The obvious times are when they’re looking at selling, if there’s a matrimonial split, when there’s a new shareholder coming into the business or they want to raise finance.
The one that’s less obvious — but equally important — is when people talk about wealth management and planning.
A company is usually one of the business owner’s most valuable assets and if they’re not in tune with how it’s valued and what drives its value, there’s something quite wrong.
At least once a year, an owner should be asking what the business is worth. Is the value going down or up and, if it’s flatlining, what is the owner doing about it?
What’s the best way to figure out what your business is worth?
The most common practice is to work out the business’ value as a multiple of maintainable earnings. But I’d put a big rider on that. No single model fits all — it depends on the company’s size, the current market conditions and the industry in which it operates.
You can’t use the same formula for, say, a gym — which is a very capital intensive business — and an IT consultancy. That’s where a good valuation expert comes in. They assess the key value drivers of a business, and have specialist knowledge in a particular market.
To find the best person for this, owners should approach multiple sources that have used valuers before, and rely on word of mouth referrals.
I’d recommend a valuation to start the process. The expert valuer will give you a good understanding of the key areas of value for your business, which you can use as the basis for determining ongoing value. A full valuation should then be done every five years or so.
What are some common mistakes people make when valuing a business?
A key one is not adjusting for abnormal or one-off areas of expenditure or revenue — if it’s a hospitality business, for example, and it has had a bumper year because of something like the Rugby World Cup.
Or maybe they’ve had a massive repair bill and there’s been no normalisation of that result. Another key one is vendors not correctly accounting for their own efforts.
These people are often working 60 hours or more in their business, which is a real cost, and I’ll either see zero recognition of their own work in the valuation, or not nearly enough.
Smaller companies can be quite aggressive when flushing personal expenses through the business. While that may achieve a lower profit for tax purposes, that’s terrible for a valuation because it’s not reflecting the true picture.
A final mistake is not discounting the business’ price for inherent revenue risk.
For example, an IT consultancy might have very few, or maybe even just one, really big client that brings in 70% or more of their revenue. While that might be clean and easy, it’s also a big risk. All this needs to be looked at — what is the quality of the clients, how many are there and what’s their longevity?
Any other advice?
You never know when someone will knock on your door, so talk to your advisor or valuation expert early. If you know the drivers of value in your business, its strengths and weaknesses, that’s only going to do good things.
What make a business valuable?
– Operating returns
– A track record of growth
– A growing or attractive market
– A compelling value proposition
– Good management and systems
– A strategic market position
– A proven business model
– Unique assets or IP
Source: Grant Thornton
– Unlimited
