Having a realistic idea of the value of your business is critical prior to commencing a sale process. Many potential sales do not proceed as a result of owners entering the sale process without a realistic idea of value, or a misunderstanding as to how to the business and company is valued. An independent valuation prior to entering the sale process will also reduce the level of emotion for sellers prior to entering negotiations with prospective purchasers.
The valuation of the business is determined by a number of factors, with the key drivers being the profitability of the business, the amount of contracted and recurring revenues and the reliance on key people. Completing a valuation of the business prior to commencing the sale process can also assist you to identify the weaknesses in the business and implement changes to increase value. Other key items which are often a sticking point in valuation and negotiation include working capital requirements for the business (cash, debtors plus inventory less creditors) necessary to maintain current earnings, and meet future capital expenditure commitments and requirements.
In the sale of private company SMEs, there is frequently a trade-off for vendors between certainty of funds and the amount and timing of consideration. As detailed in our previous articles, it is quite common in todays' market that there be a level of deferred consideration (or earn-out) that is contingent on the business reaching profit targets and/or other KPI's. Earn-out agreements can also include upside for exiting owners with some additional consideration to be received should the business exceed the performance benchmarks.
In evaluating any offers and transaction consideration, owners need to assess the following:
- The total offer value;
- The tax impacts of the offer structure;
- The potential provision of vendor finance to acquirers (which is more common for management buy-outs).
- The responsibilities will the owner have in handing over the business and over what period.
It is also recommended that tax advisors are consulted prior to commencing a sale process to ensure that the company is appropriately structured to minimise tax payable on the proceeds of the sale of the business.
It should be noted that in many professional services businesses such as accounting, law, engineering consulting and architectural firms, ownership agreements are in place which outline the terms of partnership succession including the admittance of new partners and the buy-out of existing partners. The existence of such agreements is a consideration for new partners entering the firm, and partners from both firms in the event of a merger.
If you are considering the sale of your business please contact Matt Swan or another member of our Corporate Finance team for a confidential discussion by clicking the button below.
This article is part 6 of a 7 part series.