Dave HarriesNeil, how do you go about valuing a business?
Neil AckroydWell Dave, I guess it depends on what you want to value a business for. People want to value their businesses for several reasons, you could be looking a life insurance for your kids or whatever or if somebody was getting divorced they could be looking for an academic valuation to enable them to value the relative assets within the estate. The most common one, I guess, is looking to sell your business. If you are looking to sell your business you will have a valuation done.
Dave HarriesSo tell me about that then. If I did want to exit the business where do I go, how do I do it, how am I going to find out how much it is worth.
Neil AckroydUltimately it really depends on the size of the business and who you are selling it to. There are a number of ways of valuing a business. You can use complex financial modelling, you can look at the cash flows of the business if they are robust enough going forward and then you can discount them by a time value of money or a discount factor. There are quite a lot of academic ways of doing it. What you do then is find out how much money that cash flow is worth to a potential purchaser. In a lot of ways that is the way that a PLC would value a business. Or actually it is the way that a large PLC would valuate any project that they would do regardless whether it is buying a business or whether it is buying a new piece of machinery. They discount the future cash flows and then they feed that back using their cost of capital to find out whether that project is a good project for them or a bad project for them to do.
Venture Capitialists/Private Equity players when you are looking for a management buy out employ a similar way of valuing a business but ultimately if you are selling a business to a trade player from your perspective all of those exercises are only really academically interesting what is the absolute heartbeat of genuinely being able to value your business and estimate a price you would get is understanding who is going to buy it and what they pay for businesses because in reality in the mid-market in the £5-£100m deal value arena businesses are generally valued on a multiple of largely EBIT maybe EBITDA so Earnings Before Interest & Tax or Earnings Before Interest, Tax, Depreciation, Amortisation or they are valued in certain sectors like Telecoms they are valued on a multiple of gross profit, in Document Storage is it a multiple of turnover from secure revenues so there is always metrics in those industries that are generally a multiple of some factor or trading factor in the business. But it all comes down to whether or not there are a number of potential purchasers in your business or not.
It is all very well saying that a business in your sector sold for 10 times earnings before interest and tax however unless that person wants to buy your business as well then it does really mean very much.
So the only robust way of valuing a business, in my opinion, in that space is to really understand the business, really understand the field of potential purchasers who are genuinely likely to do a deal and then put the two things together which can be done confidentially through research and come up with a very robust potential purchaser based valuation.
Dave HarriesHow can I find out more about this?
Neil AckroydWell there are a number of websites, most notably there is corporatefinancetv.com which has a huge amount of tutorial videos and help and advice and also interviews with people who buy businesses, interviews with people who have sold businesses. So you can learn not just about business valuation and not just the technical stuff such as due diligence, legals but you can also hear from people who have gone through it, the emotional experience or looking at selling businesses and looking at valuing a businesses.
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