What factors should I consider before embarking on a transaction?
When considering a transaction or selling your business, it is important to put yourself in the mind of a potential investor and consider the following.
– Is my business saleable?
– Why do I want to sell?
– What is unique about my business that would be attractive to a buyer or investor?
What is the typical timeline for a transaction process?
A typical transaction usually takes many month, and if a longer period is needed to maximise the value of the business, and therefore the returns for the owner or shareholders, the preparation period can take up to several years.
How do I make sure that this is the right time to sell or seek inward investment?
Timing can be influenced by 3 core areas:
– The Personal
– The Company
– The External Environment
It can be helpful to break these key considerations down and the below questions can highlight areas to focus on to improve your business as part of pre-transaction preparation, or they can be addressed with the incoming investor.
- How do I want to spend my time?
- What are my financial needs and what’s my personal tax situation?
- What do I want to do with my business legacy?
- What are the factors with my family relationships?
- Uniqueness: Does your business have a unique selling proposition, brands or IP with a lot of potential?
- Profitability: Does your company generate sustainable gross/net margins higher than industry average?
- Predictability: Does your business’ actual results match those of your business planning?
- Independence: Do you have a strong executive senior management team?
- Growth: is your business growing faster than inflation?
The External Environment
Will there be any factors or influences on your business’ performance or future plans including political, economic, social, technological or environment?
What is the current macro buyer and investor appetite in your business’ sector?
What is the market activity by volume & value in your sector?
Why is a valuation process complex?
Used alone or in combination, a business valuation is an art not a science and it relies on many different possible scenarios, different numbers and different underlying ‘stories’. This complexity provides opportunity for advantage for either side.
There are 3 key approaches to valuing a business
Net Asset Value
- This is a simple and robust approach that is reliant on the balance sheet
- Goodwill and intangible assets are often discounted by investors, but can be added by sellers
- Asset valuation methods here are important including capitalisation/depreciation policies, stock valuation and provisioning and approach to bad debts
- Must consider the market vs book value of any property
- This approach is earnings-based, theoretically the most “accurate” and detailed approach
- It is appropriate for long-run, predictable businesses such as utilities and large large PLC’s
- It relies heavily on assumed rates and factors
- This is the most commonly used, straight-forward approach, which models the underlying operating profit of a business
- Adjustments can be made including rent, salaries, exceptional items and investments
- Multiples vary by industry due to specific risks, costs and rate of future growth
- The model can be further adjusted for working capital, cash, assets and other balance sheet items
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