Deal or no deal – what’s my business worth?

Whilst the question itself is an obvious and very fair question for a potential client to ask, giving an answer is far from straightforward and much more nuanced.  Why is this?

Well, conventional wisdom says the answer to the value of a business lies in precedent transactions. In other words, looking into similar businesses that have been sold and using the pricing dynamics of those deals to give a benchmark.

However, I believe this is inherently flawed. Flawed for lots of reasons, not least of which is that every business is different, so making comparisons to other businesses is a guessing game. To add to this, published data on previous deals is not always reliable and not always accurate. Of more significance, it gives only a bare glimpse into the deal that was done with the circumstances hidden and the future outlook for the business being sold, at the point it was sold, not evident. 

So, I prefer thinking about value in a less scientific way.   

I regard value as an outcome rather than something that is inherent. So, if value is an outcome, what is it an outcome of?

In my view, value is an outcome of four factors – the predictability of a business; its growth potential; how it is marketed for sale; and timing. Looking at each of these in turn:

Predictability – buyers like predictability and they like certainty. And they are usually prepared to pay for it. A strong track record and a full order book give buyers comfort and has a positive bearing on value. A high dependence on one or two key customers create risk and can usually affect a buyer’s view on value negatively.  Similarly, a management team staying with the business for the long-term post-sale is value enhancing, whereas owner managers looking to leave on sale creates risk, reduces predictability and therefore value.

Growth potential– ultimately, the reason a business is acquired is because the buyer believes that it can generate cash for them. The more cash (they believe) it is likely to generate, the greater its potential value. Businesses with a clear path to growth, whether through differentiation / intellectual property, market growth potential or strength of leadership, will always be valued in the market ahead of steady state or me-to businesses. 

How it is marketed – this is fundamental and often overlooked in terms of its impact on value. The company sale market is imperfect. There is no Rightmove platform where sellers advertise and buyers browse. A deal needs to be initiated and requires either a buyer or seller to take an active stance. 

Buyers sometimes approach business owners directly. This is usually where both parties have known each other for a while or where a buyer is in fast growth mode and has initiated its own search process.  This often leads to a deal happening, although as they have only spoken to one buyer, the seller will never know if a different buyer would have valued the business in the same way.

Much more common, though, there has been no approach and the business owner appoints a sale adviser to find a buyer. How effective this process is in finding suitable buyers is a key determinant in value achieved. This often sits as part of an auction process, the purpose of which is to use competitive tension to squeeze out the best price. Finding one really keen buyer is a start. Finding several can massively add to value. 

Timing – in place of timing, I could simply have used the word “luck”, because that is the reality. It takes many months to complete a sale and that gives plenty of opportunity for circumstances to change; both for better and for worse. No business is static and unexpected changes in financial performance during a sale process are common and are likely to affect value. 

Looking bigger picture, geopolitical and economic changes are the norm these days, and these can cause a buyer to take a very different view on the business it is about to buy. Also, a sector that is in vogue one day can become out of fashion the next and vice versa. 

Just look at the stock market over the last six months. The same forces that affect stock market volatility affect private company sales too.

So, back to the question, “what’s my business worth?”  

Well, I’m a firm believer in the old adage that a business is worth simply what someone is prepared to pay for it. 

However, what someone is prepared to pay for the same business varies massively from buyer to buyer. And this can be heavily influenced by the actions of the seller in the run-up to sale and by the way in which the business is marketed.

So, maybe the better question to ask is “How do I get best value for my business?”

Get in touch with our deal advisory experts

If you are considering a business sale or are looking to manage your funds post-sale, please do not hesitate to get in touch to discuss how our Deal advisory team can support.

Get in touch