How Will A Buyer Value Your Business?

How will a buyer value your business or the shares you would like to sell them in your business?

That’s a question all business owners should ask themselves as a part of their ongoing business plan. Why? Well, every business owner will likely want to realise some or all of their business value in the future.

This blog is the first of a 5 part series on the issues you need to consider when selling your business, or shares in your business, to new or existing shareholders.

To put the question of the value of your business into context, you need to consider the different valuation approaches people use and then get clear on what is relevant to you. The key to this is the party that is valuing the business and why they are doing it.  Why? Well, your business is only worth what someone else is prepared to pay for it and as an example, a bank lending money to your business is not a buyer.

There are numerous different “valuation” approaches used by different parties for different reasons, here are a few:

  1. Basic Method (Quick Estimate)
  2. Rule of Thumb methods
  3. Capitalised Earnings Approach
  4. Excess Earning Method
  5. Cashflow Method
  6. Tangible Assets (Balance Sheet) Method
  7. Costs to Create Approach (Time and costs leapfrog)
  8. Value of Specific Intangible Assets

So as a business owner what applies to your business?

If you plan to sell shares in your business to a new or existing shareholder they will likely base their decision on the return they are likely to receive. As a shareholder, their return is share price growth and dividends. If you plan to sell your entire business to someone else, it’s most likely the buyer will be another financial advice business. Their decision on valuation will rely on the profit they will generate from owning your business and also the benefits of increasing the scale of their business, the latter is somewhat aligned to the time and costs to grow organically (leapfrog)

Most financial advice businesses are valued using a Capitalised Earnings Approach however the transactions for the sale of the businesses often are constructed on a multiple of recurring revenue.

How will buyers determine the multiple to offer for a business?

The answer should not be a surprise really: it’s partly their awareness of the current marketplace for values generally, part maths and part the buyer’s circumstances. The latter is a key factor and missed by many practice owners wanting to sell their practice. Take a simple scenario: A buyer who has a strategy to grow their client base with an acquisition, so they move further up the scale continuum. They have missed out on 2 or 3 businesses they have considered. They’re now likely to be semi-informed about the market and have some experience in the initial stages of buying a business (dealing with a business broker, initial offers, perhaps even cultural fit meetings).

Having missed out on previous deals, and knowing their strategy, these buyers are more likely to:

  1. Be super motivated to act quickly on a client transaction
  2. Likely to put their best price forward, so they are competitive

Their circumstances are very different to a buyer who is working on their first acquisition offer or, is only acting on a transaction because it has been put in front of them (e.g. they know the seller and or have been offered it due to personal contacts).

Buyers are also basing their decision on how the business is being positioned, and the data presented. If the vendor is going to them on a one-to-one basis, with limited information purchasers are acting more slowly, and pricing lower because there is no competition. By positioning the business ‘for sale’ with accurate, and sufficient, information, the purchaser and any adviser they engage can price the transaction weighing benefits and risks, often determining a fairer price than that where limited information has been made available.

At Centurion Market Makers, we use an Information Memorandum in our sales process. This document positions the business for sale, providing all the information a buyer will likely need to make an informed, non-binding, offer.

Some of the information included in this Information Memorandum includes:

  • Income types
  • Demographics – including ages, locations, investment type, FUM
  • Client service offering and pricing
  • Number of FDS / Opt-in Clients
  • Investment and Risk providers used
  • Financial Statements

In our next blog, we will look at the transaction construct and the way different multiples are used. We will include an example or two to make it clear. If you can’t wait for the next 4 blogs and want more detail, then download our guide here.

Centurion Market Makers is a wealth management industry expert providing business broking services to owners of financial planning businesses, and specialist business advisory services to large practices and licensees. If you’re planning on selling your firm in 2021, we’d love you to call us for a confidential discussion or continue browsing our website for more tips, tools, and info on the steps to take when buying or selling your financial planning firm.