After years of hard work and the roller-coaster that is creating and running a business, it might be time to sell. You may not be 100% sure, but from time to time you look outside your window and daydream about a new adventure.
No matter your commitment to following through, it is no harm to have some insight into valuing your business.
If anything it might help you look at some of your existing assets in order to consider how you can make improvements. Or pivot your products/market to improve your business's long term value.
Caveat time - As every business is different the below is just a general overview, each business has its own unique opportunities and challenges. Therefore this is only a starting point for any valuation process and as some food for thought.
Do you still want to be part of the company after the sale?
Before valuing your company, ask yourself, is this a clean break, or do you still want to be involved as a board member or chair. Your exit strategy as some will put it.
The reason being is that your involvement post sale can impact the valuation. Your name could be part of the brand equity or you will have knowledge the new owner may value.
So be clear in your mind what your are happy to do. It might be that you are selling 90% because you have a family member in a senior role and you want to protect them. Or, you realise your presence is important for some customers/clients. Therefore, to avoid losing market share and brand loyalty, you stay on in some capacity while the new owners transition.
How ever you envisage your involvement, don't ignore this when negotiation the value.
It should go without saying, it is easier to value a business that has been trading for several years and has a positive track-record, than a start-up trying to value for an investor.
There is the straight forward projected EBITA (Earnings before Interest, Tax and Amortisation) times a factor measure. (Note: this factor depends on the industry).
However, the problem with EBITA alone, is it misses out on some major assets that can be worth far more.
For example, sale for the coming year might be slower due to COVID, but 10-15 years before that, you could have built up some strong cash reserves and investments. This has a value for a new buyer. A cash positive business is always attractive. Limiting your company value to 1 years of trading by a factor is not always a fair reflection.
Therefore, EBITA should usually only be a part of the valuation process.
So what else should be on the menu? - As touched on above assets, along with industry comparatives should be on the table.
As you would in the balance sheet, split into tangible and intangible assets. Tangibles are the easiest as you can tell from a bank statement(s) how much cash you have. Then your buildings, machinery, equipment, vehicles, IT etc all have a fair market value. Some buildings can be worth far more than expected. I won't bore you with accounting standards, but you should be valuating your buildings annuals (your auditor/accountant should do this for you).
With intangibles this can be more complex, so lets break down into the main categories:
IP & Patents - If you have any of these, a lawyer or IP expert should advise on the valuation. In theory, the longer you have on a patent, the more valuable it is. However, someone else may have invented something better which will lower the value of your patent as your product will have less demand. Hence an expert in this area will be needed to guide you.
Brand value - You might have heard about the $1 Billion deal the drinks brand Casamigos achieved when bought out by Diageo. Certainly didn't hurt that one of the founders was George Clooney! Another of the co-founders Rand Gerber is married to Cindy Crawford. All that star power sprinkled some extreme magic. However, for other mere mortals, customer loyalty, social media reach, distribution deals etc can add up to some hefty brand value.
Client/customer list - Depending on your industry this can be a very valuable asset. You spent years networking, servicing and retaining this loyalty. To acquire those contracts today, would cost quiet a bit.
Your team - You may have a very educated and experienced team. World class scientists or revenue generating experts, that are integral to the business. Look into valuing your team. This can include any associates who work exclusively for the business.
There is a high chance you won't be the first drinks brand, event business, engineering company etc to sell, or even get an investor. Therefore, with a bit of research you can get some ideas about comparisons.
To find comparisons for private companies it is harder, but listed companies sales values can be used. Though, you might not be able to claim quite the same value as a public company, as they have greater scale to leverage from. Though as with the Casamigo example above, you might have some fantastic press and industry recognition.
Also, google for sales of private businesses in your sector, as these do get covered in the press as well as looking up transactions on Companies House (your countries equivalent).
Pulling it all together
After reviewing all your assets (including yourself if you plan to stay on in some capacity) and deducting any loans you can include the EBITA to give an approximate book value (balance sheet valuation). As with any estimate it is a best guess at a point in time. Therefore looking at comparisons can help to justify and benchmark the valuation you have.
Any potential investor/buyer will want to do their own due diligence and challenge your assumptions. This is very normal. Everyone involved wants to feel like they got a good deal.
Also, bear in mind that there will be industry nuances around valuations. So, the above is a general guide. When you hear of a business being bought at a 'premium' that goodwill is a belief there is further future value.
The business environment can change during the selling period which can impact the final offer. Therefore, you might feel that you may want to postpone a year or two to let the market improve. However, consider why you want to sell and if a potential 5-10% difference is really worth the wait?
The value of your business could be substantial, even in a depressed market so that the return on your years of investment will be worth selling. In order to retire, travel the world or even start a new venture.