Tag: business valuation

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How to value a business – an alternative way

Value a business by Calculating your Walkaway Price

I’ve found that the majority of business exit articles focus on how to value a business by using accountancy methods to work out how much your business is worth. I’ve written about those with our ‘quick and dirty’ Discounted Cash Flow (DCF) and multiples articles too. But what isn’t discussed at all, or at least when I was going through my business exit, is what is the rock bottom price tag that you would accept for your business and how you would go about working out what yours is. Do you already have that figure in mind? I call it your ‘walkway price’.

It’s your walkway price because during your business sale negotiations if the figure hovers around a number that is lower than your walkway price guess what you’ll do. That’s right, you’ll glance down at your walkaway price crib sheet for one last check, get up from that negotiation table and walk away in the full knowledge that you know that your business is intrinsically worth more than what’s been offered.

As I discovered, it’s really worth calculating your walkaway price because it will help you understand the reasons why you want to sell the business, sanity check that your desired sale price is realistic and most importantly it provides an invaluable reference point when you’re experiencing the ups and downs of selling.

The earlier you can take the time out to work out your walkway price the better because you won’t have time during the sale process and logical, reasoned statements may not be that easy to come by because you’re caught up in the process. It’s one of those things that until you’re in it for real, you can’t picture it. Calculating my walkaway price was the best thing that I ever did with my business partner before the business sale process began. I only wish that I looked back at our crib sheet more often during our sale process. It would have saved us going down a few dead ends.

Now there are countless ways of getting to that figure. You can use the DCF and multiples formulae to help you or work back from a figure that you have in mind and see if all the costs and what you want to do with the money ties in with that figure. I really believe that all business owners should have their walkaway price ready to hand so I created a pack called ‘Calculate your Walkaway Price‘ to help other business owners get there too which can be purchased from our online store.

If your sale process takes a long time like mine did (nearly two years), then you need to make sure that you re-evaluate your walkaway price at least annually. This way, you can realise any  new value that you’ve created in the business as you’ll find that getting your house in order makes it more valuable. Which, in turn should increase your price tag.

One final thing, my advice would be to keep this information private, even from your professional advisors. The walkaway price should be considered as a last resort measure only to be undertaken if the price tag doesn’t meet your calculated expectations.

Joanna Miller helps business owners navigate their way through the start to finish process of selling a business. Her specialty is helping owners understand how to prepare and make the most of their business sale process to maximise their company’s value. To understand how you can sell your business quickly for the highest sales price, purchase her book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale”.

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Value your business using a valuation multiple

Value Your Business – the Multiple

There are a number of ways in which to value your business. Two popular financial calculations that are used to estimate how much your business is worth are:

  1. A valuation multiple
  2. Discounted Cash Flow (DCF)

This article will focus on how to use a ‘valuation multiple’ and we’ll be covering DCF in a separate article later this week.

In our ‘Calculate Your Walkaway Price Pack‘ we included a worksheet that covers three popular business valuations for you to complete for your business.

First of all, let’s define what a valuation multiple is.  The valuation multiple is used to multiply a business economic benefit to arrive at an estimate of business value. Revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) are just two examples of what the business economic benefit could be. The actual multiplier value depends on the type of business, the forecast for future sales and many other factors.

It really is a simple calculation and it’s based on your last full financial year set of results:

Business Value = business economic benefit  x  valuation multiple

Your market will most likely have an average ‘valuation multiple’ based on past acquisitions in that sector using a particular business economic benefit.

For example, it could be 2x sales or 3x EBITDA.

Perhaps a business recently sold in your industry – do you remember what their figure was? If you don’t know, you could always ask a business broker or if the acquirer was publicly listed, the information will be on their website as they have to declare the terms of the deal.

Use the industry multiplier as your starting point and then you can adjust the multiplier when applying it to your business. Bear in mind that you may have both positive and negative influences when you do that.

Positive influences on raising the multiple figure would include:

  • Innovate products and solutions
  • Strong brand and dominant market share
  • Low number of competitors
  • Strong profit
  • Strong customer base
  • Reoccurring contract revenue

Negative influences that will reduce the multiple figure include:

  • Strong competitors with better products and services
  • Declining market share
  • Few Customers that make up 20%+ of sales
  • Legal action

Hopefully your business will have  positive influences and no negatives which will help that multiple. Once you’ve valued your business then its time to focus at how you can directly increase and sustain your sales and/or profits (the business economic benefit) so your business valuation increases.

So to recap, what you need to do is:

  1. Decide on the business economic benefit to use
  2. Use your industry’s valuation multiple (or use 2x sales or 3x EBITDA)
  3. Adjust the multiple up/down when applying to your business
  4. Perform the calculation!
  5. Focus on increasing your business economic benefit

Which leads to maximising the valuation for your business.

Simples! You have now successfully valued your business. DCF is up next…

 

Joanna Miller helps business owners navigate their way through the start to finish process of selling a business.  Her specialty is helping owners understand how to prepare and make the most of their business sale process to maximise their company’s value. To understand how you can sell your business quickly for the highest sales price, purchase her book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale”

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How You Sell Your Business Will Determine Its Selling Price

How You Sell Your Business…

When you decide to sell your business you could make 50% more or 50% less depending on how you sell your business. When it comes to the how’s, here’s a list starting from the worst way to sell (lower value) to the best way to sell (higher value):

  1. Liquidation
  2. Book value
  3. Unsolicited offer to buy from a competitor
  4. Professional contact introduction
  5. Private Equity Group
  6. Strategic Buyer through a Broker
  7. Strategic Buyers in a Bidding Process

The Liquidation value of a company is often used if a business owner dies or becomes ill. The value does not include goodwill, company earning potential or client lists. By selling your company this way, you’ll get the least value possible. On the flip side, getting Strategic Buyers in a bidding process is the ‘holy grail,’ of selling. This allows for competition and has the potential to increase value through demand.

How you sell your business is a fundamental aspect regarding the value you ultimately achieve. While trawling through YouTube, I found an excellent video that outlines the various ways to sell a business in addition to explaining why. To get a full description on each of these methods, watch the following video created by MidMarketCaptialInc.

How You Sell Your Business Video

Kim Brown, Co-Founder of Business Wand, helps business owners navigate their way through the start to finish process of selling a business. Her specialty is to help owners cut costs and increase profits prior to sale. To understand how you can sell your business quickly for the highest sales price, purchase the book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale”

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5 Ways To Increase The Value Of Your Company

Increase The Value Of Your Company

Increase The Value Of Your Company

Listed below are 5 ways to increase the value of your company.

Number 1: Make your business more efficient

You don’t need an expert to tell you that if you cut costs and increase productivity you’ll get more sales and you can increase your company value. As with so many things this statement is all well and good in theory but a bit harder in practise. A recent advert used the slogan “Don’t work harder, work smarter” While working hard is good sometimes a bit of extra effort and investment in the short term means fewer late nights and stress in the long term!

Ways you can increase the value of your company by making your business more efficient –

  • Customer relationship management software – In effect this helps you to gauge who specifically amongst your customers is the one handing over the most of their hard earned and therefore is most worthy of your selling efforts.
  • Chase up payments – One problem may be that you are not claiming your money fast enough. A way to get the sloth-like non payers going is by introducing late fee charges for unpaid bills and invoices!
  • Spend less time emailing – Focus more on the tasks you have to achieve. Yes the numbers may look scary but you will often be more productive if you focus on selling then dealing with enquiries. If you are worried about it piling up you may want to consider hiring a virtual PA.
  • SEO – Make sure that people can find you. Studies show people tend to give up looking after the third page, so you want to make sure you are as close to the top as possible to get that extra traffic (and those potential extra sales!)

For more information this topic, read our article on ‘How to Maximise Business Value‘ here.

Number 2: Shop around suppliers

Cutting costs will help you to increase the value of your company. Shopping around is crucial for everything from buying pens to getting a cheaper deal on travel. While people in the UK are getting better at this there is still a certain degree of reticence about asking for a deal.

Also don’t be afraid to be a bit sneaky and pit suppliers against each other. Tell them what their competitor told you and see if they can match it. Even if they can’t lower prices they may be able to throw in some extras. For example, a travel company may not reduce the cost of a flight but may bump you to first class!

Number 3: 10% staff churn

The rate at which you turnover staff also has an effect on how your company is valued. In an ideal world you would replace the ones who are not pulling their weight with angelic superstars who do everything you tell them and will appear instantly to babysit your children at a second’s notice.

Life unfortunately is not that simple. For a start don’t get fixated purely on the 10% – if one tenth of your employees leaving are the ones that get you the most sales then things are not going well!

You need to handle this carefully by ensuring that anybody coming in is suitably trained and equally that you handle people leaving as delicately as possible. While you want to get those healthy profit figures it can look bad if you are seen as someone who is a hard and unfair taskmaster. Give your leaving staff a positive exit interview can ironically be a good thing, as you can give them feedback and allow them to find a job more suited to their needs (sounds weird but its worth it!)

In short, while you want to get the figures working make sure you keep the human beings behind those figures on side too!

Number 4: Intellectual Property Rights (IPR)

Intellectual property rights (IPR) cover copyrights, trademarks, patents and so forth. These are factors that could help boost your company valuation. The reason that these increase company value is because it is something that you can in effect sell on again a second time.

The best way to illustrate it is with a certain famous branded coffee house. Said famous branded coffee house sells coffee, a drink that is enjoyed throughout the world and has helped Kim (my business partner) get through the day. However, while said famous branded coffee house has made its money by selling coffee, they have also further spread out by franchising across the world, in effect selling themselves as well as the item.

So when you are looking for ways to increase company value don’t be afraid to get someone in to have a look around and see what potential IPR goldmines you could have in your business.

Number 5:  Different financial calculations

Finally we go back to how people calculate what a business is worth. This is where it gets tricky. You do not want to be like one of those sweaty Dragon’s Den entrepreneurs trying to bluff an unrealistic set of figures!

There are numerous factors that can affect a value:

  • Type of cash flow – Ideally with as few costs as possible for higher profit margins.
  • Reduced risk – What can you do to reduce risk in your business? This will help to increase its value.
  • Timing – Is there a gap in the market for you? For example whoever thought of designer handbags or shoes with comic book designs on them must be raking in it at the moment!

(More on Business Valuation here).

In conclusion…

What you have are five ways to increase the value of your company. However, they are also worth looking at in terms of making your business more efficient and allowing it to grow more in the long term, something that should not be forgotten!

Joanna Miller helps business owners navigate their way through the start to finish process of selling a business.  Her specialty is helping owners understand how to prepare and make the most of their business sale process to maximise their company’s value. To understand how you can sell your business quickly for the highest sales price, purchase her book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale”

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5 Top Tips To Selling Your Business

Selling Your Business5 Tips You Must Know Before Selling Your Business!

Doing something for the first time creates a steep learning curve. Think about the lessons learned when starting to drive, becoming a parent or taking on a new hobby. At first, things were difficult but over time and through practice the curve settled down. You made mistakes but kept practicing and in the long run a level of proficiency was mastered.

Unfortunately, when you sell your business you don’t have the opportunity to allow the curve to settle down. There’s very little room for practice and mistakes can cause devaluation or even break the deal. You either get things right or you don’t and the latter can result in excess costs, time delays and sleepless nights.

Selling your business will most likely be a one-time event rather than a skill you can learn to master unless you set out to become a serial entrepreneur. That being the case, it’s imperative to understand how the sale process works, who the players are, what they’re trying to achieve and how to ensure you can maximise your sale value.

  1. Begin the sales process with the end in mind. Take a few hours away from the business, sit in a peaceful room and visualise what you ultimately want to achieve. If you don’t know where you’re going chances are that you’ll end up somewhere that you don’t like! Imagine the best possible scenario. Think about the amount of cash in your bank, the amount of time you’ll need to stick around post-sale and then really get creative and picture all the things you want to do once the business is sold. Once you’ve tried various scenarios, get a piece of paper and create a mind-map or vision board with words and/or images to encapsulate the end goal. Think about how you’ll feel and pretend that you’ve already achieved a sale – describe what you see, think and feel on paper. Keep this with you at all times. When fears or doubts come up refer to it.
  2. Maximise valuation by being prepared. When selling a house, buyers will look for reasons to negotiate a lower price. If the survey reveals a bad roof, damp or some kind of serious fault the buyer may reduce the offer or worse – walk away. Same goes for your business. Being prepared means taking the time to clean things up, get everything organised and put your best foot forward. To best be prepared don’t enter the sale process blindly – learn what you need to do look as attractive as possible before you place your business up for sale. (If you haven’t done so already, purchase the book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale”
  3. Consider a range of sale options and make a commitment to yourself on what you will accept versus what you won’t. When a buyer takes a serious interest in you they’ll create what is called a ‘Consideration’ that outlines a potential deal. The amount of money you want is one thing to contemplate but that’s only one part of the Consideration.  The deal can include cash right away, deferred cash, cash and options, deferred options, and on and on. Additionally, the offer might require an earn-out. This is where you have stay with the company for a set amount of time and hit specific targets to realise your pay-out.  An acceptable consideration can be planned for – make sure you know what you want and create a strategy on how to increase your chances to get it. For example, if you want to avoid an earn-out, your strategy must be one that eliminates your value to the business before you sell.
  4. Pick your team carefully. Remember this isn’t a journey that allows for practice or making mistakes. The team members needed – Corporate Broker/Financier, Accountant, Consultant, Tax Advisor  – play this game often. Even through they will work on your behalf, they may have their own agenda and objectives. Some will be right for you and others won’t. Research how best to compare services and match them against your end game.  One wrong team member can ruin the whole process – don’t let this happen to you.
  5. Find a friend or mentor you can confide in when times get tough. Despite the fact that you may be eager to exit the business, it’s still likely to be an emotional journey. Life can get a bit bumpy when the professionals treat your business like a mere transaction, deal fever takes charge or a completion falls through. Have someone available that knows what’s going and can be on hand to coach you through the hard times and celebrate your successes.

Selling your business in the UK can be an exciting adventure that results in great success. It can also be a life-sucking nightmare. Don’t enter the process blindly – educate yourself through independent information rather than learning by experience alone.

Kim Brown, Co-Founder of Business Wand, helps business owners navigate their way through the start to finish process of selling a business.  Her specialty is to help owners cut costs and increase profits prior to sale. To understand how you can sell your business quickly for the highest sales price, purchase the book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale”