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| Simon Gregory |
Often succession is lacking, sons and daughters have other interests and if you have been running the business for 20 years, knowing the ups and downs, the good times and the bad, you might not want to pass on those same struggles to the next generation.
Selling the business becomes a big consideration, but company owners really don't know where to turn. You have staff that have worked with you loyally, for many years, and it is important that the business goes to a good home. At the same time its right to think about making sure that when you sell it, you do so for the best price possible.
A sale could take a year. Once the deal is done it may 6 months to 12 months to make a final exit as you transition out of the business to ensure that you effect a smooth handover of the business to its new owners.
Selling is usually a once in a lifetime experience for most company owners and because of this lack of experience, there is often an inclination to approach our professional advisers, our auditors (accountants) or a corporate finance firm in the hope that they might be able to help us in the sale process.
In approaching our accountants we anticipate that because they deal with numbers and financial matters, they might be able to help us discover the value of the business.
Our accountants will usually base their valuation on the profit of the company. The profit (which will include the shareholders costs added back), will be multiplied by a ratio to come up with a value. If a ratio of 5 times is used and the profit is Euro 300,000, then the value would be Euro 1.5 million, which simply means if the buyer pays Euro 1.5 million for the business the buyer will get a return on investment (make his money back) within 5 years, if he uses a multiple of 6, then it's 6 years, if 7 then 7 years. In other words the accountant’s valuation is mostly based on a Return on Investment calculation. It does not consider that the value of your company might be different to different buyers. Some might be prepared to pay significantly more than this, others will want to pay less. This type of valuation ceilings (or puts a cap on the price)
Here is the problem with this type of valuation. Let's say that you had two Printing Companies, for sale and one was showing a profit of Euro 500,000, whilst the other was showing a profit of Euro 200,000. According to the accountant’s way of valuing a company, the one showing the higher profit would be worth more than the one showing lower profits if you used a multiplier of 5.
However, is this the correct way to value the business? What if we were to say that the company that was showing the lower profit, had recently invested in 4 new sales people, recruited from within the industry, bringing many new contacts and orders from customers they had dealt with over the years, and what if the company showing the lower profit had recently invested in the latest state-or-the-art digital technology to take it into the next decade, and this was the reason it was showing a lower profit.
On the other hand, the company showing the higher profit, had not and did not have a sales team, and much of its machinery was life's end. Are we saying that the first company is worth less than the second, because it was showing a lower profit?
Surely this cannot be! Traditional valuation methods based on a multiple on profits actually fail to consider the value of the company based on the future. They simply reduce value to a calculation based on a multiple of profits. They fail to consider that your business might be worth more to one company than another!
In addition, something else must be considered when it comes to valuation.
Let's say that I have a number of companies interested in buying my company, and let’s say that I currently have a customer base of 600 clients. Each of the companies interested might be able to do different things with my business going forward. One for example might have a further 2,000 customers that it could introduce to me, another might be able to open up a larger geographic territory for me, another might enable me to diversify, or internationalise, because they are a significantly larger player than I am.
Different sized buyers may be able to open up the future to my business in different ways. One potential buyer might have a turnover of Euro 100 million; another might have a turnover of Euro 600 million. Each could do different things with my business in terms of generating growth. Shouldn't it be true therefore that I potentially have a different value to different companies dependent on what they are going to do with my business? Absolutely.
Unfortunately this is not how most advisers in Mergers and Acquisitions work. They tend to value the company first, and never really consider that it could be worth different things to different buyers dependent on what they are going to do with your business.
To make the situation worse, not only do accountants, and corporate finance specialists value the company upfront, they often then take the company to market with a price tag attached. As soon as the price tag becomes public information, the seller has effectively sealed the price. In fact it is worse than that. Once you make a price public, the buyer will only try to negotiate one way from that price, and that is usually down.
The thing to consider here, is that of course accountants are very important to most people's businesses, however we would never consider giving our accountants our products and services to sell, but that is exactly what we do when it comes to selling our businesses, we give it to an accountant to sell, and yet the accountants skill is not in the area of sales.
Selling a business is first and foremost a selling issue.
Every day business owners employ sales skills and techniques to sell their own products and services. The process of selling a company differs only slightly from selling products and services, and yet sadly what often happens is that because of lack of experience in selling companies, shareholders often give their business to an accountant to market.
This Blog is here to help you identify, how to sell your company and achieve maximum value and how to ensure that you have a number of potential buyers interested in acquiring your business, and most importantly how to secure the best price.
As part of BCMS Corporate, one of the largest Mergers and Acquisitions Groups by volume of deals completed, and with a 20 year history presenting at hundreds of business seminars over the years I hope that you will find the articles contained within this blog helpful and interesting in considering how best to maximise the value of your business.
