How to get the right price for your business
Selling your business is emotionally challenging. How can you be sure your valuation is right? What will buyers expect? We explore how to set your price and get a fair deal
Selling your business can be one of the most exciting things you ever do, but it’s a highly demanding process, too. Preparation is key to achieving your exit goals.
How is the value of a business calculated?
There are three ways to value a business. The most common is to calculate earnings before Income Tax, depreciation and amortisation (EBITDA), then apply a multiplier. The multiplier is arrived at by looking at a range of factors that drive value in a particular market and by looking at comparable deals in your sector.
Another method is discounted cash flow, which means basing value on a cash-flow projection over, say, three years at today’s value. Early-stage firms commonly use this because they don’t have much revenue or profit yet – all the value is in their expected performance.
You can also value a company based purely on its assets. This tends to give a lower valuation because it only includes physical assets, plus some intangibles such as goodwill or intellectual property. Distressed businesses typically use this method.
Martin Brown, our CEO, says: “Companies may use several valuation methods to understand a full negotiation range. Buyers and sellers may try different formulas, depending on which works for them. The initial calculation is just a starting point for negotiation. It’s the science before you start the poker game and do the deal.”
How to negotiate a business sale
Before entering negotiations, harden your mindset. Many deals collapse or stutter because sellers are too emotionally attached to their companies. Prepare to release control. For example, you care about your staff and want the buyers to look after them. But be ready for your employees to have difficulty adjusting to the buyer’s culture, causing problems beyond your control post sale.
Prepare all your financial information – profit and loss, balance sheet and cash flow – for the past three years, and projections for the next three. Be ready to explain how the next owner can achieve value and growth.
Hone and maintain your strategic plan. Prepare to explain details about clients; suppliers; regulatory compliance; and environmental, social and governance (ESG) criteria.
Set your red lines – points you will not negotiate. Define your involvement post sale, if any. If you want to stay on in any capacity, show you’re committed to maintaining performance.
Hiring the right advisers
When selling, you typically need a team of advisers, including corporate finance, tax, accountancy and personal financial adviser. Your corporate team will send brochures to interested parties, create a potential buyer list, get expressions of interest and offers, and finally go exclusive with one buyer and negotiate towards completion.
Martin says: “One danger is using a broker that promises much but has a low success rate – as low as 10%. But they still claim their fee, which could be tens of thousands.”
Look for a broker or corporate finance house with the right success rate in your sector for your size and shape of transaction – these can be 16% to 60% and 90%+.
“As a business leader, you must prepare well and thoroughly to ensure your deal is deliverable at the maximum value,” says Martin. “Using a low-success broker can destroy people. During the process, they can fall out of love with the business, it grinds down and they walk away with nothing.”
Prepare to leave your comfort zone. Leave lots of preparation time, as there’s plenty to do and get used to. Focus on performance, demonstrating and maintaining compliance, and curating your exit story, because the buyers will interrogate you each month throughout the process.
Who to sell to
With the pound falling, UK businesses are attractive to foreign buyers. Selling to an overseas buyer can be more complex and take longer as there are extra considerations to navigate, such as language, culture, laws, taxes and foreign-exchange risk.
Selling to your staff through a management buyout or employee ownership trust is generally easier, so explore those options.
How to get a fair price
Your corporate finance team will help you create a powerful pitch and advise what to say in negotiations. Use them as a go-between with buyers, as dealing directly can be stressful and distracting.
“The way to get a fair price is to prepare as much as possible – figures, sector comparisons,” says Martin. “Lean on your advisers. Pre-empt all questions, rehearse your arguments and be ready to defend your numbers. Be positive and truthful. Don’t over-promise. Notify about issues and challenges in your business upfront, so buyers don’t use these to negotiate on price later.”
Be realistic about whether offers are fair. But keep ‘not selling’ as an option so you’re ready to walk away.
We can help you prepare your personal finances and set a minimum price for achieving your personal and lifestyle goals post sale, such as retirement or starting another business.
When is the right time to sell?
Martin says offer to completion might take 9 to 12 months. Buyouts often happen over years – for example, 25% paid upfront, then 25% a year over the next three years, dependent on performance. So if you’re thinking of selling in the next five years, start now.
“People often put it off,” says Martin. “Don’t wait for the market to improve, Brexit to pass or the war to end. You might get a pleasant surprise – or at least clarity about how to achieve your aspirations. If you want to sell, crack on with it.”
But don’t underestimate the emotional challenge. “Deal fatigue can take you to the depths of despair, then extreme highs,” he says. “At these times, lean on your advisers. They will help you through it.”
Get in touch
For support and advice on valuing and selling your business, speak to us today.
This article is written for the St James’ Place Entrepreneurs Club newsletter. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.