The key concept when valuing a business is determining the Fair Market Value.  This is defined as “the amount at which the business would change hands between a willing buyer and a willing seller when neither is acting under compulsion and both have reasonable knowledge of the relevant facts, and the negotiation for sale is at arm’s length”.

There are several valuation methods commonly used, they are:

• Earnings Based: ROI (Return on Investment) and earnings Multiples are common methods for medium to large businesses. For smaller businesses owners surplus with a Multiple plus fixed assets and inventory are often used
• Industry Ratios: industry averages multiplied by sales or earning depending on the sector
• Asset Based: Value of collective assets, tangible and intangible
• Market Based: On occasion, none of the above will work. It is not uncommon for the vendor and purchaser to arrive at a value that defies traditional appraisal methodologies but is in keeping with market realities

The main valuation method used in New Zealand is the Earning Based / Multiplier method.   This method multiplies the Earnings (after a market salary for the owner or GM is deducted) before Interest, Tax, Depreciation & Amortisation (EBITDA) by a Multiple.  The multiple generally ranges from 3 to 4, but can be higher if the business is extremely attractive and is of low risk.  Lower multiples are linked to industries that are perceived as not attractive or vulnerable or / and higher risk.  Higher multiples are likely to be linked with growth and opportunities.

Most business sales you are buying the assets in the company – “a going concern”, not the shares and therefore you are not taking over the liabilities / balance sheet of the business. 

There are two key steps to be taken when determining the value of a business:

1. Calculation of the Profit – EBITDA and “normalising” this
2. Determining the Multiplier.

To normalise the EBITDA we add back any legitimate adjustments with the aim of making the financial statements reflect the actual business earnings.  All adjustments must be valid and defendable.  Normalisation adjustments will often be adjusting owners salary to reflect the true market salary for the position, adding back personal travel, 1 off consultant fees, business coach, personal entertainment, personal vehicles costs that are not related to the business etc.  All these costs will be added back to the EBITDA.

To determine where the multiplier sits in the range a number of things are taken into consideration –

1. Sales myself and my associates at LINK have made in that sector or businesses with similar characteristics. This analysis will determine a starting or mid-point for the multiplier.
2. There is a register called BizStats that has all business sales in NZ by sector and lists the sales, EBITDA, sales price and multiple achieved. The business name is not disclosed. This also is referenced.

Then the starting multiplier is flexed using 8 drivers of value.  I use a starting point of 3.5 x and flex from there (up or down depending on the quality of the business).  Note:  the value includes in most cases Fixed Assets & Inventory & Work in Progress.

For smaller businesses it is the owners surplus before he or she is paid times generally a 1.25 Multiple plus fixed assets at book value and inventory.

The 8 drivers that will influence the multiplier and will all be taken into consideration when determining the value of your business are as follows.

1. Barriers to entry – would it be easy for a competitor to become established in this industry?  The higher the barrier is the higher the multiple
2. Risk profile of the business – does the business rely on 1 or 2 customers, are there supply contracts in place, does the business rely on the owner?  Are there strong forward sales, signed contracts in place for a new owner.  The lower the risk profile, the higher the multiple
3. Risk profile of the industry – is the industry the business is involved in vulnerable?  Is the industry at risk with new technologies i.e. electric cars may reduce the demand for petrol stations & mechanic workshops.  Food would be an industry that demand will continue to be strong, thus a higher multiple than the a petrol station or mechanic workshop
4. Is the business an established business, a strong brand such as Auckland Glass – the more established and stable the business, the higher the multiple
5. How unique is the business – does the business have a well-defined “niche”, if the business has a point of difference and a well-defined market, product niche the higher the multiple
6. Where is the business located – if it is remote or rural, the business generally will be less attractive than a business that is based in a major city which will attract a higher multiple value
7. What are the Optics like – is the business attractive, what are buyers first impressions!  Does it look attractive, lovely show home, nice offices for customers to visit, good documentation of business practices and health & safety etc.  The better the Optics, the more buyers and the higher the multiple
8. Size, growth & scalability – larger businesses generally have good management structures in place, have good systems & procedures in place.  Therefore are more attractive, and deemed safer to the buyer thus increasing the multiple

The lower the risk associated with the business AND the more attractive (8 drivers) the business is, the greater the buyer demand will be, and the greater the multiple & therefore sales price will be.

If you are a business owner looking to sell, it is important to focus on these value drivers, as by improving them you can positivity impact the multiple and therefore the selling price of your business. 

There are two key steps to be taken when determining the value of a business:

1. Calculation of the Profit – EBITDA and “normalising” this
2. Determining the Multiplier.

EBIT = Earnings before Interest & Tax

EBITDA = Earnings before Interest, Tax & Depreciation

EBITPDA = Earnings before Interest, Tax, Proprietors (owners) salary & Depreciation      

Note A = amortisation (depreciation of Intangible assets, not common)

Earnings or Profits are always before Tax & Interest.  Interest is excluded as how someone funds a business is not applicable to the value of the business. Some will gear up the business with significant debt, while others will have low debt.  Same logic applies to Tax.

As a rule EBITDA is used to value a business.   This is Profits before depreciation, thus giving a higher Profit figure and therefore a higher business value.  This is because Depreciation is an accounting adjustment and not a true indication of asset use.  Many assets can last a significant period of time, therefore Depreciation is not a true reflection of expense of the assets.

Asset rich companies, where there is significant capital expenditure year after year the valuation should be based on EBIT (including Depreciation).  A rental Car business is an example where EBIT should be used, as you are refreshing the fleet consistently.  If EBIT should be used but the depreciation is not a true reflection for Capital expenditure, a notional depreciation can be used i.e. 50% of the accounting depreciation or the estimated annual capex spend could be used.  Key is it has to be defendable.    

Profits must always be after an owners salary at market or a General Manager salary is allowed for.

Once a business owner decides to sell their business, they often have to make an important decision about whether to hire a business broker to handle the sale or go it alone.

An error we see is people selling privately and significantly under valuing the business.  Many buyers we deal with are also out in the market door knocking and making cold calls to business owner.  They give the business owner what is perceived to be a great price and say you are cutting out the middleman and saving paying a broker.  What often happens is this price is well under what a managed and well marketed sales campaign would achieve.

Having a professional and experienced business broker helps a business owner maximise the value of their business and avoid the stress or pressure that comes with engaging in complex business negotiations. Just like growing a business, selling a business requires a well thought out strategy. A good broker will have the relevant expertise to handle a business sale transaction and the capacity to handle all the aspects attributable to a successful sale.

The ‘for sale by owner’ strategy or ‘go it alone’ mentality when it comes to selling a business can be detrimental and for any business owner who has worked hard to build a company, getting the best buyer for the best price is undoubtedly top of the agenda and therefore a worthy investment. With so much at risk, one cannot afford to underestimate the importance of hiring the right professionals for the job.

Selling privately it is difficult to vet potential buyers without revealing your identity, also it is complex – does the sale price include stock, work in progress etc.  Can you create a multi offer situation or are you dealing with one buyer?

Because that’s exactly when it will be most attractive to buyers, we should be able to get a multi-offer situation and get a premium for it.

5 reasons why to sell your business through LINK and the Enterprise team (Enterprise sell high value businesses)

1. Success
   Over the last 3 years, we have had a sales success rate of over 90%.
2. Commitment
   I draw on years of professional experience to successfully mediate between buyer and seller, ensuring the entire purchase process runs as smoothly as possible. I am a Chartered Accountant and ex Business owner so I know how you feel and work will with business owners.
3. Quality
   All buyers will complete a Confidentiality Agreement and I will pre-qualify all potential buyers to ensure they are serious.
4. Expertise
   We will be with you at every step – from structuring the offer, through all negotiations, to a satisfactory completion of the sale.
5. Confidentiality
   We protect your business’s confidentiality through proven systems.

If your business is doing well, now’s the ideal time to sell!

Leave things too late and you run the risk of your business passing its prime sales point. Don’t wait too long – don’t let your energy and drive slow down!

What affects your profitability affects your value.

To begin with, you should ask yourself the following questions on a regular basis;

1. Do I have the business / lifestyle balance I desire?
2. Have I still got the energy and enthusiasm the business requires?
3. Is the business at a stage where it requires a large capital injection?
4. Do I have the training and mental capacity to cope with increasing levels of technology changes?
5. Is there something else I would rather be doing?

I am happy to come and discuss an exit strategy with you (at no cost or commitment).  Also discuss the value drivers and how to maximise these prior to selling.  Some business owners I may recommend a plan of action and the business will not be put on the market for 2 years.

The key is to maximise the time and the price.

Confidentiality is paramount and your business broker will arrange a time with the business owner for you to inspect the business.

A physical inspection of the business should come at a time when you have met the broker to initially discuss the business, considered the Information Memorandum and the financial information given to you, have met the owner and are satisfied and wish to proceed further.

The owner of a business will be very sensitive about your visit. On the one hand they will want to provide you with all the information you require, yet on the other hand they will not want staff to know why you are really there. Often the visit will be outside normal hours of operation.  If it is important to see the business during hours of operation you will often go under cover as an Insurance advisor or the like.

Selling a business is a process and it must be followed to ensure we maximise your selling price and the sale happens.

We advertise and market the business without disclosing the name, location or specific sector the business is involved in.  We advertise enough detail to get a buyer interested and enquire, but not too much.  We ensure anonymity during the marketing phase, we use generic images, not real photos of your business and omit both the business’s address and name.  This is particularly important in smaller locations.

Any prospective buyer receives information only upon signature of a confidentiality agreement and we have spoken to them and ideally met them.

If they are interested in the business we meet them, vet them, ensure they have the ability to transact at the value of the business.   It is once this is completed we will arrange a face to face with the buyer & seller.  This is generally conducted in the LINK offices.

There are 2 costs.

1. Up front Marketing. This is key to ensure we cast the net wide and attract as many buyers as possible and ideally create a multi offer situation.  This cost ranges from $4,000 to $12,000 depending on if we are targeting NZ and / or offshore buyers.
2. Success fee, this is only payable on a successful sale of your business.  LINK has a standard commission rate, but for larger transactions which I specialise in we negotiate to ensure it is a win win.  In life you get what pay for, so it will cost you to sell your business, but we are very cost effective.  We have to sell your business to put food on our table, so we are driven to get a successful result for you.