What’s it worth?
Article Date: Mar 02 2006
Debt depresses value
A swathe of other factors will influence valuation, including your record of controlling costs and also the debt levels within the business. If the company owes a lot of money, this will often have to be subtracted from the amount that you finally receive from a trade buyer. Therefore, make sure you are realistic when calculating its negative effect on worth during the audit process.
David Whileman, an investment director at renowned private equity and venture capital giant 3i, says, ‘Valuing a company is as much an art as a science. Accountants are taught there are roughly six different ways of valuing a company, but in reality it all comes down to predicting the amount of cash the company will make over the years, valuing its assets, or using an earnings multiple.
‘It’s important to apply the valuation model suitable for the type of business as there are so many anomalies. Some businesses, such as recruitment firms, have hardly any assets, while others, like property companies, don’t generate much, if any, cash.
‘At 3i, we tend to look at profits and p/e ratios because these are the valuations the City uses. So, if an owner-manager comes to me and says, “My business makes £10 million,” I can open the Financial Times, see that the p/e ratio of that sector is eight, and estimate it’s worth around £80 million.’
Referring to lessons learned from the dotcom boom, when pre-revenue, pre-profitable companies traded on overly optimistic ‘blue-sky’ multiples, Whileman says, ‘The one thing that’s always a rock solid guide is profit. We’ll look at profits growth, and ask ourselves whether we can get a better p/e for the business in two or three years’ time.’
Smell the air
‘Be shrewd and smell the air,’ adds Cavendish’s Leigh. ‘The value you achieve depends on selling at the right time. In the past, businesses were handed down through families, whereas today, people tend to be serial entrepreneurs looking to sell at the best time as dictated by market conditions.’
Macro factors, such as the state of the economy and conditions in your sector at the point of sale, will come into play, not to mention the question of supply and demand. How many potential buyers and offers are on the table? If there are a few, you might be able to play them against each other and raise the price, though it’s a risky game that can easily backfire and scare buyers off or engender bad feeling.
It’s also worth bearing in mind that strategic buyers, desperate to assume geographic advantage or access to your prized customer base, are likely to pay more for your company than financial opportunists.
Whileman also advises that the whole pricing process should be conducted early, since trade buyers usually prefer a handover period rather than buying an owner-manager out in one fell swoop. ‘Trade buyers tend to use deferred consideration more than private equity houses because they are more interested in securing the long-term success of the business. You should factor in a handover period of at least six months, maybe even longer. So if you plan to be sitting on beach at the age of 65, you’ll need to start the sale process at 63.’
Don’t under-sell intangibles
Hard numbers – profits, cash and hard assets – are fairly black and white guides to use when pricing. Intangible assets, however, are murkier entities that you’ll need to try and quantify because they can radically alter the pricing of your enterprise. Make sure your valuable people, brands, patents, copyrights and licences are understood by potential buyers and fully recognised in the price. Creating and then managing intangible assets can be crucial to realising the long-term value of your business.
Trademarks and patents are legally enforceable intangible assets that should underpin pricing, but make sure you don’t forget about the goodwill within your business.
Relationships built up with customers, internal corporate culture and staff relationships – these are all important assets. When taken into account, they can help you leverage a better price, so make sure your business advisers understand and convey their value to potential purchasers of your enterprise.
Your brand has value
Brand value is often a company’s most valuable asset and a thorough brand valuation will help negotiate a better sale price. The new International Financial Reporting Standards code has put a spotlight on the issue, with brand valuations now mandatory for acquired brands of European companies.
‘Intangible assets are much neglected by owner-managers and investment bankers when readying a company for trade sale or flotation,’ argues intangible asset valuation sage Thayne Forbes. Joint managing director of Intangible Business, the brand valuation consultants, he recalls a recent case in point. ‘A well-known directories business issued a prospectus during its initial public offering (IPO) that contained hardly anything about brand, the key driver of that business. Many companies are paying only lip service to their brands in communications with the City and with potential trade buyers.’
Intangible Business advises clients ranging from small owner-managed concerns to Fortune 500 behemoths. Forbes says, ‘We help them put the spotlight on why the business is attractive from an intangible asset/ brand point of view.’ He advises that firms run the rule over intangibles with accountants and lawyers when valuing these aspects. ‘Before even considering putting your business up for sale, it’s worth doing a legal audit to see what the legal basis is for intangibles. Have a check to see what rights you have.’
There are plausible ways of measuring intangible assets, from calculating what it would cost a rival to duplicate your brand, researching past brand sales in the sector, and also forecasting the future sales and profits benefits your brand (and other intangibles like patents) will bring to your business and the acquirer. But rather than do this alone, the general consensus seems to be that advice from the experts will be money well spent if it helps you realise the full value of the business you’ve built.
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