As a platform, we spend a significant amount of time tracking data from our community and online searches and we have noticed a spike in interest from entrepreneurs looking for assistance in valuing their businesses for sale.
We have prepared a couple of notes below, which might assist a business when it comes to preparing themselves for sale:
- A business sale is typically not a short-term process and it puts a significant amount of pressure on the entrepreneur to manage the business at both an operational level as well as handle new stakeholders who may be conducting a due diligence around the business.
- It’s important to remember that there will be a Due Diligence of your business and its assets and it’s important to understand the Due Diligence process. We hosted a “Value Forum” event in 2018 where we took a look at this process and some of the considerations that an entrepreneur would need to keep in mind.
- A signifiant amount of your value is likely to be tied up in your Intellectual Property – this could be trademarks, patents, key contracts etc. – it is important to ensure that you have an Intellectual Property strategy in place to help you extract the most value from your investment.
- Is your potential acquirer an: “Opportunistic Buyer”, “Investment Buyer” or “Strategic Buyer” and what does this mean for your valuation? An opportunistic buyer may look at your business as a business in distress and offer a low multiple to help you exit an unprofitable business while a Strategic Buyer may look at your position in the market and opt to pay a premium for your assets / client base
Many entrepreneurs have an inflated idea of what their businesses are worth and this very often becomes a sticking point when it comes to selling your business. There are a couple of factors to consider when thinking about selling your business including:
- The transaction and advisory related fees: While you may believe that you can sell your business without an advisor, you will quickly realise that you will be facing up against a team of professional negotiators, lawyers and accountants and advisors who will be seeking to get the best deal for their client. It will help to have a team on your side.
- Legal costs: Drawing up contracts and legal agreements or simply reviewing contracts supplied by the acquirer will quickly add up if you want the job down correctly. Make sure that you factor these costs into your negotiations.
- Time costs: Often an under-appreciated aspect of the transaction process, the sale of a business can take a significant amount of time. Not only will senior management find themselves focused on non-operational issues but the transaction may preclude you from exploring strategic opportunities or new relationships with other industry partners.
- Capital costs: Another aspect which doesn’t receive sufficient attention when it comes to the sale of your business, is the management of the cash inside of your business. During normal operating times, management will be able to decide the optimum ways to manage their cash resources or distribute dividends, bonuses or capital. During the acquisition process, the acquirer may put in place demands to maintain certain cash balances.
- SARS will want its share of your profits: Once the sale is completed, the South African Revenue Services (SARS) will want its fair share of the gains on the transaction. Depending on your tax bracket, this could be as high as 37% which could take a significant chunk of money out of your pocket.
What is a realistic price?
This is always a contentious topic for sellers of businesses who will often argue that their businesses are worth many times what they are actually worth.
This is particularly prevalent when it comes to high-growth early stage businesses who believe they are “the next big thing”.
Typically there are 2 measures for valuing a business:
- Price to earnings multiple
- Discounted / Free cash flow models
For the purposes of this post, we are going to try and focus on the price to earnings multiple to try and help entrepreneurs manage their expectations.
A key consideration for an acquirer is going to be: “If I buy this asset now, what value would a potential acquirer attach to these assets down the line?”
Put another way: “Is there a secondary market for this equity?”
Arguably the easiest way to go and look at this question is: What multiples are comparable businesses trading for on the JSE?
- In the technology sector, AdaptIT would be a good example of a high-quality business and they currently trade on a price to earnings multiple of around 8 times earnings.
- Highly regarded logistics and technology group Santova trades around 6 times earnings
- Asset management groups like Anchor Group and Coronation trade around 10 times earnings while offering dividend yields of between 6% and 10%
- A global leader in property like Growthpoint is trading on 11 times earnings while offering an 8% dividend yield
While it is attractive to look at double digit multiples, it is important to temper your expectations. A high quality advisory team will help you to analyse the offer on the table and identify whether you are being offered a fair valuation.
Can the acquirer actually afford to acquire you?
This might sound like a strange question but a significant number of transactions fail when a potential acquirer is unable to come up with the capital to actually complete the transaction.
Perhaps your transaction involves a partner who is looking to buy into the business and will require some form of vendor financing to help finance the transaction. This might include a BEE partner or staff buyout where you know that the acquirer doesn’t have the capital but will facilitate a buyout through distributions of dividends or a financed transaction.
A strong advisory team in your corner will be able to ascertain what guarantees the purchaser will put in place when facilitating the transaction and will keep their eyes and ears on the market to monitor that there is not a material change in the operating situation of your acquirer.