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Contents
The successful sale of a business requires careful planning, good timing and an effective approach. It involves presenting the business in the right light, intelligent research and carefully approaching the right buyers, avoiding technical pitfalls and creating and managing a competitive process. The steps are: 1. Selecting an advisory team 2. Business valuation 3. Value enhancement strategy 4. Timing and personal financial review 5. Positioning your business in its best light 6. Research and create competitive environment 7. Negotiate and structure the right deal 8. Project manage to completion
Undertaking a business sale is one of the most important financial decisions you will ever make. The approach an advisory team take can make a real difference in maximising value and minimising distraction. There are many legal, tax, accounting and regulatory issues to address. In addition, there is the matter of finding the most profitable buyer for your business and then negotiating and structuring the most advantageous deal, ideally in a competitive environment. Start by meeting several intermediaries. Appoint based on track record, ability to create highly strategic transaction at maximum value, experience, personality, research resources, international approach and technical deal structure knowledge. Make sure fees are linked to success deliverables; avoid high non-performance based time fees. Finally make sure they take the time to understand your aspirations, approach and business. A good intermediary will also help you understand the timing and value influencers.
2. Valuation
Values
are
often
significantly
exceeded
by
creating
competition
with
the
right
strategic
buyer.
A
forecast
valuation
is
helpful
however
as
a
review
of
prospects
for
increase
in
value
both
quick-win
and
long-term
and
also
to
understand
and
seek
to
realise
aspiration
value
(beyond
the
numbers).
A
valuation
will
seek
to
measure
the
trust
the
market
has
in
a
business
and
in
its
ability
to
create
wealth
(the
goodwill).
Goodwill
is
intangible,
although
the
accounting
definition
is
the
difference
between
the
purchase
price
and
the
companys
balance
sheet
assets
(net
assets).
There
are
many
different
techniques
for
calculating
the
value
of
a
business,
such
as
industry
specific
formulas,
asset
based
valuations,
discount
cash
flow
forecasts
and
dividend
formulas.
However,
typically
in
unquoted
smaller
businesses,
the
most
usual
method
is
to
use
a
multiple
of
one
years
adjusted
and
maintainable
profits.
The
chosen
multiple
is
the
number
of
years
it
is
considered
acceptable
to
generate
a
payback
on
the
investment.
This
can
be
expressed
as:
Multiple
x
Adjusted
Maintainable
Profit
per
annum
pre
tax
=
Likely
Valuation
Profit
Adjustments
A
sustainable
profit
figure
will
be
assumed,
often
using
last
years
net
profit
as
a
base.
It
is
then
normal
to
make
specific
adjustments
to
this
figure
to
obtain
the
net
profit
to
a
buyer,
rather
than
the
one
the
previous
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This guide is not definitive. Accuracy is not guaranteed and it does not replace professional advice.
owner may have enjoyed. This is called calculating the adjusted net profit. An adjusted EBIT or EBITDA may be used depending on sector. This is calculating the earnings before interest and tax (EBIT) or depreciation and amortisation (DA). This can include items such as salary or extraordinary or personal costs. Adjustments to the net profit might include add ons such as costs for placing the business under management, additional premises cost if requiring relocation and investment required replacing old equipment. Multiple influencers Low multiple High multiple Volatile Sustainable Less desirable SME business Highly expandable Poor expansion Growth sector Declining sector (poorly perceived) Bigger profits Lower profits Strong team Poor infrastructure Recognised Brand Low economies Growth record Intellectual Property
Multiple
Range:
Below
is
a
typical
guide
to
the
assumed
multiple
range
x
the
adjusted
profit.
The
profit
is
usually
expressed
either
PBIT
for
service
companies
or
EBITDA
for
capital
intensive
businesses
such
as
manufacturing.
The
table
assumes
a
debt
free/cash
free
balance
sheet
included
in
a
deal,
excluding
Freeholds.
Aspiration
value
should
always
be
sought
to
secure
transactions
beyond
the
multiple.
Prior
to
sale
owners
should
be
looking
at
strategic
ways
to
increase
the
value,
not
only
through
the
level
of
profits,
however
also
through
addressing
elements
that
will
directly
impact
the
final
valuation.
These
can
include:
Ensuring
steady,
recurring
and
forecastable
income.
Eliminating
dependency
on
key
members
of
staff,
clients
and
suppliers.
Ensuring
solid
systems
are
in
place.
Clean
accounts
and
balance
sheet
with
good
Management
Information
Systems
Creating
strategic
long-term
growth
plans.
Not
only
will
this
increase
value
but,
being
clear
on
your
alternative
strategy
creates
a
powerful
walk
away
position
to
leverage
negotiations
and
optimise
price.
Ensure
your
website
represents
your
company
in
its
best
light.
Consider
geographical
and
sector
diversification.
Businesses
should
aim
to
own
a
niche
marketplace.
Ensure
all
legal,
tax
and
accounting
paperwork
is
in
order
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This guide is not definitive. Accuracy is not guaranteed and it does not replace professional advice.
The
timing
of
the
deal
should
be
when
the
business
is
in
good
shape
but
ideally
still
growing
and
at
a
time
when
the
shareholders
have
reached
a
personal
cross
road.
It
is
vital
to
be
objective
as
many
a
deal
is
lost
when
the
shareholders
needs
drive
the
timing
rather
than
what
is
right
for
the
business.
It
is
also
important
to
analyse
the
forecast
net
proceeds
versus
the
net
sale
income
you
will
receive,
versus
the
time
wealth
achieved
from
a
sale.
If
fast
growth
is
envisaged
seek
an
elevator/earn
out
deal
which
working
with
the
buyer
will
maximise
the
proceeds
over
time.
Costs:
Tax
on
any
capital
gain
you
make
will
probably
be
your
biggest
cost.
Currently
Entrepreneurs
Relief,
an
Inland
Revenue
allowance,
allows
the
first
10m
to
be
at
10%
per
executive
shareholder
owning
more
than
5%
for
more
than
a
year
in
a
qualifying
company.
The
relief
is
given
after
all
other
reliefs
and
allowances.
The
amount
of
the
reduction
depends
on
how
long
you
held
the
asset
(the
qualifying
holding
period),
and
whether
the
asset
was
a
business
asset
or
a
non-business
asset.
Entrepreneurs
Relief
creates
a
significant
argument
for
entrepreneurs
to
make
money
through
capital
gain
rather
than
through
ongoing
profits.
Sellers
also
need
to
allow
for
professional
costs
including
a
merger
&
acquisitions
advisor,
a
tax
advisor,
accountant
and
a
lawyer.
For
smaller
companies
professional
costs
are
usually
between
5-10%
of
the
proceeds.
Some
of
the
costs
will
be
prior
to
the
sale.
Income
Vs
Capital:
The
diagram
below
further
assists
in
making
the
right
decision
as
to
when
to
sell.
It
highlights
income
vs
capital
considerations.
The
scenario
depicted
is
a
company
valued
at
1m
based
on
a
multiple
of
4.
The
end
result
that
the
owner(s)
would
have
to
run
the
company
for
5.859
years
on
the
same
profit
levels
to
achieve
the
same
income
as
they
would
by
selling
the
company.
You
should
also
consider
the
fact
that
Capital
is
certain
whereas
future
income
is
uncertain.
A
certain
(capital)
0.90
today
is
worth
more
than
an
uncertain
(income)
1.00
tomorrow.
Income
(uncertain)
Assumes
all
profit
stripped
-
Corp
tax
@20%
-
Dividend
after
corp
tax@
25%
Total
net
No
of
years
earnings
Capital ( certain) 1,000,000 Assumes multiple of 4 -70,000 - Estimate legal & brokers costs -93,000 - Assuming Entrepreneurs Relief at 10% +41,850 Interest at 5% for 1 year 878,850 Total Net Assumes full profit strip each year
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This guide is not definitive. Accuracy is not guaranteed and it does not replace professional advice.
In order to value a business and to then seek to exceed this it is essential to secure the right buyers in order to create competitive bids. In depth research should be conducted to identify these potential purchasers using a combination of global intelligence tools and a database of active financial and trade buyers. A business in an auction can sell for more than 200% of financial forecasts. Through synergies and economies of scale available, the business will be worth differing amounts to buyers. The optimal purchaser is one who has a we want, we need motivation who drives their own shareholder value via an acquisition. A good advisor will carefully position synergies to multiple, interested parties utilising financial modelling and future visioning to demonstrate the benefits of the acquisition on an international basis.
A good advisor will orchestrate all the parties, create a timetable and manage the project to completion. They will also anticipate and circumnavigate issues. Deal fatigue or worse failure, can result if a poor dialogue occurs once terms are agreed. The parties need to continue to listen and aim at a win/win transaction. Your advisor will facilitate this, liaising with all other advisors (legal, tax, financial) through to successful deal completion.
www.avondale.co.uk
Page 4 of 4
01737 240888
This guide is not definitive. Accuracy is not guaranteed and it does not replace professional advice.