Daisy Mackay is a Manager in our M&A team. In this interview, she shares her expertise on the in’s and out’s of valuing a business in readiness for a trade sale.
One of the first things you can do is have a look at what is going on in your sector in the marketplace. You can easily find out in the trade press what deals have been done and how much businesses are sold for. What is really helpful is to have a good sense of where your business is going. Having a business plan in place with a robust 2–3 year forecast so you can see where your business fits into the market.
Sometimes you can find trade values in news releases, or trade publications such as Insider Magazine, or Business Leader. You will often find deals published on the websites of law firms and corporate finance companies in a ‘tombstone’ or case study format.
Quite often for small non-publicly listed companies you may not see the trade price published. This may be due to commercial sensitivities and clauses are often inserted into the deal contract to omit mention of value. You may have to look at larger companies in your sector and apply an appropriate discount factor. However, it’s not as simple as saying “company X is ten times bigger than mine, so I’ll get a tenth of that price”.
These are tricky to place a value on. When it comes to a sales process they are not likely to have a specific value attributed to them. Instead, a higher multiple may be applied to whatever valuation metric is being used e.g. revenue or EBITDA. So if you have a really strong brand presence and good customer loyalty you will attract a higher premium.
Where it’s not a premium is areas such as trademarks and IP ownership. These are often seen as a hygiene factor for your business – a need to have – so if you don’t have these in place, this would detract from the value rather than adding value.
"The most common valuation method for a sale is discounted cash flow analysis."
There’s a variety of valuation methods including discounted cash flow, multiple of earnings, entry costs and more, but unfortunately it’s not a one size fits all. It really depends at what stage your company is at, whether that’s pre-profit, established or winding down. That’s when the different valuation methods are applied.
But the most common valuation method for a sale mandate is discounted cash flow analysis. This is because even if you’re pre-profit you can extend out a high-level annual forecast until the point where you reach a stable level of growth. This then enables you to capture some benefit from this in the valuation.
It depends! If you have had strong growth, that will be reflected in your financials and whatever valuation metric is used, a multiple will be applied to those financials. However, you may see a small hit in your multiple if your business is not in an “exciting” sector i.e. one that has slower or negative growth potential. Essentially, it’s the risk appetite of buyers that can influence the valuation.
It depends if a buyer sees your business as taking the group in an interesting new direction and opening new doors, or if they are happy to simply have a bolt-on business that shows consistency in growth.
Again it depends which side of the valuation you’re looking at. When considering the enterprise value, having debt in the business is unlikely to affect the valuation. However, to get from the enterprise value to the equity value (the pre-tax money that will be paid to the shareholders), any debt that you are carrying will be deducted. The other two common adjustments to get to equity value is adding back surplus cash on the balance sheet and well as adjusting for normalised working capital. This means if you’ve recently raised debt, but not spent it, the effect should be negligible. For most businesses, bringing a sensible level of debt into your business and demonstrating you can grow with a robust growth plan is more likely to add value rather than subtract it.
You can run your own valuation process, or you could get a third party in to value your business. The real true test is to take your business to market and run a full sales process. It’s unlikely that a competitor’s first offer would be the market rate. There’s usually a reason why they come to you directly, so it’s worth doing your due diligence or taking advice from corporate finance specialists.
This can be a tricky one and the answer is usually no. What you need to bear in mind is that different sectors attract different premiums. Some sectors are seen as high growth and will be exciting to investors who want to latch on the current trends. If you think back over the last 12 months, online retail has had an uplift due to the pandemic affecting shopping habits whereas the high street has struggled. So comparing a high street retailer’s value to a similar sized online retail business is not likely to yield an accurate valuation.
If there is a lot of demand for your business, I’d always recommend running a full sales process and inviting offers from other parties to generate the maximum value.
By doing this you can create competitive tension among potential buyers or identify those who are prepared to pay a strategic premium for your business. If you don’t run a full sales process, you are at risk of diluting the sales price. I always recommended that business owners should not get too carried away by the excitement and seek specialist advice before going to market.
The main the pro of selling yourself is that you won’t have any corporate advisory fees to pay! It can be hard to understand the benefits of paying a corporate finance advisor at the very start of the process. But we continuously get feedback that a multiple return is made on these fees with the impact we are able to make on deal value.
Selling your own business, especially if it’s the first time you’ve gone through the process, comes with high risk. Never underestimate how much time you’ll need to put aside for the process of selling your business. This will consume all of your time and emotional energy. It will also take you away from the day-to-day running of your business which could make it suffer. By having a team of advisors to guide you through the process and take some of the work load off your list can be very valuable.
Having a corporate finance team onside can also help you cast the net wider in terms of potential buyers and not limit you to the companies who have already approached you directly. Not having the right amount of competitive tension can lose you significant value if you don’t know what you’re doing!
"The most important advantage when using a specialist to support you with your trade sale is their deal experience."
Less confident owners may undervalue their business or may not present their business in the best way compared to using a third party specialist. A seasoned buyer will immediately spot this weakness and try to cut a better deal for themselves.
Using corporate finance specialists can remove the owner from the emotional side of the transaction and deploy deal craft to counter any offer that dilutes the value for the owner. It’s often easier for an owner to say “my advisor has suggested that the value of my business is...” instead of saying “I think my business is worth...”
But the most important advantage when using a specialist to support you with your trade sale is their deal experience. A good corporate finance advisor will have a library of knowledge to navigate buyers’ tricks in an attempt to reduce the sales price. If you enter any deal negotiation on your own, without seasoned experience of what can and can’t go wrong, you are at serious risk of getting a less optimal deal.
Corporate finance advisors earn their fees by creating more value for you. My advice to any owner is if you’re starting to think about selling your business, identify a selection of advisors and get to know them. Ask about their recent deals and how they navigated any complexity. Ask for case studies of businesses they sold that are similar to yours, or speak to their clients to get feedback.
Nanopharm is the world’s leading provider of orally inhaled and nasal drug product design and development services. They approached us to help look for a new owner.
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