There’s no doubt that 2021 saw a return to normal in the commercial world, as the value of outward mergers and acquisitions in Q2 peaked at £6 billion. This equated to an increase of £4.3 billion in relation to the previous quarter, suggesting that a larger number of high-value acquisitions and deals were completed to the satisfaction of vendors throughout the UK.
Of course, any successful acquisition requires vendors to accurately value their business. But as there’s no single formula that can be used to value every private venture, what steps can you take to achieve a viable valuation?
The Importance of Arriving at a Realistic Valuation
When it comes to valuing your business, the single most important thing is that you arrive at a realistic valuation and one that the market can actually bear.
After all, applying too generous a valuation to your business can price it out of any potential deal, whereas underestimating this sum does a disservice to your efforts in establishing the venture over time.
But what general factors go into creating a realistic business valuation? Firstly, it’s important to distinguish between tangible and intangible assets when valuing your firm, as it’s much easier to apply a numerical value to the former and present this as part of a potential deal.
Another common valuation approach that applies in most sectors is referred to as ‘Earnings Multiples’. This describes a formula that’s based on a multiple of net profits (the Price/Earnings P/E) and can present the value of the business divided by its post tax profits.
Multiple factors impact this equation, with high-value sectors such as IT and technology often commanding a higher ratio than brick-and-mortar ventures like cafes and land-based shops.
Businesses that are reliant on a single product or particular demographic also increase the buyer’s potential risk, which can translate into a lower P/E ratio and negatively impact the value of your venture.
Carrying out a valuation of your business is a great way to examine the financial health and money making potential of your business. Valuing your business isn’t just about getting an insight of the profit and loss of your business, it can give a very detailed overview of your company’s chances of sustainability over a long period of time.
Recognizing the Impact of Negotiation
By valuing your firm’s tangible assets accurately and incorporating a viable P/E ratio where applicable, you can create a realistic valuation of your venture. However, while this creates a viable starting point for entering into an agreement, you should note that selling your business also relies heavily on the art of negotiation.
Remember, buyers are rarely sentimental and will be motivated simply by buying your business at the best possible price, just as you’d like to optimize the resale value and bank as much as possible.
Certainly, having a realistic initial value can help to initially engage potential buyers, but this should ideally be slightly higher than the true market value to help create room for manoeuvre. This can be a difficult balance to strike, of course, but it’s important if you’re to come to a quick and amicable agreement.
You should also have a clear minimum price that you’re willing to accept from a valuation perspective, as this minimizes the risk of you undervaluing the venture in the quest to complete a deal.
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