At a glance
- Calculating how much your business is worth is a key first step in getting the best possible price for it.
- Businesses that are particularly innovative, show great future potential or can demonstrate solidly repeatable profits are the ones most likely to be able to boost their value. It also helps if you’re prepared to stay on for a year or two as part of the handover.
- Your financial adviser can help you to understand how much you’ll need to earn from the sale in order to fund your future plans.
If you’re ready to sell your business, or think you might be looking to exit at some point in the future, you’ll need to ensure you do everything you can to obtain the best possible price for it. After all, you can only sell it once.
Carefully calculating your firm’s potential value before speaking to buyers is crucial if you want to be in the strongest negotiating position. So here’s our advice on how to work out a sale value and the key impacting factors.
First, choose your formula
The value of most small and medium-sized enterprises (SMEs) is calculated on a multiple of adjusted profit as measured by earnings before Income Tax, depreciation and amortisation, otherwise known as Ebitda.(See below for an idea of what that multiple might be.)
Alternatively, you may base the value on your firm’s assets, such as plant, machinery and property. Companies generally only do this when their assets significantly outweigh their profitability – for example, if you’re in liquidation. But you could use it for a going concern if your business has many valuable physical assets but runs on tight margins.
You can also calculate what a business is worth based on revenue. This often applies to businesses such as technology start-ups, which tend to have extraordinary potential but no profits yet. Law and accountancy practices often use this formula too.
A potential buyer, when making an offer, should explain how they calculated it – but that won’t matter, of course, if you get the price you want.
How to adjust Ebitda
It’s worth having a good accountant who will be able to calculate your Ebitda from your financial data, then adjust for other factors affecting the value.
Richard Murray is Chief Commercial Officer at consultancy Elephants Child, which offers free valuations to SJP clients. He says that adjustments can be made for any one-off events affecting profits. These could include, for example, a large, extraordinary investment; writing off bad debt; or furlough payments.
“But the biggest adjustment we see is for limited-company owners who pay themselves with dividends, as that doesn’t show up on the profit-and-loss statement,” he adds. “If they stay on as an employee post-sale, those dividends become salary payments, which could significantly affect profits. Adjustments for two or three well-paid directors can wipe out much of the Ebitda.”
Boosting your multiple
For most small businesses, the Ebitda or revenue multiple will lie between three and five. However, multiples can increase beyond that – sometimes into double digits – for larger businesses, as they tend to be more resilient and better managed. Innovative firms with great potential, such as technology start-ups, can also attract larger multiples.
To boost your multiple, show buyers, if possible, that your profit is solid, robust, repeatable and guaranteed for several years. Revenue also needs to be diversified, which means reducing reliance on a small number of customers.
Environmental, social and governance (ESG) aspects are increasingly important too. Research by KPMG has shown that 53% of investors have pulled out of a deal after ESG due-diligence findings1.
“Your acquirer will usually be significantly larger than you,” says Richard. “Bigger companies are increasingly under pressure from regulators, investors and customers to have robust ESG policies. So they want to understand your ESG strategies.”
You should also be honest and credible about your willingness to continue working with the buyer over a reasonable transition period – 12 to 24 months is common. And, as part of that, you will need to be prepared to properly transfer all contracts, people, intellectual property and other key assets.
“No matter how well-run your business and processes, buyers believe elements of value still sit in your knowledge and relationships,” says Richard. “If you can’t commit to staying on, you will be in more of a fire-sale situation.”
The worst thing you can do is signal that you want to leave quickly. That’s a red flag and makes buyers wonder if you know something they don’t.
Another factor is the strategic importance of your company to the acquirer – strong potential to expand and monetise your business could support a higher price compared to the industry standard.
Creating competition among buyers
Attracting more than one potential buyer is essential. Competing bids are the only way to ensure you get the best possible price, says Richard – so get as many as you can.
“For many business owners, the first thought about exit comes from someone knocking on their door, asking to buy,” he says. “But engaging with one opportunistic offer risks losing the best price. To attract more buyers, prepare your business for sale as soon as possible.”
How a financial adviser can help
You can ask us to help you calculate how much you need from the sale to fund your future goals.
Simon Martin is a Chartered Financial Planner at Technical Connection, a subsidiary of SJP that provides support to our Partners. He says that it’s essential to look at your finances holistically and consider all potential options for funding your retirement or any other plans you may have.
For example, extracting more money from your business and paying it into your pension – while leaving enough cash reserves to cover emergencies, ongoing costs and so on – can reduce risk and pressure from the sale process.
“Most people know how tax efficient pensions are,” says Simon. “But business owners often don’t think about how pensions can add certainty and diversify risk away from their business. If your business sells, that’s great and the proceeds can fund your retirement. However, you can still use your pension as an Inheritance Tax (IHT)-efficient asset in lifetime and death. If the sale process doesn’t work out, your pension can still fund retirement.”
That fallback also gives you negotiating power if you don’t like the price.
Lifestyle planning – assessing in depth how you want your future to look – is equally crucial before you discuss any financial calculations, says Simon. “That starts with having someone who can ask you the right questions so you can understand what you really want.”
We will then be able to model your cash flow to show exactly how much you need to fund your goals and aspirations.
And this modelling might mean you can accept an offer below previous expectations because you know it’s still enough for your needs and aspirations post-sale. Or you might realise you can sell earlier and have longer to enjoy the fruits of your labour. Conversely, you may decide that you need to spend some time growing the value of the business before you’d be able to exit with the sum you’re hoping for.
In addition to supporting all these planning goals, we can act as a hub, introducing you to other professionals who can assist your business sale with advice on business planning, taxation, accountancy and legal structures.
We work in conjunction with an extensive network of external growth advisers and SME specialists, such as Elephants Child, who have been carefully selected by St. James’s Place. The services provided by these specialists are separate and distinct to the services carried out by St. James’s Place and include advice on how to grow your business and prepare your business for exit and sale.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
1KPMG, ‘The sustainable advantage: leveraging ESG due diligence to unlock value’, 2023 (from a survey of 202 US Investors).