Business Valuation

Our approach to considering a value for a business?

Firstly Business Value, and Market Value are two different things. A business valuation should not be confused with a Market Valuation.

Businesses Valuations are commissioned for a host of different reasons and the ACCA give guidance on the methods that are used in assessing business value. This aspect of company or business value is reserved largely for the private sector as public companies have a share price, unless there is a drive to understand value due to a takeover approach and the evaluation of the effect of the takeover on the business value which is in question.

So, we need to be clear that business value is a separate subject to market value. 

When selling companies the business valuation should be used as the starting point. This evaluation is based on the factual financial position detailing the businesses total asset values, total liabilities, and income generation. There are a number of other important factors that would be relevant to the individual business valuation including the goodwill which is based on a number of elements that have to be considered.

A business might be the subject of a valuation assessment for inheritance tax, capital gains tax computations, or insurance purposes, but caution should be used if the exercise is to attain a value to be used for a business sale.

Market value

Just like any major asset sale situation, and in this sense businesses are a major asset in the form of shareholder value. There is a market and the market is a variable one which is subject to the prevailing market conditions. In comparison, as much as house prices go up and down for the same house depending on the market, so do business market values in different market conditions and in respect of different trading results posted. 

Business brokers are primarily sales focussed people, and that means there is an element of optimism in any view points presented. Optimism should be regarded as a good thing, because without optimism we cannot reach the higher values we are seeking to the vendors benefit in looking to maximise shareholder value. 

A business brokers un-quantifiable optimism, is designed to deliver what we will call the "added value offer price", whereas the subject of business value becomes a self determining exercise if we go purely on historical trading figures achieved, and many accountants (not all) who are trained to work on actual results as a measure of certainty, do just that when called upon to assess value. 

Conversely, the over assessment of market value is likely to lead to later disappointment for the vendor and the business agent as the business fails to sell.

The whole point of the exercise is to sell the business provided it is for a good or an acceptable price depending on the circumstances. 

Burdening the sale process at the outset with a valuation label that is way above the market trend for businesses in its particular sector and with its unique circumstances, is a waste of everyone's time. 

So, the broker should be consciously aware that their job is to bring some immediate sanity to the subject of business market value even if the conversation is not what the vendor wants to hear, it should provide an honest starting point to be considered. This is important as the broker needs to go forward with a sale instruction they believe in and one that has a value that is acceptable to the vendor. 

Market Value is a guide and so we market businesses on the basis of "best offers" because the buyer decides how much they will offer and how important the purchase is to them alone in light of the prevailing market conditions of the time.

For example a true case study. 

An energy related business that was discussed with a major firm of accountants and the value considered with the vendor to be around 5 million. Two offers came forward the first at 4.8M the second at 5.5M and then a third that was was considered to be the most likely buyer. The vendor said if I get 6.0M I will be happy to take it. When the offer arrived it was 16.5 Million! 

So this is an important example of why we should make sure we remain open to offers and see what buyers think the business is worth to them.

The honest answer in respect of business value is that it is something we can assess but the market will decide as nobody has ever forced a buyer to pay a certain price for a business, but we have to agree what is at least an acceptable offer the vendor would consider to start with before instructions are taken and marketing commences. 

Once marketing commences we have to be sure we have combed the market for the right buyers because the quality of interested parties is important otherwise we are unlikely to yield good offer values.

Selling a business can be a quick or slow process and in order to do the job of marketing and negotiation properly a typical sale process can take anywhere from 3 - 9 months depending on the appetite from buyers to purchase and sometimes it takes longer. Although the longer we have to market the business the more time we have to find all available buyers that might yield a quality bid.

That said, a high value offer can come equally as quickly given the right buyer party comes forward.

The main three methods of business valuation are as follows

Assets based approach, Income Based Approach, Cashflow based approach.

In order to establish business market value we would look at all three areas combined to consider the market value that relates to the shareholders ownership interests.

Shareholding value.

Shareholder value is also dependent on the rights that the shares have, for instance a majority shareholder has access to their share of the company earnings and they have the option to wind the company up and release their share of the net assets, whereas a minority shareholder cannot wind the company up and access their share of the net assets and they are dependent on the dividends the board approve from time to time and so this shareholder is potentially the subject of a slight value impairment unless they are selling along with the major shareholder.

Shareholders can have agreements already in place signed many years ago and long forgotten with other shareholders. These agreements can detail that parties invested in the same company entity need to be offered the selling parties shares before they agree to sell to another party. This situation  can mean the selling party is frustrated by delays due to the conditions applying when there is disagreement on value. There can also be different share classifications with different rights attached or conditions applying. Worse still these agreements can sometimes crop up before or during a sale completion event!

Minority shareholders can be the subject of what is known as a "drag along" clause that means they have to sell when called upon to do so by with the majority shareholder or such other group of shareholders under a different share classification.

Understanding the rights and obligations of each of the share classifications is important.