Valuing a business can be a minefield.
There are several methods used which invariably result in different figures, plus there are other factors, which are more nuanced, that can affect the end result. There are plenty of valuation calculators around which will take a guess, probably based on your turnover or profit, which at best can give you a starting point or guide. But how do you value an exceptional management team or customer loyalty?
Here are the key factors to consider when you begin to value your business.
Future Financial Performance
If your business can demonstrate consistent performance and steady growth it will be highly attractive to potential buyers. There are buyers out there who will actively seek out ‘distressed’ businesses (usually to grab them at a low price) but most reputable buyers are interested in profitable, well-managed companies. Business acquisitions can be risky, so buyers are looking for investments that minimise risk and provide opportunities for development and growth.
A loyal and trusting customer base is another indicator of a company’s solidity. Not only does this provide reassurance of the company’s continuation but it also opens up opportunities for cross-selling with other businesses. Buyers with several businesses in their portfolio will be looking for synergy with existing companies and access to potential customers that they may not be able to target currently. A good customer base will make a business more attractive and should be nurtured carefully throughout the selling process.
A Strong Brand
It depends on the industry sector, but the strength of a company’s brand can affect its value. Positive brand perception can push a valuation higher as can having Intellectual Property Rights and patents, which will benefit a buyer in the future. A strong brand might also allow a buyer to access a previously untapped part of their market.
A Quality Management Team
If you’re planning to exit your business once the sale is complete, having a strong management team, who can run the business without you, is crucial. Potential buyers will be keen to know more about your key people and having this tier of management in place can drive a valuation higher. Some buyers will want to be involved in the business post-acquisition, but most won’t be involved day to day. Having a reliable and trustworthy team in place adds value to your proposition.
A strong supply chain will always be attractive to a buyer. Not only does it demonstrate a company’s reputation, but it offers opportunities for cost-saving within a buyer’s existing business.
Most buyers will be looking for a business which compliments their existing offering. They might be looking to buy their supply chain to increase profit margin or to access a different sector of their market. If a business is a good fit a buyer could find it more attractive and attach value to the synergy. They might also be looking to economise post-acquisition by merging the two entities and reducing overheads.
If you’ve worked in your sector for many years and have built your company from scratch your knowledge will be considerable. If you’re willing to stay involved in the business post-sale, perhaps as a consultant or advisor, some buyers will see this as a significant benefit. Equally, this might appeal to you and it’s often a more favourable alternative to exiting completely.
Craft a persuasive argument to a buyer and position your company in its best possible light. Of course, the financials will be the first port of call, but these other key factors can influence the valuation too.
At Fidelis, we are always pleased to hear from business owners who are looking to sell or exit their business. Wherever you are in the process, for a confidential, no-obligation discussion please get in touch.
Telephone: 0161 410 7070