Share Value
Before selling a business, it is appropriate to know how much the business is worth, which, if done professionally, will be undertaken independently by an experienced Valuer, who will consider the most appropriate valuation method to use, based on the type, structure and performance of the business. For a limited Company, it’s important to know the value of the shares, which will indicate how much the Shareholder(s) are likely to receive for their shares, if sold.
The advantage of a share valuation prior to selling will be to understand how much the business is worth “on paper” before making the decision to sell. It will also enable the business owner to understand whether or not offers from potential buyers are realistic or not and will therefore, help with negotiations, as it’s important to understand how the value has been derived at.
Enterprise Value
When offers are received for a business for sale, they will typically be based on the value of the shares to be purchased, which, assuming an offer for 100% of the shares, will be the equivalent to the “Enterprise Value”, also known as the “Headline Price”. The value will be based on the same principles of the share valuation exercise, usually based on the underlying performance of the business and future expectations.
A frequently used valuation method for a profitable business will be based on calculations based on “Earnings Before Tax, Depreciation and Amortisation” (EBITDA), with “normalising adjustments” made for one-off income or costs, in order to arrive at an “Adjusted EBITDA” (sometimes known as the “Normalised EBITDA”) figure, with a multiplier applied, depending on type and size of business, marketplace, risk factors etc.
Equity Value
Assuming that the Buyer and Seller agree on the valuation, it is important to realise that the final offer price may be different to Enterprise Value. This is because the value is based on underlying business, regardless of the actual timing of the sale transaction and the level of cash or debt within the business. For this reason, offers are often made on a “Cash Free, Debt Free” basis.
Deals will normally be arranged for enough cash to be left within the business to provide sufficient Working Capital. Where there is “Surplus Cash” at the time of Completion, it would only be right for the seller to be rewarded on a “Cash for Cash” basis. Leaving Surplus Cash within the business may also be beneficial from a tax point of view, so long as the buyer recognises the amount involved!
Where debt is concerned, buyers will be reluctant to fund and service the debt which often take the forms of bank loans, overdraft, factoring etc. which may reduce the Enterprise Value, especially if the debt is not covered by the Current Assets. However, subject to negotiation, it can be agreed that a certain amount of debt can be taken on, such as long-term finance on Plant & Equipment.
Summary
When selling a business, it is especially important for the Seller to understand the likely difference between the Share Value/Enterprise Value and Equity Value, depending on how the business is trading at the time of a sale, and to always seek professional advice if necessary. This will provide the best chance of avoiding prolonged negotiations, costs and aborted deals.
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