For many entrepreneurs involved as owner managers, the majority of their net worth is tied up in their business, the eventual sale proving to be one of the most impactful, important and stressful times of their life. The question and discussion of valuations for owner managers is therefore a highly emotive and critical area.

There is a sense of mystery which surrounds this subject and it is an area of much misinformation and subjectivity, where sadly, the ultimate proof may only be determined at the point of emotional ‘no return’ for many vendors.

At Menzies we act for both buyers and sellers and have seen both sides of the coin on many occasions. Indeed, we have also acted as principals in our own right over the years, and understand the emotional highs and lows involved with business valuations and the ultimate sale of business shareholdings.

When considering and assessing valuations, there is of course the opportunity to look at values of publicly listed companies in similar sectors of ‘comps’ (comparable transactions reported in the market place). These are available through various sources and can assist in understanding what recent values have been placed on transactions within the same sector. However, each case is so individual that valuations and expectations can and will often markedly differ.

This inability to mark a ‘price’ against a business frequently frustrates owner managers. Although a range of values can be suggested, without some considerable work and review by an experienced practitioner, it would be very unwise to believe and trust in anything more than an indicative value with key assumptions as a ‘feel’ for the range of the ultimate sale value of the business.

Not that this dissuades less experienced practitioners lending a hand in creating the classic ‘expectation’ gap of an aspirational price in line with the vendor’s desire.  Whatever the source, it was specific to that transaction and the circumstance of that deal.

The evaluation process

Business owners and managers do at other times recognise the uniqueness of their business models and hence the differing values, thereby acknowledging that the evaluation process is singular and specific. Frequently, in discussing their business they will cite the fact that whilst some industry knowledge may assist, their business has specific attributes which mark it out from others in the sector and needs to be understood and considered separately from the mainstream sector view.

Accordingly, when discussed in such a rational fashion, owner managers do recognise and acknowledge the duplicity of such discussions, (business value vs. specific business model), and therefore that a generic approach to valuation really doesn’t hang together. Most businesses are not valued in an ‘off the peg’ fashion according to sector, but they are bespoke and unique, each with their own specific values – and this is the most important point to recognise.  When owners (and I dare say advisers) understand this, they are then only really beginning to enter the reams of considering how they can maximise the value of their business at the point of sale.

Timing and circumstance plays a lot of ‘luck’ in this. However, thinking and planning in advance of a sale in order to maximise the value is crucial.

So what is the value of an owner managed business? Surely, there must be some components that assist in higher or lower valuations being realised?

Before turning to some more specific pointers, it is important to realise that the following broad maxims convey the essence of the reality of a private company sale valuation with three distinctive bases:

• Value 1 - The first valuation basis is the aspirational price at which shareholders would wish to sell the business
• Value 2 - The second is the aspirational price which a purchaser would wish to pay to buy the business
• Value 3 - The third is the price which a purchaser is able to finance or is prepared to pay for the purchase of the business

When all is said and done, the ultimate value of the business is determined by reference to the market’s appetite and the real investment case for purchasing the particular business. This true price, the market value, is of course the price at which all of the three maxims above agree and compromise.

Maximising returns on a sale

Set out below are some pointers which offer a view of some of the typical positives and negatives in sale discussions and valuations:

Valuation Maximisers:

• Niche business
• High barriers to entry for competitors
• Business experiencing growing demand for its product / services
• Security of income streams and profits
• Strong cash flow generation
• Limited capital investment requirements going forward
• Synergies with businesses which may be purchasing
• The ‘jigsaw’ piece play for a purchaser – filling a gap in its product range / geographical coverage, etc.

Valuation Minimisers:

• Stagnant / declining industries
• Low barriers to entry
• Heavy reliance on single source customers / suppliers

Choosing an adviser

Don’t ever simply go to the lowest fee based adviser or someone who will broker your business and charge purely on a success only basis – a good adviser will always add more in terms of value to the process than the differential in fees charged, and frequently more than their total cost. A good adviser will:

• Identify the likely interested parties, including those creative ideas which might generate a premium valuation
• Approach the market on your behalf on a discrete basis
• Seek to ensure that the price is maximised by means of generating competitive tension from interested parties
• Present the business in the best light, including the negative aspects which could hurt you if discovered later in the process
• Ensure control of the information flows, thereby maintaining confidentiality of information regarding the business
• Act as a filter in negotiations, protecting you as vendor from potential pitfalls
• Ask difficult questions of the purchaser and their advisers
• Project manage all aspects of the process including liaising with: accountants, tax advisers, lawyers and the purchaser’s advisers
• Steer the path towards the deal completion in an objective manner
• Take the strain and ensure you can continue to run your business as usual throughout the process

For further information, please contact Mike Grayer, Director of Menzies Corporate Finance Limited, at mgrayer@menzies.co.uk or on 01784 497130.