Selling my business: What is my business worth?

Often, when running an SME, focus is on key drivers such as sales, profit and cashflow, but at some point many SMEs contemplating the future will ask this question in some guise and at some point in the development of the business, especially when considering a strategic change such as a full or partial sale, a merger, raising new capital, or on a change of personal circumstances, such as bereavement of a shareholder, divorce etc.

The glib answer is “It is worth what someone is prepared to pay”. Whilst going to market will establish a price that a particular buyer is prepared to pay, it is not always appropriate or desirable to go to market and can be costly. It also suggests that it is the buyer that sets the price, whereas it is actually the market and the buyer/vendor who set the price as it is a negotiation. Further, that commonly quoted punchline confuses value and price. Notional value is the price of a company under specific assumptions. These assumptions depend upon the purpose of the valuation, as well as any restrictions on transfer, under the company’s Articles of Association or a Shareholders Agreement. Price, by contrast, does not exist until a transaction is concluded and depends upon a number of factors such as how well and extensively the acquisition opportunity is marketed, negotiating ability and different knowledge of the business between the buyer and seller, emotional considerations may override objectivity, legal and contractual constraints, or structural impact upon the consideration are just a few reasons for differences.

Value is also ‘in the eye of the beholder’. ie the same business could have a different worth to different buyers and also between buyer and seller. IVS 104, published by the International Valuations Standards Council defines four different concepts of value and identifies four other definitions, though the list is not exhaustive. Value, or worth, to an owner, is typically reflected in future cash flows and, for some owners, the lifestyle it supports. However, buyers usually focus on the past, using actual achieved results which are less subjective than forecasts. A transaction will only occur when both sides’ view of value or worth can be aligned.

Why get a valuation opinion?

Typically, when contemplating a transaction of any sort, a vendor will usually form an opinion as to value of the asset or service to be sold, usually by consulting a trade guide, looking at adverts for similar items, or seeking the view of a property professional for a house. This is likely to give an approximation of value, though beware of the inflated value to secure an instruction.

Without an up-to-date valuation, it is impossible to gauge if an offer is reasonable. Bidders may have a bidding strategy, and may not have put their best offer forward, leaving room in negotiations to improve their offer. The difference could be material.

Additionally, in some circumstances, it is a requirement to get a third-party opinion and directors of companies may have a fiduciary duty to do so.

Who do you turn to get a valuation?

DIY is rarely a solution, unless you have experience and access to appropriate data. There are on-line tools, usually linked to a business broker/business transfer agent. While you might be willing to rely on an estate agent’s free price estimate before you put your house on the market as a guide to what you might expect, to do the same for a business comes with considerably risk. The differences between businesses in the same sector are far more significant than those between houses in the same locality. And like the estate agent, a broker’s estimate is very unlikely to comply with any recognised professional or technical standard and would have little to support it if challenged.

Using free online valuation tools can have the same drawbacks as broker quotes and many are designed to seduce a prospective vendor without any real credentials behind them.

At Wilson Partners, we have a dedicated valuations team with extensive experience in the UK and overseas and can provide detailed valuations based on market insight, up to date data and of course and in depth view of your business and longer term objectives.

So, whether you’re ready to sell, planning for exit and want to give yourself a target to work towards or for any of the other reasons mentioned above, why not get in touch with our Valuations Team for a no obligation chat about how we can work together?

Learn more about our business valuations service.