Are you a South African looking to calculate the value of your business to sell?
For many entrepreneurs based in South Africa, much of their net wealth is tied up in the businesses that they build.
While it easy for an investor in listed businesses such as Homechoice and Capital Appreciation where the share prices are listed and buyers and sellers create some price discovery, most un-listed businesses owners ask the natural question:
“How do I value my business for sale?”
Below we have outlined a couple of ideas and thoughts that might help in answering this question:
How is the value of a business determined?
In most cases, the value of business is determined by a couple of pretty standard metrics:
- Profit after tax
- Net Asset Value
- Market equivalent transactions
Depending on the nature of your business, you might find that you use a combination of the above factors to come to a final valuation.
Value your business using Slicing Pie
But what happens if you a relatively young asset-light business with little to know profit and cash-flow is patchy?
How do you value your business in this instance if you are for instance bringing in new equity investors who are prepared to take a chance on you?
One of the options is to look at using the Slicing Pie method to calculate the value of your business.
Slicing Pie is a universal, one-size-fits all model that creates a perfectly fair equity split in an early-stage, bootstrapped startup company. The methodology will help you value both monetary and non-monetary contributions into the business in an equitable and transparent manner.
The below videos how you can use use Slicing Pie for Perfectly Fair Cofounder Equity Splits for Startups:
If you are a South African business struggling with your valuation and would like help in applying Slicing Pie to your business, we are happy to setup a consultation with you and your management team. You can either complete the form below or reach out to us via our office or e-mail contact details.
Using Discounted Cashflow (DCF) Model to value your business
The DCF analysis is a method of valuing a security, project, company, or asset using the concepts of the time value of money. Discounted cash flow analysis is widely used in investment finance, real estate development, corporate financial management and patent valuation
Every investor should have a basic grasp of the discounted cash flow (DCF) technique and this tutorial from Tim Bennet is one of the most popular on the internet.
The value of precedent transactions:
Often we will chat to South Africans entrepreneurs looking to value their business and they will attach very unrealistic multiples and valuations to their business based on what they have seen on TV or read online.
Often entrepreneurs will point to the lofty valuations of US tech businesses as an indication of how they believe they should be valued.
In reality, many of the big businesses on the JSE trade on single digit earnings multiples and this is with the benefit of a track record, cashflow, assets and in many cases long-standing dividend track records.
An important asset when managing a business valuation is being able to tap into a network of people who have worked on similar types of deals and transactions and who can provide guidance into how you can value your business accordingly.
Don’t forget the cost [and value] of professional services when valuing your business
While there are tools out there to help South African entrepreneurs, it is important to remember that valuations will always be subjective.
When thinking about the sale of your business, remember that there will always be professional service fees that will have to be taken into consideration.
– What will the impact on the personal tax status of the entrepreneur be post the transaction? Are there smart ways to reduce the tax impact and will you require the services of a tax consultant here?
– How many legal hours will be invested bringing the party parties to the point where they can actually sign an agreement? If your legal teams are costing R1500 an hour, these numbers can add up very quickly – particularly on complicated transactions
We look forward to working with you on getting the maximum value out of any transaction you are looking to do. If you wish to discuss a transaction, please complete the form below and one one our Problem-Solving team will respond shortly.
Alternatively, reach out to us direct via e-mail or telephone.