How To Value A Business

1st January 2018 by

There are far too many myths about with respect how businesses are valued. Unlike with the sale of houses, prices are not well defined. A house would typically sell for + or - 10% of the asking price. However, that's not so with businesses. A business could fetch 500% of the asking price ... or just 5% of the asking price (!) depending on how it is sold and depending on the skills of the person project managing the sale.

We've put together a range of articles on valuation to help business owners maximise the price they achieve from the sale of their businesses. Unlike the oft mentioned quote, a business is not worth "just what someone is willing to pay for it". It's worth what you can convince someone to pay for it ... and there's an art in that convincing. It has to do not just with the attributes of the business but on the marketing, on the attracting of the right prospective buyers, on the careful handing of those buyers and providing them the information in the right format to influence their price perceptions (and that's not achieved by simply stating to them all about the "potential"!)

In addition to the above, a smart sales process will add value to the deal. The vendor's representative needs to identify the factors of greatest importance to each buyer and seek out ways those factors can be enhanced. For example, one buyer may see significant value in a longer handover period - the vendor's representative would then use that to negotiate price upwards in exchange for a commitment from the vendor to extend the handover. Other factors that can be used to influence the price upwards is the extending of credit to the buyer (with appropriate security, of course), providing guarantees and indemnities to assuage some of the worries / concerns he may have, tying part of the purchase price to the performance of the business post-sale and structuring the sale in such a way as to minimise the buyer's tax liabilities.

A competent intermediary would have a range of other such incentives that he'd use to ensure the vendor walks away with the highest possible personal benefit from the sale. Some of the myths surrounding the valuation of businesses are covered here and they are a must read for any business owner considering a sale.

This article was provided by UK Business Brokers (The EXIT Firm). You can find us here.

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