When you’re considering the exit strategy for your Financial Services advisory practice, it’s essential to obtain an accurate valuation to position your business in the right way and make the opportunity for potential buyers as attractive as possible.
Understanding business valuation
A business valuation is an independent assessment that calculates the worth of your assets and inventory, operational output and go to market strategy. It can be done in many ways, but it’s mainly based on cash flows, sales of similar businesses around the same time and long-term output.
“A business valuation is more than just a number, it’s a powerful tool that provides insight into the inner workings of your company, future growth opportunities and key operational decisions. Seldom do business owners spend the time and resources needed to analyse organisational worth”, says James Salmon, Business Manager.
The valuation can also provide insight on issues that might have a negative impact on value, helping owners to understand what they may need to remedy in advance of going to market.
“It’s very common for the sale of a business to be executed on a debt-free cash basis. A buyer will typically focus on EBITDA (Earnings before interest, tax, depreciation and amortisation) as standard when assessing profitability and then base the price on a multiple of this metric. To get to this point it’s really important to analyse historic costs and financials and strip out any unusual costs which are unlikely to recur, such as the expense of a transformation project which is now complete. The owner then needs to look at any fees an acquirer may need to take on, including those which may not immediately be visible. Things might include paying a shareholder who is no longer active in the business or paying old merchant fees. To ensure that a valuation is accurate and true profitability can be realised, it’s key for the owner to put themselves in the shoes of the buyer and only identify the costs necessary to run the business. Equally it’s important for business owners to be transparent about anything which might increase the cost base for an acquirer, such as a lack of re-investment in various platforms or an understaffed team”, adds James.
James goes on to explain how evaluations are formed:
Asset-based method - values the business based on the value of its assets such as cash, investments, and property.
Income-based method - values the business based on its projected future earnings and financial performance. This can include a discounted cash flow analysis or capitalisation of earnings.
Market-based method - values the business by comparing it to similar businesses that have recently sold in the marketplace, which is more contextual.
Rule of thumb - a quick and simple method which involves using a multiple of the business's revenue or profits to estimate its value.
With this in mind then, how can businesses seek an accurate valuation?
Consult the right people
Valuation firms, accountants and investment banking consultancies can all manage valuations but choosing the right professional with relevant expertise is key. Businesses need someone who can do more than ‘crunch numbers’. Professionals who are subject matter experts for a particular specialism can offer market leading insight and advice to help provide accurate assessments and even drive up the value of your business.
Understand and evaluate growth potential
As well as looking at EBITDA, it’s effective for business valuations to also include a growth forecast, these typically tend to be for five years. This includes the general market size, which consists of the number of potential buyers of a given service or product and the total revenue these sales may generate, and the organisation’s market share. Influencing factors also include potential barriers to entry for competitors.
Business owners can gain insight into their business value by understanding where and how comparable competitors are trading and what services and products they’re not offering. This will help leaders to develop propositions and unique selling points which they can capitalise on and ultimately use for future business development and growth.
Evaluate key risks
It’s important for a valuation to identify the negatives and provide an accurate overview of what might reduce a company’s value. These could include significant people currently involved with the business, who if they leave, take work and clients with them. Technology and having the right platforms and channels also play a part, as well as how the business is responding to changing customer preferences.
“The sooner an owner engages in a valuation, the more time they’ll have to enhance ‘levers of value’ and optimise company worth. Other factors in conjunction with valuation will make the deal more attractive such as timing, whether the terms match your exit strategy, cultural considerations, integration, proposition, etc but without the right valuation it’s unlikely the deal will be attractive”, says James.
If you’re looking for support or advice with mergers and acquisitions in the financial services specialism or would just like an informal chat about your options feel free to contact James Salmon, Business Manager or Tony Bates, Managing Director.