Along
with marriage, divorce, moving home and death, selling your business is
something the majority of people will only ever do once in their lifetimes.
It
could be to realise funds to start a new business venture or to allow the
continuing trading of a business that is finding itself in troubled times. It
could be due to the business finding itself in a stage of stagnation, or
perhaps it’s just because you have worked hard and it’s time to cash in on your
efforts and enjoy that early retirement. You must, must, get it right, as you
won’t be able to get back either your hard earned cash or your company once
it’s gone.
For
me, the whole “What is my business worth?” and “How has it been valued” question
is probably the most important part of this journey you are considering to
undertake. For if we get this part wrong from the start, the whole process or
journey could be doomed to fail.
Therefore
I will now discuss one of the most important things you must consider when valuing a business:
Well
meaning business brokerages that do not have experience in the various
sectors of business sales will often employ a “smokes and mirrors” attack on
naive sellers, promising them huge multipliers (also forgetting to mention
“deal structure” throughout the initial discussions) just to get their
instructions to sell their business. This normally culminates with them handing
the seller a hefty instruction fee for their “expertise” with no promise of
success and being tied into a contract of exclusivity that could end in
either a lengthy battle to escape from such a clause or a business not selling, which ultimately could be detrimental to the business, your nerves or personal
life.
We
have found that understanding your sector and how potential buyers value their targets
can often lead to sale values of over 400 percent higher the results gained by
inexperienced brokers. A great broker will also utilise a number of methods of
valuing businesses to not only achieve you a higher return for your hard work,
but more importantly to realistically justify this to a potential buyer. Ultimately it doesn’t matter how you package the valuation, it all comes down
to one question: “How much cash is going to end up in my pocket?.”
A
Senior Broker here at Axis recently had a conversation with a person
considering the sale of their business that had just had another meeting with a
potential corporate company that specialised in selling SME businesses. They
had been told to “never accept any offer that was based on a multiplier of anything
less than at least 7 times”. 7 times filed profit? 7 times adjusted profit or
EBITDA?
Quickly,
we reassured the vendor that this indeed could be right, but as previously
stated, before we either confirmed or rejected whether his prior advisor was indeed
correct, we probed a bit deeper into his business and sector of trade.
As
previously stated, the first point of call made by a good business broker is
the sector of work that the potential vendors company trades in. Once we
understand this, and a whole raft of other information I shall discuss later,
we at Axis would then consider what method to value such a business first. As I
will show you, if any business broker is being genuine then they must
fully consider this information first before offering any REALISTIC goodwill
value, full share value or deal structure to any vendor.
The
company my Broker was talking to traded in the Lettings & Estate Agency
sector, which we all know since the start of the recession has been affected
greatly, with a large number of company owners having to either down size, sell
at a reduced sale value or even, I am afraid, fall by the way side.
So
let’s assume some figures for the client. Say, a £1 million turnover with £50k filed
profits. (Based on a national average of 10% management fee)
So
based on his previous advice by the inexperienced corporate broker, they
suggested, “Never sell for anything less that at least 6 or 7 times your
profits and we would be aiming for nearer 9 times!”
So
a bit of quick maths suggests that his “goodwill” value would be in the region
of circa £300k to £450k for the sale of his business. Up to 9 years worth of
profits, and surely a sign of serious intent from a purchaser as it would mean
a return on investment of 9 years!! That’s a long time for a buyer, especially
if it’s a venture capitalist backed group pulling the purchasing strings.
Quite
rightly, compared to the multipliers of 2, 3 or 4 he had been told from other
brokers or his accountant, he was eager to accept such a promise from his
potential advisers. But quickly my Broker stepped in a saved him from such an
almighty potential error.
Calmly
and logically, my Broker explained to the vendor, that this indeed sounded a
very good offer, but let’s study the suggestions made by the other corporate
broker in a little more detail.
“6
to 9 times”. This consideration for goodwill is based on 6 to 9 times the
companies filed profit of £50k, hence a “goodwill” value of £300k to £450k.
So
lets consider a common method of how Axis, other Brokers and the vast majority
of the accounting and financial world are valuing a business, IE. On the “EBITDA”
method. This basically means putting back into the company’s accounts any costs associated with the current owners
accessing their cash in the most tax efficient way possible, and also any costs
incurred by the current owners due to the way they manage the business etc.
This inflates the filed profit figure before Tax and Depreciation up to what we
refer to as an “adjusted net profit”.
Typically
your accountant would afford you multipliers when valuing with this method of
anywhere between 3 to 5 times EBITDA. So in this case, when considering the
vendors accounts, it gave an EBITDA of £100k which would suggest goodwill
values of between £300k to £500k.
Can
you see where this is heading? The vendor could quickly see that by using a
“smokes and mirrors” approach, the crafty broker had flashed large multipliers
about which on the face of it looked too good to be true, when in fact, they
were not too good to be true, but were really in a way, not different than the
norm!
But
we are not finished here. Again my Broker, using testimony and examples of
recent deals completed, explained further still how understanding your company
was even more important than this potentially fishy subject of “Multipliers”. You
see Axis has been one of the major players in the sale of companies in the corporate
sector for over 16 years now, and this is something we pride ourselves in. We
have facilitated deals with many of the major “Blue Chip” company’s right down
to one man band businesses and from Scotland to Lands End and feel we have the
proverbial “finger on the pulse” of such sectors in the current SME market. So
did we agree on this method? NO!
You
see, understanding the sectors like we do, we explained that in fact the
majority of the UK market that specialises in the Lettings & Estate Agency actually values on a method where goodwill is calculated on a multiple of its
“Fee income” or to less experienced brokers, “Turnover”.
Both
recently and historically, Axis has negotiated sales values for goodwill based
on multipliers of up to and over 2 times a company’s fee income. In this case,
suggesting our client’s value for goodwill would actually be in the region of
circa £2 million pounds and not the previously suggested value of only £300k to
£450k! This, on their method, should have equated to multipliers for goodwill of
around 40!
After
allowing for the client to put his chair right and pick the phone up again, the
Broker forwarded over both previous testimonies and current marketing
information of similar companies to his that we had recently sold and were
currently marketing. Not only to justify our valuation and methods, but to also
reassure him of our good intentions to look after him as a client and not just to
gain his instruction and hefty consultancy fee, as unlike other corporate
business brokers the majority of our fees are performance related, and not
upon instruction.
So
to summarise, I am not stating that the other methods suggested by other Brokers are wrong or flawed, as saying “ours is the only way!” is not only wrong but
arrogant. Being honest, depending on your sector of trade this will and can
be a method we use when valuing a business. But I must strongly reiterate the importance of
finding a broker that understands your sector or work, your business, and more
importantly how the market values and buys businesses in your sector. Any
competent brokerage will be able to sell your business, it’s just they will
potentially sell if for a sum far, far less that it is potentially worth and
that you deserve.
Ian Charlesworth, Senior Valuer
