We are often asked by business owners, considering the sale of their business or trying to assess the value of their assets, how much their business is worth?
The answer invariably disappoints, as what might be determined as the ‘real value’ is often way below the owner’s perceived value. The situation is often compounded by hype such as the business potentially being worth multipliers of annual profits from any where between 1 to 15 times.
Whilst there are a number of ways to value a business for example, based on assets, shares or a multiple of profits, a business ultimately is only worth what someone will pay for it.
One reason why the value may not be in line with seller’s aspiration is that the value of the business is synonymous with the owner. Removing the owner from the day to day activity of the business, may result in the business struggling to operate to the same capacity as before the sale. The result can be no sale at all or one at a price much lower than desired.
Another key reason for the value being below expectations is often the simple fact that there is no known market for the business; essentially there are no potential buyers.
To optimise the value of the sale of any business, the approach must be to set out with this goal in mind, either from the start or at least for a set period of time before a proposed sale. By focusing on the goal of selling the business, many owners make themselves ‘redundant’ by demonstrating that the business is able to function in their absence, just as well if not better than before. This approach should help to maximise the financial value of any proposed sale, by what is often termed ‘grooming the business for sale’.
Typically what you are looking to do is not only identify potential purchasers but to ensure the business is in the best shape, justifying your valuation and helping to create the right conditions for sale. At the same time forward planning should involve consideration of your own personal circumstances including the most tax efficient way to construct the sale and extract capital.
Overall the sale value of a business focuses on working with the end game in mind and utilising the advice of accountants, tax advisers and other professionals to help you attain your goals.