Selling a Private Business: How to value it
Posted on 11 Sep 2023, by admin
INITIAL OFFER IS NOT THE VALUE RECEIVED!
When selling a business the Seller gets paid for the equity (shares) held. This is different from an initial offer made by a buyer usually a multiple of profits ( ”EBITDA”).
It is necessary to have a completion statement, a mechanism which provides a “bridge” between the initial offer and the final equity value.
Online advertisements to “value my business” are often used by business sales agents. They are misleading and may cause a Seller to make the wrong decision to sell or when to sell their business.
5 QUESTIONS A SELLER MUST ASK TO ESTABLISH THE COMPLETION MECHANISM.
A Seller should not take a generic quick and dirty valuation via a website, but instead understand the valuation mechanism. Dexterity Partners uses the 5 wise (wo)men questions:
- What?
- Why?
- When?
- How?
- Who?
If you want an answer to these 5 questions, contact us.
WHAT IS THE METHOD TO CALCULATE FINAL EQUITY VALUE?
A seller must understand the methodology / framework that determines how much and when they get paid. This requires the definition of:
- EBITDA
- Adjustments to EBITDA to find underlying financial performance.
- Cash free position and definition of cash and cash equivalents
- Debt free position and definition of debt items (often disputed).
- Normalised working capital vs. working capital at completion.
- This is further complicated if deferred payments or an earn out is proposed.
WHY IS THE CALCULATION METHOD IMPORTANT?
There is not a set of published rules or standards to use to calculate the final equity value received by a Seller.
Buyers initial offer for their business is often materially different from the final equity value. There are fundamental issues ignored due to the buyer and seller simply trying to agree a headline price.
The consideration template acts as a “bridge” between initial offer and final equity value. Without a consideration template material misunderstanding can occur only recognised at due diligence stage when considerable costs have been incurred by both parties. This often results in dispute over price definition and is a common reason for an initial offer to collapse or a price reduction.
At Dexterity Partners we focus on turning the initial offer into an agreed value before wasting time and money at due diligence stage.
WHEN does a Seller have an agreed value mechanism?
Until a consideration template is designed there is no value agreed and so no deal.
Because of the complexity this is left by the sales brokers to the buyers and sellers corporate finance advisors to undertake the financial analysis as the terminology is all new to the Seller.
At Dexterity Partners we believe the best approach is to involve our client at the very start of the process. We work in partnership with our client prior to any marketing to a buyer to ensure the optimisation of underlying EBITDA. We do this with our practical hands-on “Fit to Sell” and “Fit for the Future” improvement process based on the Doctorate research of Dexterity Partners’ co-founder Dr Simon Brayshaw.
This research was completed at Warwick Business School based on actual analysis Private Owner Managed Companies. By starting early it ensures the client understands the value drivers in the sales process. This is very important when deciding on earn out, deferred consideration and payment security.
HOW DOES THE COMPLETION MECHANISM WORK?
Dexterity Partners has designed a jargon free consideration template for use at the beginning of the process not at the end, when negotiation positions of buyers and sellers are unwilling to be changed. The consideration template shows how the buyer’s offer is calculated and all price impacting factors considered. We explain the pathway from initial headline offer to a final equity value (“the equity value bridge”).
Dexterity Partners provides clients with a bespoke consideration template which explains advisor jargon in clear and simple terms. This ensures the Seller understands the factors impacting on the equity value.
This is very important when a Seller is receiving offers as it ensures like for like comparison to ensure the value is clearly understood.
WHO PREPARES THE CONSIDERATION TEMPLATE?
This is usually done by Corporate Finance advisors due to its complex financial analysis. At Dexterity Partners we do not think this is the best approach. A Seller only has one business to sell and therefore should be aware of the factors impacting on the value of their business.
Therefore we spend time at the start of the sales process outlining the pathway in clear and simple terms using actual financial information from the client’s business. We work in partnership with our client to design our unique “Fit to Sell“ and “Fit for the Future” process to maximise value and attract the greatest number of buyers.
NEXT STEPS TO UNDERSTAND HOW TO VALUE A BUSINESS AND SELL MY BUSINESS?
To discuss further the unique Dexterity Partners “value my business” consideration template and how to maximise your business value with our unique “Fit to Sell” and “Fit for the Future” process then please contact us.
