Who makes the valuation on businesses for sale?

·         It’s in the eye of the beholder.  Potential buyers will assign a value based on risks and rewards from their point of view – financial forecasts, their own position and cost of capital, and how much the business is worth to them.  Therefore different buyers can give different valuations.

·         Vendors might prefer receiving less cash now than more cash later.

What can a business owner do to increase the valuation?

·         There are a few basic things that lower buyer risk, and/or add value:

○      Recurring revenue reducing risk.

○      Range of high quality customers (none with over 10-15% of the revenue).

○      Being in a growing market with good market share.

○      Good management with a good track record.

○      ‘Transparent’ business (well presented forecasts, accounts are consistent with forecasts etc).

If you are offered cash or equity, how do you evaluate the difference?

·         You have to decide what you want.  Do you want cash now, or are you confident in the future of the business?  Once you have decided the minimum amount of cash you want, you can make a deal with deferred payments or shares.

·         When assessing the amount of shares, it depends on the future of the business and the risks involved.  A good financial advisor will help sort this out.

Is there a premium for control a buyer should pay?

·         For small/medium businesses, control premiums are largely redundant.  Some people use the stock market as benchmark, but it isn’t a good one as the shares aren’t likely to be very liquid on AIM.

How do buyers try to push down the price of a business?

·         If the buyer hasn’t become comfortable with the business before they put in an offer, they will often bid high to progress through the rounds, then either cut their bid or drop it completely during due diligence when they find problems.

·         Only way to avoid this is to ensure they are comfortable with the business before bidding, and that you have other potential buyers in the wings.