synergies or have a strategic motivation for a potential purchase, which is also likely to incur a bid premium on any offer for a business.
The opposite can happen in a crisis sale, or where a potential buyer chances their luck for a bargain price against an uninformed seller. In this scenario the price would be lower than the value of the business.
By having a business valuation before starting a full sale process, a business owner can perform a ‘hygiene test’ on their own expectations and see if the business is valued at the price that they think it is. If the business is worth less than what they thought, then the owner can decide if they still want to go through with a sale or plan to get the business to the aspiration exit value (discussed further below) without incurring any unnecessary sales process costs.
A business valuation means offers can be vetted quickly if they come in a lot lower than the valuation. Just because a potential purchaser has bought a company before, it doesn’t mean they have paid or will offer fair value!
Recently, we’ve spoken to one party who had purchased between four and eight companies per annum in the last four years, bidding early to get ahead of the competition. Had the business not been valued, the initial offer may have tempted the vendors before other parties had chance to come to the table. But the offer was c50% of our valuation of the business, so the bidders were quickly moved on and our time was focused on the parties which came through later in the process offering far more than our sober assessment.
For help and support selling your business, get in contact with our specialists.
Another reason for a valuation is the issuance of employee incentives such as EMI or Growth Share schemes. One way to incentivise key individuals in the business’s success, is to offer them shares or share options which participate in the capital value of the company above a predetermined threshold value (usually close to the company’s current value). These schemes encourage employees to maximise the growth of the business as they have a stake in the value above the determined threshold level.
To set an appropriate threshold value, the current value of the business needs to be determined and then the threshold value is set in relation to this. Usually, the threshold value is calculated with a small uplift on the current value to give the recipients of the scheme an achievable target to give their share/options value in the short-term.
HMRC may investigate the threshold set on issuance to find out if the appropriate tax has been paid. At the time of writing, a full valuation report can form part of the evidence, if prepared correctly, to explain why the threshold value was set. You should seek additional tax if a share incentive scheme is being undertaken to confirm this and if there is any additional ‘hope value’ to be considered at point of issuance.
Where these schemes may recur on an annual basis, or if staff want to track the performance of their share, a recurring valuation may be useful to a business owner to adjust threshold values where needed or to show their staff the impact of their hard work in the year.
Whilst an exit may not be imminent, a current valuation can give you an idea of what an exit may look like in 5/10 years’ time. In some cases, knowing your business’s current value may change your opinion on when you would like to exit. Some business owners struggle to see the value they have created over the years of work and the market may suggest it’s a good time to sell, or the opposite where the business isn’t quite ready to be sold. Understanding this enables an informed decision to be made to maximise the return from your business.
A valuation gives you the chance to assess where the business could save money and what changes need to be made in order for the company to become as attractive as possible to a potential buyer. If following a valuation, weaknesses have been identified, PEM Corporate Finance are happy to work with business owners to help create a strategic plan to help improve the business – whether that be to aid growth, or to identify opportunities to ‘trim the fat’, making the business more marketable for an exit further down the line. Get in contact to discuss your requirements in further detail.
If the business has multiple entities providing different services, a valuation may also bring to light which entities are adding the most to the overall value, or worth investing in for future growth.
A business owner might decide they want to take part of the capital off the table, that could be to deploy in another business venture, de-risk, pay off the mortgage, or school fees. Getting a valuation identifies what proportion of the business could be sold to facilitate cash demands in other areas or what the cash benefit to de-risking would be.
A valuation can also be useful if looking for additional funding, particularly if Private Equity (PE) investment is an option. Knowing the value of the business before starting these discussions means an informed conversation can be had around PE involvement and the figures to be discussed.
If you are looking to sell your business, planning your exit strategy, or are looking to conduct a strategic review, get in contact with our valuation experts to get a professional, accurate value for your business.