Understanding and achieving value

Valuing a business is as much an art as it is a science. There are a number of techniques that would be considered by advisors in preparing a valuation but ultimately, a business is worth what a willing buyer will pay and a willing seller will accept.

Both parties may have different ways of valuing the business, which can depend on the sector and performance, but methods may include;

  • Multiple of (adjusted) profit after tax;
  • Multiple of (adjusted) EBITDA, adjusted for debt, cash, working capital;
  • Net assets; and
  • Other methods such as multiples of turnover or discounted cash flow

Obtaining an independent valuation as part of the preparation process may provide a starting point, or may challenge any preconceptions or expectations.  Such an exercise also enables a seller to understand the value drivers for the business and therefore consider the steps that could be taken to improve the value.

Factors that will increase a valuation include:

  • Contractual income, or a high degree of sales visibility
  • A spread of customers, rather than high levels of concentration
  • Skilled and loyal workforce, including 2nd tier management
  • Well maintained equipment and a level of investment in fixed assets appropriate to the nature of the business
  • Protectable Intellectual Property

Where there is a difference in the valuation between the seller and the buyer, but they are close enough for the two parties to explore options, there are a number of negotiation options that could enable the two parties to reach agreement, including:

  • Deferring (more) consideration to enable the business to generate the cash to pay additional value where other funding is not available;
  • Contingent consideration where the purchaser attaches value to opportunities, so the value is only achieved if performance criteria is achieved;
  • Retaining some shares for a future 2nd stage exit when the value may have increased;
  • Alternative structures that may include surplus assets, including cash, consultancy or employment arrangements.

Where debt is used to fund a transaction, particularly in the case of a management buy out, there may be restrictions on the structures available, the maximum valuation supportable, or the amount of cash that can be used to fund the consideration.

There is not always a single right answer in this area and therefore it is important to discuss your wishes, ambitions and “red lines” with your advisors so they can support you in the negotiation process.

If you wish to discuss the valuation of your business and how a transaction might be structured, please contact our Corporate Finance team.