How Not to Value your Business

Traditional valuations

Valuing a business can be a confusing process. There are a multitude of approaches, but what we have discovered in our 30+ years of selling companies is that all these valuation methods have their limitations.

If you have researched company valuations you may have had someone tell you that the most common valuation method would be to look at your accounts for the last two-to-three years, make some adjustments, and coming up with an average pre-tax profit. This is then multiplied by a ratio, which can differ depending on the sector you operate in.   

The big problem with this approach is that the valuation is based on past performance, not what your company could do going forwards with the acquirer’s increased resources.  

And what about the strategic reasons?

Why do buyers buy?

There are many underlying strategic objectives for buying a business, growth being the main driving force. This accounts for over 60% of the acquisitions we oversee. Top reasons include:

- Diversification of the product portfolio, increasing client base and growth

- New client acquisition, offering cross-selling opportunities across both client bases

- Geographic expansion.

We approach typically between 80 and 120 companies, which creates a competitive environment. These acquirers know they are in competition with others. All of a sudden, their mindset changes from ‘how little can I get away with offering’ to ‘how much will it take to outbid my competition?’. This competition usually results in a wide variety of offers.  

This is why we don’t put a value on a business when we take it to market. Putting a value on your company creates a ceiling from which valuation can only work down. Going to market without a value creates an opportunity to increase the final selling price.

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