What is my Business Worth?

• As you are personally invested in your business, you will have your own belief as to your business’ potential and worth. This will be influenced by your reason/s to sell!
• However, ultimately value is truly determined on the ‘willing buyer, willing seller’ principle, where the parties will eventually agree on a fair value
• There are many aspects that will influence the final value agreed upon and it is important that any seller present their business in the most beneficial way
• Unlike selling your house, a fresh coat of paint and tidying the garden, won’t necessarily work for your business. The history of past business performance and the current balance sheet will be a key basis for any valuation. However, the good news is that, like a house, the beauty is in the eye of the beholder, and future projections based on a fair assessment of future potential can also be used in determining the current value
• Professional valuers will most likely be used by both parties (Seller and Buyer) and the 3 most accepted measures of valuation are:
  • Net Asset Value – Looks at the current value of assets versus liabilities and adjusts these based on current realiseable values -The Balance Sheet approach
  • Discounted Cash Flow – The expected potential value of cash generated by the business in future, based on expected market and growth opportunities, adjusted for risk/inflation and back to current day prices – Often the seller may have to give warranties on the delivery of this and/or stay on in the business for a period on time to ensure this happens
  • Industry or market-based price to earnings ratio – usually limited to publicly traded companies on the stock market, but can be used for privately owned companies also. This boxes companies with similar companies, usually within an industry, and relates similar values to each, linked to Revenues
  • Each method has its pro’s and con’s  and often a combination of all can be used. However, at the end of the day, these will provide a guideline and other factors such as goodwill, business/commodity cycles may have some influence – but ultimately the principle of the value agreed between a willing buyer and willing seller will be the final outcome

 

How do I sell my business?

• Use a professional expert & trusted advisor – You are an expert at running your business and marketing your business’ products/services. However, selling a business is a specialist skill, so let them use these skills for you. But make sure you work closely with them, as you still know your business best
• Prepare your business for sale –
  • Understand your reason to sell and what implications this will have.
  • Timing is important! Sell when business is going well, rather than poorly and when markets are optimistic
  • Prepare a Marketing Document. Assess past, current and future expected opportunities and performance. Present your team in a positive way (they are a key asset, not measured on the Balance Sheet! Similarly, your brand name, product/service pipeline, customer contracts etc are equally valuable and should be optimally reflected in this document
  • The sale will be a contract – so get your affairs in order – make sure that all statutory affairs are in order and up to date. You don’t want an unfiled tax return to hold up the deal you have just completed
• Confidentiality – Make sure that all involved (Internal and External) in this process have signed some form of confidentiality agreement. Eg an NDA. The last thing you need is this leaking into the public domain and causing anxiety to key stakeholders
• Data room – Set up a data room to keep all confidential information and documents that you need to share with the buyer (eg: one drive or drop box). You control access via permissions and passwords. The buyer will need to do due diligence, so the better prepared you are beforehand, the quicker the process will be and deal making will be easier. It will present your business in a more favourable light
• Negotiator – Hopefully, your business advisor can fulfil this role, but if not, get professional help. This is a complex transaction and can be highly emotional. Let someone else lead this, with you by their side
• Facilitator – Same as above – you will need a competent co-ordinator for all the professional skilled support required – Accountants, Auditors, Tax professionals, Lawyers, Other experts
• Change Manager – Any change in business ownership, even if a small stake only, can have a significant impact on all your stakeholders – funders, employees, customers, suppliers etc. This communication and transition process needs them all to be comfortable and confident, or the transition will not go smoothly

 

How do I get the most value for my business?

• Understand your reasons to sell – This is a key question! The main reason for starting your business was probably to generate a good income for yourself and family, but also to build an asset that you could either pass down the generations or sell at the best possible value or retain a portion to earn a continuous income. You could also be selling a stake as part of an exit strategy or even to get new blood and fresh capital injected into the business. Each reason will impact the type of solution or deal structure that will work for you
• Be realistic and prepare properly to sell – based on your reasons to sell you should clearly determine what type of buyer best matches your reasons. Have a professional business advisor and valuer assist you to prepare the pre-sale marketing documents, do a health check on your business and do a preliminary set of valuation ranges based on certain assumptions. This will manage your expectations, but also motivate you to prepare properly for the buyers’ objections and price reduction tactics
• Do your research – The value of your business is not only based on your company. There are many external influences such as the economy, the competition and so on. Look forward 5 -10 years and prepare a proper SWOT analysis, as the Buyer will base their decision on these factors too
• Find and select a buyer that sees the same opportunities you see – research and assess all the alternative buyer options. Some may not be obvious to you and this is where an experienced advisor can help enormously. Each group will have different motivations and the final solution will differ accordingly. Some may want you to exit the business immediately and others may want you to stay on for a period of time thereafter to ensure a successful transition
• Be creative and open minded – during the buyers’ due diligence process, many factors may come up that you were not aware of or did not believe would be an issue for the buyer. This does not mean the deal is off but may require your deal to be structured in a different way. Selling a business is a lot more complex than selling an asset like a car or house, many preconditions may need to be met before the deal becomes effective or other solutions created to adjust for these issues
• Don’t let emotions get in the way of a deal – use a trusted negotiator. For the same reason an estate agent sells your house (you won’t like buyers criticising your house), the same applies to your business. An experienced negotiator handles buyer criticisms and concerns in a professional manner and keeps the parties focused on a positive outcome

 

How do I find the right buyer? (The matchmaking process)

• Professional Advisor – An experienced advisor will guide you through this process. It is as much an art as it is a science. Looking yourself opens you to all sorts of risks and pitfalls. Yes, you may get a direct approach from a potential buyer and this should always be looked at, but why limit your options. There are many potential buyers and you will be best served by at least considering and evaluating 3 or more of them at any one time
• Identify Targets – As discussed previously, this should be linked to your reason to sell. Often the most obvious buyers are the toughest to deal with. Others may need you to stay on for a period of time after the sale and this may not suit you.
• Search process – this should always be conducted in a confidential manner for reasons stated before. Sometimes invitations for bids can be sent out without disclosing your name or quiet approaches through a third party introduction can be facilitated. Focus on your previously identified targets. Deals can take a long time and you don’t want to waste time with non serious buyers or difficult buyers. If you spend several months with the wrong party and the deal does not happen, it is tough to start again
• Vetting process – Do your homework or have someone do it for you. Is there a likely fit? Will they have the funds? Is this their core business or is it part of a wider business network? Will they see the opportunities you see? Do they understand your market?
• Match making process – Again, your reasons for selling will influence how important this aspect is. However, every seller will have an emotional attachment to their business, which will continue long after the deal and after your exit, so it is very important that you are comfortable with the prospective buyer. Getting to know each other, your mutual values and intentions for the business will be important to understand, before getting too serious and committed to the deal process

 

How can we help you? (www.pathfinderssa.co.za)

We provide a variety of standard services across all aspects of business as well as programmes tailored to suit your needs, as highlighted below:

 

Key Services:

• Business valuation
• Buy or sell side deal project management – start to finish

• Buy or Sell side Negotiation
• Contract facilitation and advisor management
• Post-deal support services – transition handover metrics, management training, internal/external communication
• Pre-deal support services – business evaluation, sale marketing document preparation, data room support
• Tailored services to suit client needs

 

 

Contact us via info@pathfinderssa.co.za or via our website www.pathfinderssa.co.za to find out more.