Whether or not you are thinking of selling your company in the next few years, it is important for the directors and shareholders to understand how businesses are valued so that informed and timely decisions can be made.
As boutique dealmakers at Strategic Corporate Finance, we can’t stress enough why a sound knowledge of the factors involved in the valuation process can help shareholders to maximise their eventual sale proceeds.
There are many ways of valuing companies, although the most common method is heavily linked to a company’s profitability. As you may expect, the more profitable the business, the more it is worth. However, this is not the whole story.
Wide-ranging factors affect a business valuation – many of which are subjective and therefore difficult to quantify. Others, such as changes in legislation, the general economic outlook and market trends, are completely outside the control of the shareholders. However owners can influence the value by taking early pro-active decisions in key areas which can not only strengthen and boost a company’s desirability, but can also ultimately increase its worth. Factors which can positively influence the value include:
- A strong management team with a clear vision of how to take the business forward and the ability to put their plans into place after the current owner has moved on;
- A patented product, unique service or well recognised brand, and a track record of continual investment in product development and brand awareness
- A good quality customer base, with the business not being overly reliant on one customer, and a track record of repeat orders. An ability to demonstrate future demand with some certainty, eg. contracts or confirmed orders;
- A stable and reliable workforce and well invested plant and equipment
- Good housekeeping within the business, eg. written contracts and required company policies all in place and up to date.
Although it may not be feasible to implement all of the above – any steps taken to differentiate a company’s products or services or attain a competitive advantage – will enhance its attractiveness, saleability and, in the long term, its price.
Irrespective of the myriad internal and external influences, ultimately the true value of any business will be the price a buyer is prepared to pay, and this will be determined by the commercial opportunities, or cost savings, which become available by putting two businesses together. These synergies can be driven by many factors such as complimentary products, cross selling opportunities, access to new customers, availability of a skilled workforce, additional manufacturing or R&D capacity. Until you get into detailed discussions with potential buyers you will never really know the true worth of your business, but it is essential to be anticipating how a future buyer would view your business.
We are hosting a series of free seminars for MDs and owner managers on this topical issue – the next one is on March 20 at Newark. For a free of charge consultation in connection with the valuation, sale or acquisition of a company call myself or our team on 0114 324 0430, email firstname.lastname@example.org or visit www.strategiccorporatefinance.co.uk
If you have been through this experience – or are about to embark on this journey – share with us your key queries or concerns below.