How much should I sell my business for?

Posted on 16 Sep 2022, by admin

How much should I sell my business for?

Knowing how much you can sell your business for is one of the most important factors to consider when deciding to sell your business. After all, the amount can be the deciding factor as to whether you sell or not. However knowing what someone will pay for your business or how they reach that figure is often not well understood.

Word of warning: Be very skeptical of direct mail/cold call business sales agents offering you a value over the phone or to a link on to a website. Often you get through to a commission sales agent who will have nothing to do with realising the value of your business. Without a detailed understanding of your business these can be misleading and often they suggest a high value to sign you up to a contract which is expensive to get out.

There exists a whole professional services industry around valuing businesses. Here at Dexterity Partners, we talk you through the issues and how to maximise EBITDA.

So how much should I sell my business for?

Let’s start with the worst case! The minimum you could expect to receive is the market value of the assets owned by the business. This is effectively the closing doing value.

Valuing your business can be like valuing your favourite painting or antique. It is unique and is only worth what someone else is willing to pay for it. This is the key point of this article; you need to look at it through the eyes of a prospective buyer.

The good news is there is normally a common approach used which is as follows:

Normalised EBITDA x multiple ( general + specific characteristics of your business) + free cash less debt.

The multiple is often the most subjective element of any valuation. Normally a multiple of normalised EBITDA (operating profit before interest and tax and adding back depreciation and amortisation) is used.

The multiple is also not only dependent on the business itself, the better the business the better the multiple, but also dependent on the buyer as different buyers will also have different factors which go into their own opinion of the multiple. Usually the oft quoted number for the multiple is somewhere around 6, however whilst the average can fall around there it is key to understand it is only an average. What is often the case is that small owner managed businesses will often struggle to achieve a multiple greater than 3 without other strong positive factors, which is where Dexterity Partners can help in creating and enhancing those other factors to push the multiple higher.

On the other end of the spectrum businesses demonstrating fast growth with a proven business model and the ability to continue on that trajectory can achieve multiples much higher than the average. To determine accurately where exactly your business falls requires a deep understanding of the business as well as the market which is where Dexterity Partners can help.

There is then the need to calculate free cash less debt assuming normalised working capital. Usually this requires an agreement between both parties on how the working capital is to be agreed regarding the specifics of the business.

The standard approach usually requires looking at the normal trading pattern of the business, what the stock, creditors, debtors, cash etc are at in the usual course of trading. Then determining on sale, where the business sits in regards to usual trading and whether any adjustments need to be made to balance the differences. For example if at the date of completion the debtor balance is double what it usually is because of a known issue and it will be resolved 2 months after the sale then it will be adjusted for in the sale price. This works both ways, so if it is something that means the working capital is lower than expected then the deal value would be adjusted down or adjusted up if the opposite is true. After this is all done the remaining cash goes to the seller on the completion of the deal, adding to the amount received from the sale.

What we have described is the most common approach to the valuation of a business, but each deal is unique, and so is each seller and each buyer, along with the approach they want to take in valuing your business. There are many possibilities of how a deal valuation might be structured but the most important thing is that it works for you and you understand exactly how the intricacies affect the deal and yourself.

It is important to fully understand the offer and how the terms and conditions affect the actual amount you will receive at the end. Is there a deferred element of the payment? and is this in cash – some larger businesses might want to pay in shares. There might be an earnout element in the deal – again this is often included for between one and three years.

This may allow you to benefit from the business over performing but you may also lose out if the business underperforms, as such there is a risk you may or may not be comfortable with. What we at Dexterity Partners believe is that these issues should be ironed out at the very start in any offer you accept and make sure you are 100% comfortable and happy with all the terms and conditions in any offer at any valuation.

As you can see this is not a simple answer, but if you want to discuss further just contact us for a free discussion.

For further information and impartial advice, feel free to contact our founders at Dexterity Partners.