Showing posts with label buyers of businesses. Show all posts
Showing posts with label buyers of businesses. Show all posts

Tuesday 10 November 2009

How does a business transfer agent go about valuing a business?

 
How does a business transfer agent go about valuing a business?

Leading business transfer agents discuss the myriad issues surrounding business valuation:
  • such as the various causes of overvaluation,
  • how the same business can be given significantly different values by different agents, and
  • how the urgency with which you need a sale is often pivotal to the price you achieve.

Don Glossop, Andon Frères
"The valuation of companies is not a precise science, it's a complex process based on an array of different information that can be subject to change. It's not like valuing a residential property, where you can rely on similar properties in the area and make adjustments based on numbers of bedrooms, a single or double garage or an en-suite bathroom, etc.

 
"All companies are different, their valuations are subjective, and there are many factors that can affect a company's value. These include tangible factors such as profitability – historic, current and forecast – the extent of contracted income or recurring revenues, the strength of the balance sheet – net asset value – etc.

 
"Intangible factors also need to be considered, for example the company's reputation, longevity and track record, the quality of its products and services, its customer base, any dependence on particular customers, its management, the market it operates in – for example, an emerging market with high growth prospects or a mature market likely to decline in future years – threats and risks to the business, and so on.

 
"The buyer's circumstances might also affect potential value. In general, there are three types of buyer.

 
  • "Management, individuals with experience looking to buy their own business, typically don't have the funds to buy a business outright and have to borrow to raise the asking price, in which case servicing the debt has to be factored into their calculations of value.
  • "Then there are corporate buyers, not in the same industry, but in, say, an adjacent, complementary sector, looking for diversification, that can see benefits from such an acquisition and might be prepared to pay a premium.
  • "Finally, there are trade buyers – ie, competitors – who work in the same sector, have similar or larger operations and can see synergies and potential economies of scale, which again might make them be prepared to pay a premium.

 
"Having said this, it should be remembered that a buyer wants to buy as cheaply as possible. An analogy is the sale of painting or piece of pottery at an antiques auction – the bidding starts low but can rise substantially depending on how badly the bidder wants to complete the purchase.

 
"It's fair to say that most vendors tend to overvalue their businesses and unfortunately, some brokers overvalue businesses because that's what the vendor wants to hear and to improve their prospects of securing the business. Vendors should remember that a broker has nothing to gain by putting forward a low valuation; it's likely to be an honest appraisal based on information provided and his experience in the marketplace.

 
"They should also remember that the broker doesn't determine valuation. This is determined by what a buyer is prepared to pay and what a vendor is prepared to accept, and without agreement by both parties, there will be no deal.

 
"The vendor should be aware of high valuations accompanied by high fees that are not related to the sale of the business."

 
Derek Burgoyne, Cornerstone Business Agents
"The sad truth is that of the many thousands of businesses currently on the market the majority are set at an extremely optimistic asking price – to put it mildly.

 
"Why is this? The reason is usually one (or more) of the following:

 
•This is the price the business owner would like to achieve and no one has put him/her right. Even if good advice is given, it is often ignored
•This is the price the business owner needs to achieve – to cover loans, pay the agents, banks and other creditors
•An agent with little experience has suggested the price (the less experience and confidence an agent has in his/her ability to value a business the more likely he is to overvalue to please the client)
•An agent suggests the price as a way of gaining the instruction as a sole selling agent. This enables them to get a large up-front fee or to make it more likely that he/she is instructed ahead of a competitor (with the intention of going back to the client after a period of time to suggest lowering the price if no interest has been generated)
•There is a lack of financial information supplied to the agent, who then has to value on verbal indications of turnover and profitability. As most owners usually overestimate their turnover and profitability, the business is overvalued
"To ensure a business is valued accurately I would suggest the following: invite two or three agents to value the business and ask for an explanation each time of how the value was calculated. The explanation should include examples of similar businesses recently sold – or on the market at least – and what adjustments and multipliers have been applied to the net profit to value the goodwill of the business.

 
"Advice should also be given on how the value could be increased. What improvements would have to be made to the property, should the lease be extended, what financial information should be provided, etc."

 
Shaun Sweeney, Turner Butler
"Anyone can give a business away. Some business transfer agencies find it simple to go in with what I would call an extremely reasonable valuation, and effectively give the business away.

 
"A client may have spent 35 years building the business up, and have a long-term view of the sale – in other words, he may have three years to sell it and prefer a more dedicated agent who would achieve a substantially higher value.

 
"So every business and every client is different when it comes to valuations. If a seller wants to sell within a week, he'll have a different valuation to one with long-term view of selling.

 
"Some business transfer agencies are accused of overvaluing to get advance fees. But I think sometimes, they’re reflecting what the client wants rather than the market valuation.

 
"I'd say that valuation and overvaluation depends on many factors. If your client wants a quick sale, the asking price may be lower than a well prepared, well presented sale.

 
"You should never knock another agent for overvaluing, because he might have seen something in the business that others haven't.

 
"We get lovely letters from our clients, and one recurring theme is that we got more for their business than they expected.

 
"We sold one restaurant for £1m. Their testimonial said: "We've been on the market for two years with other agents, and despite taking a fee in advance, failed to sell the restaurant.

 
"You valued our business at £150k more than our previous agent and sold for an even higher price. Only you could sell a restaurant in England, to Australians living in America, for a Frenchman married to a Polish wife."

 
"People could say we overvalued that, but he wasn’t desperate to sell, and we saw the potential in the business, where maybe another agent just saw it as just another business."

 
David Rhodes, Horizon Business Agents
"I'd say it's a simple thing to value a business – there are well known criteria. I'm aware that certain agents ignore this and effectively overvalue to gain instruction, not to sell the business.

 
"The fact is, these agents know what's on their books and they know what they're selling. If they're valuing at a certain figure and they're not selling them then it must surely show that they're overvalued.

 
"I tell the client what I think the market will bear. There have been times where a buyer pays more than I advised the client it was worth, but 95% of the time I'm about right.

 
"It's up to the agent whether they take on an instruction at the figure the seller wishes to market at. Ultimately, you're the expert, not the seller.

 
"If you're the one telling them that it's worth 'X amount', you should be able to stand by that valuation.

 
"Sometimes people don't like the truth. Overvaluations often happen because the vendor gets greedy.

 
"A number of times vendors have told me that they knew their business wasn't worth the figure they'd asked, but they thought they'd give it a try anyway.

 
"Then there are owners who need a certain amount of money to get out of trouble. One told me last week that if he couldn't get a certain price for his business then there was no point in selling it, as he couldn't pay off his debts otherwise, in which case he rather go bankrupt. Others simply want to get their original investment back."

 
Rupert Cattell, Amberglobe
"Overvaluations are usually caused by salesmen who have been given very aggressive targets by their employers and are required to get a large up-front fee to meet those targets.

 
"Be wary if a valuation is significantly in excess of everyone else's valuation, if a lack of understanding of the sector is apparent, and if they have an impractical view on how quickly the business will sell. Vendors get told by some people that they can sell a business within six weeks – which is just nonsense."

 
Norman Younger, Kensington Business Brokers
"Two things spring to mind. First, when the vendor has a particularly good business and believes it's worth above and beyond its true value, and they can hold that view so strongly that the buyers believe the hype. It's like houses, when people put crazy prices on them and people pay it because they're scared of getting left behind.

 
"Then of course you get a buyer who doesn't do his homework properly and doesn't want to follow the advice of his agent.

 
"Or it could be that someone has a particular reason for wanting that particular type of business or location, so to them it's worth more than to most people. That would be an overpayment in terms of market value, but not from their point of view.

 
"But some people might look at how much a buyer paid for 'X' business to determine the price of another business, not realising the misleading reasoning behind the valuation."

 

 
http://www.businesstransferagents.co.uk/info/articles/how-does-a-business-transfer-agent-value-a-business.aspx