TGBN - Business Valuations

BUSINESS VALUATIONS

It is a safe assumption to make at the outset that you will, for a whole raft of reasons, value your company for a higher value than a potential investor. Going through the process of negotiating value is at best a sobering experience for many promoters.

This is the number one reason deals typically fall apart. So, keep your cool and don't expect that an investor will value your company on the profit you anticipate generating in three years time. They probably wont.

At TGBN we are forever using the old adage that "a business is only worth whatever a person is willing to pay". However, one has to ask why is a business worth more to one buyer than to another?

Besides the net earnings of a business, the motivation of a buyer is the key factor in determining the value of any business. For instance, a company that sells labour hire in the blue-collar sector may be of more value to a competitor than it would be to a company involved in a white-collar line looking to expand into the blue-collar market. There are many reasons affecting valuation and taking into account all these facets, valuations generally revert to the standard maxim of any economic paradigm - supply and demand.

When determining the value of a business, there are many areas that a buyer will look at prior to making their determination of value. Some factors include:

What does the business earn on a net basis?
Is any one client worth more than 5% revenue to the business?
If the owner or director leaves the business, will these relationships disappear?
Are the financials able to withstand a due diligence by external accountants?
What type of handover period can the buyer expect from the seller?
Is the business in a growth/decline industry?
Who is the engine driving the business?
Are there any external government changes which will affect the bottom line?

Beware of an advisor quoting you a high sale price to win your favour only to beat you down gradually so that eventually your business will be sitting on the shelf and pass its "use by date".

There is no such thing as the perfect business - the attraction of your business will be determined by your preparation and the advice given to you prior to marketing your business for sale. Some businesses may need rejuvenation after being navigated by the same captain for many years and others may be suffering due to new competition, legislation, overseas tariffs, technology or other pertinent factors.

In some industries multiples can be applied in determining values. For instance a 5-day CBD café with a long, tenant friendly lease can achieve between 2-3 years EBIT. However in comparison, the food distribution company that supplies the café with goods may be more attractive to a multi-national company looking to expand into the Australian market and therefore a multiple of 4-7 times EBIT may be appropriate. This could partly be due to the fact that the local food distribution company already has an established client base to add their lines, making the transition into the distribution market more efficient and cost effective for the acquirer.

Thus, there is no golden rule in determining the value of a business and each business should be valued on a case by case basis and purely on its own merits. This will basically include evaluating its unique strengths, weaknesses, opportunities and threats.

Contact TGBN to discuss your specific business or register for our upcoming seminar.