Kirsty Wilson, Senior Manager in Corporate Finance at Knill James Chartered Accountants explains how you as a business owner can work out the financial worth of your company
“How much is my business worth?” A seemingly straightforward question, and I always wish that I could give my clients an equally straightforward answer. Expectations of speed and simplicity are fuelled by the abundance of apps, providing the answer to every question at the press of a button, or these days by a conversation with Alexa or Siri. And there is, indeed, a multitude of apps available which claim to provide business valuations at the press of a button.
I therefore have to resist the temptation to quickly produce a figure, and I need to sit down with the client – ideally over a cup of coffee – to have a discussion. And the discussion starts with my own question: “why are you asking?” As business valuation is an art rather than a science, the final answer to the question will change as the conversation develops. But more importantly, it may transpire that it is the wrong question to be asking. Indeed, this is becoming increasingly likely in the Post-Brexit period of uncertainty, where buyers will want the ongoing uncertainty reflected in the purchase price, driving down values.
This reality is demonstrated in the recently released “Small and Medium Enterprises Valuation Index” from the UK200Group. This SME valuation index is the result of UK200Group member firms providing key data on actual corporate finance transactions involving the purchase or sale of real UK businesses (in the form of asset or share deals). Knill James is a member firm of the UK200Group and with David Martin, our Corporate Finance Partner, being a member of the Corporate Finance Panel, we have access to this data which is a useful indication of up-to-date valuation trends in the SME market.
Since the referendum and the vote for Brexit the economic uncertainty has generated pressures on deal multiples causing them to fall, and in some cases this has resulted in the sales simply not happening. The latest UK200 SME valuation index highlights the pressure on deal values in the latter part of 2016 which resulted in the median EBITDA multiple (multiple of earnings before interest, tax, depreciation and amortisation) falling to 4.8 as compared to 5.4 in the previous year. This means that all other things being equal, a business valued at £1,750,000 a year ago could now be valued at only £1,555,000. The starting point in any sale negotiation will have been drastically reduced simply because of the surrounding economic climate. It is then necessary to find out whether the particular business should be distinguished from the norm. There are, after all, businesses which will be unaffected or, indeed those that willclearly benefit from the Brexit decision.
But I said just now that the business owner might be asking the wrong question. Why might that be the case?
M&A is changing. The days when an entrepreneur owned and built a business for life and then passed it on to family at retirement are passed. There are now many more opportunities to capitalise on a business, and partial divestments are set to be the cornerstone of 2017-2018 Corporate Finance planning. Against a backdrop of Brexit-fuelled economic uncertainties, well-advised businesses are now generating capital through strategic divestments and using the capital generated from such divestments to buy-in ready made innovations. This enables them to continually adapt their strategic goals for the post Brexit era. The ability to respond more swiftly to economic changes is essential in the rapidly evolving world in which we now live in. The businesses that not only survive, but also thrive and grow, will be those adopting innovative financial and strategic solutions in response to the changes in their economic business environment.
For some, a business valuation and full sale will still be the answer and the conversation will focus on possible reasons why the particular business might merit higher valuation multiples. In those circumstances, we will work with the client to identify the best potential purchasers and to generate the highest possible sale price.
But for many businesses we will conduct a thorough review of the possibilities, and will explore financial options which could mitigate the impact that has been felt so keenly by other business owners over the past year.
It is also important to remember that there are two sides to every transaction. While the falling valuations have been bad news for sellers, they have been welcomed by the buyers who have used the period of economic uncertainty to drive down prices. Where we are representing entrepreneurs seeking to acquire new businesses, our access to a valuation index like this is essential as we advise our clients on the current, rather than the historic, value of the target business.
Finally, it is worth mentioning that some valuation discussions are not with buyers or sellers, but with HMRC. The UK200 SME valuation index is a useful tool in supporting the valuation decision. In some cases, the falling index can the help in persuading HMRC that a much lower valuation was justified; and nobody wants to pay more tax than is correctly due.