Business valuations are typically assessed by using one or more of the following approaches as follows:
- Transaction comparables, which analyse the multiples of profit and revenue of similar businesses that have been recently acquired. A variation of this might be to consider recent pre-money investment values, for example based on MRR.
- Trading comparables, which analyse the multiple of profit and revenue of similar businesses that have publicly traded shares.
- Discounted free cash flows, which estimate the present value of future cash flows often supported with scenario analysis.
- Net assets, which consider the market value of assets and liabilities.
Selection will depend on the sector and the first two are the most common for businesses trading as a going concern; discounted cash flows will more frequently be applied for more mature businesses, which can be relevant for businesses seeking investment from venture capital, private equity or on public markets.
The first three will give a range (often quite large) and in addition discounts or ‘alpha values’ will be applied that reduce the derived value to take into account higher risk. These discounts can easily have the effect of reducing a valuation by significant sums and so very easily the more subjective discount will have a greater impact on estimates of value than the transaction and trading comparables, leading to a fundamental question about how to maximise value for the seller.
Answering this question, it helps to focus on the core determinants of a businesses valuation: the willingness of a buyer and a seller to agree on price. From the seller’s perspective, value is likely to be driven by three key considerations, namely:
- Having a good number of credible bidders and a credible option to not sell, if a price cannot be agreed;
- A well managed deal process, including avoiding due diligence pitfalls and a thorough understanding of the offers and the bidders.
- Excellent communication of value creation drivers. These financial, non-financial and qualitative value drivers will vary by industry, by business maturity and even by potential buyers and are often the key to resisting a discount being applied. If you are selling a business, focusing on the value creation drivers (see our article here) is normally critical to achieving an attractive outcome and they will also help drive performance.
For example, anticipating and addressing buyers’ concerns by providing information that underpins the industrial logic for an acquisition has helped clients substantiate potential synergies and confidence in their business model and achieve leading transaction multiples. We have also helped clients selling their business to avoid price chipping at the later stages of an exit with the confidence that alternative buyers were available if necessary, having received multiple offers. Equally, having assessed proposed earn out proposals and working capital adjustments we have avoided potential significant reductions in enterprise and equity value for clients. Having been the seller, we have seen the whole process from beginning to end a few times across advisory, executive and non-executive roles.
HOW WE CAN HELP: We support clients with an integrated, flexible and structured approach, applying both commercial experience and professional expertise. Our recent transactions have included exits, acquisitions and fundraising, with journeys from seed via private equity to assisting publicly listed companies. If you want to know more about how we can help you, get in touch for a free and confidential consultation on hello@linkstoneadvisory.com
