Understanding the value of your business
The very start of the process is the business valuation. We have often been asked similar questions regarding valuation work, so thought we would share our thoughts in this complex area.
What is a business valuation?
A business valuation typically assesses the price that a business would achieve from negotiations between a willing buyer and a willing seller.
When would I need a valuation?
Business valuations can be used for a range of purposes, including preparing for sale, admittance of a new shareholder, agreeing a value with HMRC, divorce etc.
What is the benefit of having a valuation?
Maximising Value: Valuations are an ideal method of identifying which aspects of your business are driving value up and areas of weakness that may be eroding value. By identifying these factors, you are positioned to focus on the changes that need to be made in order to have the best chance of receiving the maximum consideration when you decide to sell.
Strategy: By analysing the current economy and market conditions, specifically in the sector you are operating in, you can gain an understanding of where your business fits within the market. From this, you are able to identify and focus on strategies that will enable you to adapt to the current climate rather than be adversely affected by it.
Legal: We are often engaged by lawyers to undertake valuations for use in probate, divorce proceedings and as Expert Witnesses, producing reports in a concise and understandable manner.
How do you approach a business valuation?
A robust valuation requires detailed research and analysis of all the key internal and external factors impacting the business.
Our valuations only only look at your business and the inherent factors which may be making it more or less valuable, we also look specifically at the industry as well as the wider economy to support the valuations report. We subscribe to a trusted market research site and a transaction database in order to gain a full understanding of the industry and look at recent transactions that have occurred within your sector. This gives us a realistic view of the structure and value of the transactions that are being undertaken. By adopting this approach to valuations, our clients can be assured that their valuation is based on key supporting evidence.
Can I obtain a cheaper alternative online?
Randall & Payne focus on understanding the value drivers in your business and will ask the detailed questions that a website is not able to. Understanding some of the intricacies which cannot be achieved by simply inputting numbers or checking a box can have a significant impact on the valuation and its robustness.
In addition, we have experience of preparing numerous valuations over many years, throughout different economic conditions. This knowledge and experience allows us to thoroughly consider whether the valuation of the business ‘feels right’ based on experience.
What is the output from a Randall & Payne valuation report?
We offer two types of valuation report:
Short Form: This is typically 2-3 pages long and provides the overall value of the entity, summarising the key points that have been considered in determining a value, taking in to account the most appropriate valuation approach. In arriving at a value, we research sector specific transactions that have been undertaken in recent years as we believe that these provide the best supporting evidence. Additionally, we address the industry outlook as well as the wider economy and consider how this may have an impact on value.
Long Form: This report is a more in depth version of the short form report and provides further analysis of the valuation process. A greater depth of explanation is given in respect of the effect that each contributing factor has had on the valuation and we will identify aspects of your business that are improving or eroding value. This report type provides the greatest strategic value as the output can directly filter into actions to increase business value.
How to maximise value
The following value drivers should be frequently considered, however, if you are planning on selling your business within the next five years, these need to be addressed to ensure that your business can achieve its full market value potential.
- Profitability – To be in the best position for sale, your business needs to demonstrate underlying profitability and growth potential. The best scenario for a seller is to demonstrate a pattern of consistent growth.
- Strong Management Team – Does your business pass ‘the bus test’? If you were hit by a bus tomorrow, would your business continue to run effectively? If your business can’t run itself without you, then this is something you need to address.
- Healthy Cash Flow – With poor cash flow often being the cause of business failure having a healthy cash and working capital position demonstrates that your business has been run efficiently and effectively.
- Barriers to Entry – Barriers to entry will increase the value of your company. Intellectual property, high capital investment and advanced technology are all factors that create barriers to entry which can maximise the value of the business.
- Clear Strategy – A buyer will often want to see that a business has been run with clear strategic objectives in place that management have bought into.
- High Customer Concentration – Business value can be significantly eroded where one customer accounts for a significant portion of your turnover. The ideal remedy for this is to dilute this proportion by winning more customers, however, some businesses may find themselves in a position where they cannot avoid high levels of customer concentration – in this scenario it is best to try and put robust contracts in place, thus providing some visibility of future income.
- Capital Expenditure – Are the assets that are required in the day-to-day running of your business in good shape? Assets should be up-to-date and well maintained to ensure that productivity levels are high and the benefits of this subsequently filter through to improve financial performance.
- Customer Satisfaction Rates – In a world heavily focused on social media, customer satisfaction must be at the forefront of every business owner’s mind. Negative customer feedback, particularly on a regular basis, highlights poor customer service which has a detrimental impact on value.
Detailed preparations for sale
Recognise When the Time is Right – Even if the business is in good shape, are you emotionally prepared for the sale of the business? After years of dealing with the highs and lows associated with business ownership you need to make sure you are fully committed to the exit process and prepared for life beyond.
State Your Objectives – Make clear any ‘deal-breakers’ or objectives that would fulfil your sale requirements and write them down. These will be useful for making decisions during the shortlisting process and assessing whether buyers have respected these points. Things to consider are buyer culture, handover periods and offer structure. For example, if you are family business, you may prefer to sell to another family business to maintain the established family feel of the business.
Be Realistic on Value – Your valuation report will give you a clear indication of the value of your company but the true test of value is dictated by the market and what a willing buyer is prepared to pay for it.
Be Transparent – By being as open and honest as possible, we can prepare to navigate any anticipated tricky issues that may arise as part of the sale process. If we do identify any issues, we can try and address these before the sale in order to avoid a potential price-chipping opportunity for the buyer.
Set Time Aside – Dealing with the sale of a company is a significant drain on management time. Setting time aside will reduce the strain on both you and your business and keep you focused on the objective.
Dry Run Due Diligence Assignment
The key to a smooth transaction is maintaining momentum to ensure that all parties are working efficiently and effectively to adhere to the set deadlines. One of the main factors that can slow this process is waiting for responses to information requests from professional advisors. These requests typically arise as part of the buyer’s Due Diligence assignment.
We suggest a dry run Due Diligence process, as a pre-sale exercise which endeavours to answer all the foreseen questions in advance. Using a comprehensive Due Diligence questionnaire, we gather as much information as possible to identify any areas of weakness and actions that need to be taken.
Both accounting and tax issues can arise from the dry-run Due Diligence process however, legal issues such as shortfalls in employment information, lack of policies, expired registrations and data protection issues are all typical areas in which questions may surface. As such, we would encourage an early engagement with a lawyer in order to identify and address any legal issues that may arise, particularly as they may take longer to resolve.
Once the dry run Due Diligence process has been completed, you can rest assured that, whilst every question may not have been anticipated, most queries can be resolved quickly, allowing the transaction to move forward unimpeded and giving the purchaser comfort in the underlying controls and systems of the company.
All of the documentation gathered during the process should be uploaded to a secure online data room and organised into folders which correspond with each element of the Due Diligence Questionnaire. The information gathered is essentially a bible of all the key information a buyer needs to make a full assessment of the business. The information is retained in the data room which is opened up to shortlisted purchasers at a later date.
Benefits of Detailed Preparation
- Highlights any problems ahead of the buyer’s due diligence process allowing us to address it in advance;
- Allows for a smoother and quicker sale process;
- There is less pressure to gather information quickly. You can take your time and make sure the information gathered is relevant and complete;
- You accountant and lawyer are able to review and gain a greater level of detail earlier and are, therefore, able to deal with the issues that arise more easily;
- The data room population process can be used to confidently provide any relevant disclosures against warranties.
Marketing your business for sale
There are several key steps:
1. Populate a list of potentially interested parties
Through detailed and thorough research a list of potentially interested parties should be prepared. This is typically achieved through a combination of:
- reviewing transactions in the sector
- understanding habitual buyers
- understanding the supplier and customer base of the company
- reading trade magazines
- carrying out detailed internet research into the sector
- utilising the power of a professional network of advisors
Following the implementation of GDPR legislation, this list needs to carefully vetted to ensure compliance with data protection regulations. In addition to these targeted approaches, we will often use commonly utilised business sale websites as a method to accessing a wider audience.
2. Preparation of a Sale Preview Document or ‘Teaser’
This is a key document in marketing the business for sale. The Teaser provides an overview of the company including a brief financial summary and will highlight the opportunities the business presents to potential purchasers. The information encompassed in this document is completely anonymous but will be sufficient to enable the recipient to make an informed decision as to whether they would like further details. The document is then distributed to the targets on your list of potentially interested parties.
3. Preparation of an Information Memorandum
The Information Memorandum (or IM) is a document that provides a much greater level of detail about the company. The level of information in the IM should be sufficient for potential buyers to provide preliminary offers for the business.
Therefore, following the Teaser mail out to the list of potentially interested parties, we will seek satisfactory completion of the following documentation from interested parties before sending the IM:
- Non-Disclosure Agreement – This agreement is the protection against non-authorised disclosure of sensitive information relating to your business.
- Standard buyer Vetting Form – The vetting form helps to determine the intentions of the interested party and whether they are likely to be able to finance the transaction.
Typically, both the Non-Disclosure Agreement and Vetting Form are enclosed with the mailed Sale Preview Document. If responses are not received it is usual for a courtesy telephone call to be made to ensure that the opportunity has not been missed.
4. Release of Information Memorandum
Once a completed Non-Disclosure Agreement and Vetting Form has been received from an interested party, the Information Memorandum would be released, allowing the interested party the information they need to assess the opportunity and make a preliminary offer.
Completion of the sale
The aim for every transaction is to move through to completion with the minimum of fuss. The closing stages of a transaction, i.e. working through Due Diligence and dealing with completion issues such as agreeing legal documentation, require all parties to work in a collaborative manner in the knowledge that both teams are working to achieve the same end result.
I have had a preliminary offer for the business, how do I seal the deal?
Is the offer acceptable and does it meet you requirements?
The chances are a preliminary offer does not represent the best and final position of a buyer so there is usually room to negotiate. This could mean negotiating headline price, payment terms (i.e. moving deferred payments to completion), commercial terms and usually a combination of all of these.
We are experienced advisers on which you will be able to rely to negotiate the best terms for your deal, whilst understanding what is most important to you. These negotiations may take a little time but getting these details nailed down now can help keep up the pace later in the deal.
Once the broad terms of your deal have been negotiated, the buyer will want to ensure they will not get any unwelcome surprises post-completion. This is the purpose of Due Diligence. Assuming you have adopted our approach of a dry run Due Diligence process, you can move into this next stage feeling well prepared and confident that any price-chipping will be minimised or eliminated.
Often at the same time as Due Diligence is being completed, the lawyers will draft up a Share Purchase Agreement or Asset Purchase Agreement (the distinction is based on whether you are selling shares in a company or just assets within it or a sole trade/partnership).
As the buyer’s lawyer ordinarily prepares the first draft legal documentation, you will need close engagement with both your accountant and lawyer at this stage to run through the documents and to understand which areas you can accept and which areas you wish to negotiate further on.
As you move further towards a completion date, an important part of this process is preparing a disclosure letter. There will be warranties in your Share Purchase Agreement – these are a series of statements that represent legal promises to your buyer. If, on reading these statements, you need to declare that you cannot promise some of the statements to be true, or further clarification in an area is required, the disclosure letter is your opportunity to do this. As the warranties will cover legal, financial and commercial aspects of the business you will need to work closely with your lawyer and accountant to make sure your disclosure letter is complete. Your lawyer will be of critical importance in pulling this document together.
Champagne all around
Once the Due Diligence is complete and the legal documentation agreed, you can formally complete the deal and start to think about life after exit, after all the years of high and lows associated with business ownership.
Now I have completed, is everything done and dusted?
Depending on how your deal was structured there may be a few things to tie up after the hangover has passed! These can include:
- Completion Accounts – These are required for transactions where a best estimate has been made of cash and debt in the business at completion and can give rise to both shortfalls and uplifts in consideration and will result in either a payment to the buyer or the seller which is agreed by both parties.
- Anniversary Accounts – These are required for transaction structures which involve an earnout element.