13 February 2019
Valuing a business is a small, but very important, part of the overall M&A process. Before you can get that far you will need to have developed an acquisition strategy and criteria, searched for suitable targets, made approaches and agreed on headline terms (including NDAs) and once you have an idea of the value then you will need to negotiate the price, carry out due diligence, prepare a sale and purchase agreement, get finance and implement the transaction. Only then can the post-completion “fun” can start!
Valuing a business is a complex issue and there are no right or wrong answers. Value can vary depending on the drivers that make you interested in the first place. There are unlikely to be comparable transaction to offer guidance on price.
What you need to consider
Value is dependent on expectations, future cash flows and tangible capital assets. All these elements will need to be taken into account in arriving at a value. There are different methods to determine the value, either asset-based (either book value or liquidation value) or earnings/cash flow (discounted cash flow or going concern value). You can then capitalise the typical net earnings, the typical cash flows, discount the future cash flows or calculate adjusted net assets. Some industries have specific “rules” that are frequently applied, such as a multiple of turnover or recurring income.
There are a number of comparative ratios that may also help, such as the price/earnings ratio or the enterprise value/sales ratio.
Another very important area to understand has to be the synergies that a deal could generate. These are the merger benefits that the combined business will achieve and are often very difficult to ascertain with any degree of accuracy.
Part purchase
There are many ways to achieve a result that satisfies both parties, perhaps you don’t need to acquire 100% of the business and can get what you want with a lower controlling holding and an option to acquire the remainder of the equity later. It may also be possible to agree for the exiting management or owners to stay engaged in the business for a time and be compensated with an earn-out arrangement.
In the end, the value will need to be agreed in negotiation between the parties, and it is often the case that neither side is fully satisfied, usually an indication that a fair deal has been struck.
For more information, please do not hesitate to contact me or visit our Corporate Finance page.
Alternatively, contact your usual UHY adviser or fill out our contact form.
