Q: How are businesses valued?
There are many methods of valuation used in buying or selling a business. Basically the worth of the business hinges upon how much profit a purchaser can make from it, balanced by the risks involved. Previous profitability and asset values are starting points but intangible factors such as key client relationships, can provide the most value.
The main valuation methods are based on Assets – if your Company has substantial tangible assets; Price/earnings – for Companies making substantial profits; Entry Cost – values a business as if starting a similar one from scratch; Discounted Cash flow – based on future cash flow, particularly where companies have invested heavily and Industry Rules of Thumb – use of an established standard formula for a particular sector. At least two of the above methods are used to arrive at a value. For further information on business valuations, please click here.
Q: What is “book value”?
The “book value” is simply the net asset value after all liabilities. In other words if all the debts were paid off and the cash and assets within the Company were used to pay for them, the remaining amount would be the “book value” and is in effect, the equivalent to the “Shareholders funds”.
Q: Should I buy the assets as well?
There are two types of purchases: Assets, Name and Goodwill and a Share sale. In both cases, the assets go with the Company but in certain cases, some of the assets may not be required by the purchaser and can be discounted from the valuation or asking price, as part of the negotiations. It may be that the purchaser may not want some or all of the property, or in extreme cases, even planes or yachts!
Q: How is goodwill valued?
Where the valuation of a business (determined by one or more of the recognised valuation methods) exceeds the market value placed upon the business’s adjusted net assets, the difference will be “goodwill”. Goodwill is an intangible asset as it invariably does not have a value in the balance sheet and as such is notoriously ambiguous to value unless recognised valuation procedures have been adopted. It will usually involve two valuation methods being employed (excluding Entry Cost). The practice of valuing goodwill will be determined from negotiations between the buyer and seller and at the end of the day will come down to what a willing buyer is prepared to pay and a willing seller is prepared to accept.
Q: What documentation will a potential buyer require?
Prior to selling a business it is as well to have all your systems, accounts and paperwork up to date. The buyer will want to see Statutory Accounts, monthly Management Accounts, Cash-Flow Statements, Fixed Asset Register etc. The legal people will want copies of just about anything legalistic, so be prepared to provide copies of loan/HP agreements, leases, contracts of employments, salary details etc.
Q: What is the “Memorandum of Sale”?
The Sale Memorandum is an outline of the business and provides a potential purchaser an overall view of its present structure and operation, including key financial information, such as sales and profitability. The Memorandum will also concentrate on positive aspects of the business, outlining possible benefits and future opportunities to a potential purchaser. It is important that the purchaser ensures a thorough “due diligence” exercise to ensure that the Company “is what it seems” before Completion takes place.
Q: What are “Heads of Terms”
“Heads of Terms” is an outline agreement between a purchaser and the vendor. The Terms will usually provide straight forward details of what the purchaser is prepared to pay for the business and any Terms on which the sale is to take place.
Q: How long will I have to stay in the business after it is sold?
The amount of time that you will have to stay within your business after it is sold, is mutually agreed between both parties and often before the Heads of Terms are drawn up. If you offer to stay on with the business, this will provide greater re-assurance to the Purchaser who will value your knowledge of the Company for the short term future. Agreements will vary but the norm is 6 months and on a 2 to 3 day a week basis. Also, you will probably act as a “Consultant” rather than as a Director/ employee.