Let’s start by eliminating an urban myth: when you have your business valued, it does not mean that is what it’s really worth.
A business valuation is not unlike having your house valued. Sure, it provides you with some parameters but if a buyer comes along then, even if they offer you the sum the house is being marketed at (and it’s very likely they will want to negotiate), they have yet to raise the money.
So, why bother with a valuation if every transaction on a private company sale is in effect a horse trade?
Let’s continue with the house sale analogy. If you are serious about selling your home, you can of course put the property up for auction and see what bids you may or may not get. The problem with this approach is that if you do get a bid, you cannot be sure if it’s in the right ball park, unless you have a certain amount of property expertise.
Sure, it’s a market bid, but could you do better if you put the property on the open market? This way you may feel more comfortable with the bid you get. However, to have had your property valued by at least one, and maybe several estate agents will make you feel more comfortable in accepting a bid.
It’s for the same reasons that having your business valued before you go to market is a good idea. For one thing, the buyer is likely to have gone through a similar process, allowing both sides to be on the same page.
The business may be worth less or more, depending on the buyer. A trade buyer will always have the opportunity to take advantage of synergies. A real premium can be scored if you are fortunate to find a buyer who is desperate to win the deal.
In addition, this whole situation can be enhanced if a number of bidders are vying for the opportunity, in these cases a good adviser can create an advantageous deal fever atmosphere.
There are many technical ways of valuing a business, including multiples of profits, and net assets, plus goodwill to paybacks using complicated DCF models. There are also some industries, such as the insurance sector, that use multiples of incomes as the norm.
It all becomes a little more complicated in early stage or revenue businesses, when selling a licence or IP. In these cases, you can project forward an anticipated income stream and profits; but as someone once said to me, it’s a bit like fairies at the bottom of the garden: we would love to believe it, but until we see them…
In these cases, it’s still important to undertake some sort of technical valuation, but to be open-minded in how that value may be realised. In other words, it’s much more likely. In these circumstances, a deal will be done on an earn-out basis.
Finally, is it worth having your business valued, even though at this stage you may not even be considering selling? The answer is almost always, “yes”. For one thing, it will give you a line in the sand as to the value of this asset, and a good adviser will discuss with you what needs doing to enhance this further. You may be pleasantly surprised and move forward your sale plans.
Jo Haigh is head of FDS corporate finance services and the author of ‘The Financial Times Guide to Finance for Non Financial Managers’.
Share this story