The process of placing a value on a business is a tricky one. • There are 4 value numbers for any business owner to understand.
This is the standard, much spoken of approach from the text books with its four elements:
willing buyer, willing seller
reasonable knowledge by both buyer and seller of the facts
neither seller nor buyer under any pressure to do the deal.
I would argue that there is seldom a deal where all four factors apply. It is unusual to find an unwilling buyer, but it happens. It is more common to find an unwilling seller. Hundreds of business owners in South Africa stare down the BEE barrel. They are unwilling participants in the sale of their shares.
There is very often a very real struggle for willing buyers to find funding. This is a place where sellers can influence the selling price.
The reasonable knowledge of all the facts works both ways. If a seller understands the buyer's plans, he may raise the price. But he is seldom given those facts.
The buyer must assume that he is not given all the facts about the business. So he factors that risk into his valuation.
Sellers have their collective feet held to the fire of BEE pressure. That is a compunction which counts. It forces sellers to do deals before they are ready. Until recently this forced selling prices down.
There are two different elements to this:
Firstly: the present day value of future cashflows
The owners and directors of a business have a deep and complete understanding of it. They know better than anybody else how it operates. They know what to expect from its debtors. They know better than anyone what the future cash flows will be.
The present value to the owners is a sum of the future cash flows, discounted for the risk that those cashflows may not happen.
This can work both ways. If owners understand the risks are high, or will get higher, the value to them must fall. If the cash flows are certain, the value to them will be higher.
To get this message to a buyer is fundamental in raising the price of the deal. Convince the buyer and his funders, and things will go well for price.
Secondly: what does the owner want or need from a sale?
What does the owner want or need from the sale? If he does not want to work again, his personal number will be higher than someone who wants to diversify and keep going.
The owner's age will influence the number. The things you want to do after the sale will call for different numbers.
If you want to pay off the mortgage and other debt, and go fishing, your number will probably be modest.
If you want to travel the world for the next twenty years, on a debt free yacht... Well things get tricky.
You should understand that your number does not need to relate to the value the business has to you now. It is a personal thing, and not related to the value the purchaser will see in it. It also has nothing to do with the outcome of a business valuation exercise.
But it is the cornerstone to your eventual negotiations with a potential successor. And it is the early start point in setting some goals.
The formal business valuation will give the personal number some relation to reality.
Every single business purchaser goes into a deal with a view to future earnings. By definition he wants to invest to get some sort of return.
That return may be from your business on its own, or it may be from putting one business together with another one.
He will discount the future earnings to a present value to establish his offered price. The discount rate he uses, will be dependent on risk to him.
It would make no sense for him to offer more than his perceived value.
CSuite teaches business owners how to show future value in present value terms. We do that by demonstrating safety, reducing risk to your new owner.
The closing price represents the best that both sides could negotiate on that day. On another day, the price might be different.
In other circumstances, with different people, more time, and better information, prices would change.
But it is what it is. You can change what it might be. You can add millions to the value and selling price of your business.
I am offering another twenty places at the CSuite table. The first month is free. And all confirmed subscribers get a business valuation thrown in right up front. The business valuation is part of R 130,000 parcel of products and services for subscribers.
To find out more, please attend one of our webinars where I describe the programme in detail.