How much is your business worth?

Russell Veitch, of KWS (www.keywealthsolutions.co.uk), looks at what can have an impact on the value of your business.

If you’re thinking of selling up, do you know how much your business is worth? This is an important question that, as a business owner you should be asking yourself on a regular basis. Understanding the potential value of your company not only prepares you for its eventual sale but also allows you to monitor the progress of your venture.

There are many ways to value a business, and it is important to obtain a good estimation early on. This will help you to prepare before the time comes to eventually sell. Ultimately, you will set a price for your company in your mind based on what its worth to you.

However, you must keep in mind that a business, just like any asset, is only really worth what a buyer is willing to pay for it. So, when working out how much your business is worth, you will need to look beyond your own valuations and consider other factors that will determine the price that you could receive.

Whilst the price of a business is often based on the multiple of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization), which gives a truer reflection of the earnings of the company, resulting in a higher overall value. It is important to remember that the value of a business is not merely determined by mathematical calculations and number crunching.

Prospective buyers make judgements about market position, quality of assets, growth potential and associated risks of the business. Careful planning to address these issues is essential if you are aiming to increase the value of your business and reap the rewards of your venture.

Timing

To get the best price possible, a key issue you should concentrate on is timing. The general state of the economy and the sector your business is in can have a significant impact on the price it will be able to command. It’s easier for a buyer to fund a purchase when their own business is doing well, interest rates are low and banks are keen to lend. The decision from a buyer could also be influenced by the current tax environment and any forthcoming changes.

Supply and Demand

The largest influence on the price you will get for your business is the Law of Supply and Demand. If, when you sell, there are plenty of willing buyers with capital in place and only a few sellers, you are likely to get a good price.

If, however, the converse is true, you will be unlikely to get a good price or, even worse, you may find you cannot sell at all. Competition between bidders can also inflate the final selling price.

Growth

Buyers will pay more for businesses with a solid potential for future growth, as this not only makes the company a more attractive prospect but also helps them to recoup their initial investment more quickly. Your business will be worth a lot more if you aim to sell when profits are increasing and look likely to grow further still.

Consider the impact of sales cycles or seasonal fluctuations in your business. If you have a full order book at a particular time of year, it might be helpful to undertake the sale of your business around this time.

Keeping the Books Clean

Good financial management is as important as operational management when it comes to selling a business. Areas such as a history of solid cash, debtor and creditor management will reflect well on the overall stewardship of the business – minimising the expectations of any ‘skeletons in the closet’.

Make sure you know and understand the main financial aspects of your business and that you can easily get the accounting and management information that buyers will ask for. I have met many business owners who don’t produce management accounts or budgets and this can send a negative signal to would-be buyers.

During the sales process, it is common for a company’s accounting records to be re-stated to reflect the true financial performance of the business. However, when producing final accounts in the run up to any sale, it is wise to focus less on ‘tax efficiency’ and more on ‘earnings/profit maximisation’. In doing so, the books any potential purchaser will want to see, will paint a more positive picture of the business’ finances.

The strength of your balance sheet can also have a great influence on your business’ value and its potential to attract buyers, especially when financing is required.

Customer Base

The quality of your customer base is another important factor that will influence the value of your business. Customer bases made up of blue chip clients in growing industries generate higher value, particularly if there are opportunities for the buyer to sell additional services to them.

A potential buyer will also recognise the value of security in your client relationships. Turning long standing agreements with suppliers or customers into contractual ones will give potential buyers more confidence and could add significantly to your company’s value.

Are you Transferable?

An important question you should be asking yourself is whether or not your business is transferable. It is important that your business and its work ethic are transferable and compatible with the types of company that might be looking to buy. A potential purchaser will want to buy your business, not you and if the company is reliant on your day-to-day it will dramatically decrease in value or require your continued involvement for an agreed period.

Adopting a solid infrastructure will add to your company’s value. Your business will be worth more if you focus your efforts entirely on developing, leading and expanding its model. The time invested in strategic development will allow you to streamline your business operations and procedures to ensure that a smooth transition is possible.

A company that can be bought and run with a minimum of disruption is an attractive prospect for potential buyers who will be willing to pay more for the promise of quick returns on their investment. Checking equipment is well-maintained, key contracts are in order and that you are complying with all relevant legislations will also add intrinsic value to your company.

Although there are a number of methods that can be used to value a business, ultimately it is only worth what you can get for it at the time of sale. A mathematical calculation of value is a mere indication of potential worth. Confidence in your business will set the level of demand for its acquisition and in turn will determine how much potential buyers are willing to pay for it.

To maximise the value and increase the certainty of the sale, it is important that you prepare and position your business for sale early on. This forward planning will not only help you to generate the best possible value out of your company but it will also give you a yardstick by which you can measure its growth.