Business valuations are an art not a science. When it comes to selling a business, one of the first things we encourage an owner to do is manage their expectations by getting an independent valuation of their business.
Business Valuation and Exit
Is your business worth enough?
Value your business.
Business owners often ask themselves and their trusted advisors if they need to spend money on a business valuation as part of their business exit strategy – is it worth it? The answer is most definitely yes.
Planning a business exit
It is essential to know the value of a business. During exit planning, a five-year forecast and an initial company valuation are very important in determining how to get business owners up to the value they need to be when it’s time to sell. Also, it is an essential part of receiving the full market value for a business when the time comes to exit.
Whether we’re mentoring a business owner or taking them towards an exit, we often start with the ‘Why’. Sometimes this could be a Clarity Day where we take them out of their business and facilitate the definition of their objectives. Other times, we’ll just get them to write a list of their top 100 ‘wants’. We then put a value and timing to each and determine what the desired business value needs to be. If the current business value doesn’t match, we know there is work to do to enhance the value so the owner gets what he or she wants.
The design of the Exit Plan should be entirely based upon the business owner’s goals. How much do they need post exit? If it’s for retirement or to start or acquire another business, what does the baseline sale price need to be?
Next is to know the company inside out. Do a SWOT analysis to determine any gaps that need to be filled. Get rid of or mitigate against any serious risks and make the company an attractive acquisition.
Valuing the company
Tax is an important consideration in a valuation. You want to know how much you’re in for when you sell. There are plenty of different ways in which you can mitigate a large tax bill. You might transfer part of the company into a spouse’s name, or even transfer to a co-owner who might be considering an MBO. The message here is, when thinking about an exit, a bit of tax planning some way ahead of the transaction may well get you to your goal sooner because your post tax cash position could be enhanced through saving tax.
Employees can also have an interest in the company valuation. You might consider an employee share scheme to incentivise them to increase the business value over time. Selling your business to your employees can be a tax efficient way to exit your business.
During the transaction itself, if you have a solid basis for your asking price in the form of a professional valuation, then this forms a great starting point for negotiation with a potential buyer.
When you do a business valuation is critical to your long term achievement of your exit objectives. We would encourage sooner rather than later. You get to know your starting point and what you need to do to sell the business for what you need after you have exited. When dealing with customers we typically discuss these issues in a particular order:
- Clarity – know where you are now and where you want to be
- Roadmap – what are the milestones you need to pass in order to get there
- Full exit plan – how are you going to reach each of the milestones?
- The exit transaction – control the transaction as closely as possible. Make it happen as quickly as possible and at the best cost.
Who do you get to do a valuation?
It may well be your accountants – especially if they have a corporate finance department. Alternatively, you can approach a corporate finance specialist. We would encourage an independent specialist, so not someone who has an interest in the sale, be that someone who would lose out if you sold or who would gain as part of the transaction process in the form of a fee.
How much will it cost? Budget for anything between £5,000 and £15,000, depending on the size and complexity of your business. Relatively low in terms of the eventual outcome. However, make sure you spend it wisely and get the right advice.
Speak to us if you’re unsure about where to go and we can point you in the right direction.