Business Valuations

Everyone knows a business valuation is needed when it’s time to sell a business but this is not the only time they can be invaluable and the specifics of why valuations are necessary and specifically how they can be used are often misunderstood.

Please keep in mind that we are talking about an independent business valuation from a specialist valuer, not some financials that your Accountant or CFO put together, and only by using an independent specialist appraiser can you provide credible financials that all parties can agree upon. Whether there is conflict or potential conflict, instructing an independent valuer to act between the parties can often save money and time.

One should ensure that a specialist valuer also buys, sells and lets the specific businesses in question so that they have direct comparable evidence of similar transactions that they fully understand.

The five insights set out below will help you identify why a business valuation is so critical.

1. Someone Else will Conduct One Anyway

It is critical to know the current valuation before getting in to any process whether it is a sale, raising money, division of assets, etc. so that the process itself does not affect the objectivity of the valuation.

If you don’t organise one, someone else will organise one anyway. The business valuation is part science, part art - in other words there is some subjectivity to it. If a Bank or even the IRS need to run their own business valuation you may not like the results.

If you are selling or willing your business to your heirs, the IRS may have an interest in valuing your business. In many cases, their valuation will be comparatively high, simply because a higher value means more tax revenue. Some organisations base their strategy in finding out what the owner wants for the business and then letting the buyer beat the seller up on the valuation in negotiations.

We generally tell clients that we do not want to know what they think their business is worth so that our valuation is completely objective.

2. The Buyer May Produce a Questionable Valuation

A good valuation gives a benchmark and gives a guide to areas that can be worked on to raise business value.

By understanding what the business is currently worth and making that calculation transparent, the owner can begin to build a process around areas that can be worked on to increase the value of the business.

A business valuation is about looking at trends both forward and backward - in sales, margin, costs - compared to industry norms.

If you do not already have a valuation, a buyer may produce a questionable valuation geared to their best interests.

3. You can Develop Your Retirement Road Map

Many business owners are not ready for retirement because they don’t know how much money they will have for their golden years.

Even if you are not planning on retiring in the next year or so, an independent valuation can give you a sense of how much money will be waiting for you down the line and this affects your retirement, estate planning, everything.

The valuation can also identify areas of the business that could be worked on to increase profitability and thus value if undertaken sufficiently early.

Valuing a business is not precise – in the end, a business is worth what a willing enquirer and seller will agree to. This is why it is very important to instruct a specialist who not only values but sells and acquires similar businesses as they will fully understand the nuances.

4. Valuation Methodology is Critical

Many if not most valuations depend on multiples and ratios such as price to sales, multiples of EBITDA or operating profit, multiples of sellers discretionary income and others.

Multiples as a valuation method are not always the right way forward for the following reasons:

- they are backward looking and do not tell what the company can do

- they do not take trend analysis into account

- they do not take transaction terms into account

- they do not provide a basis to determine what is driving value

We have just had experience of HS2 valuers using a multiplier to value the asset and trading potential of a wholesale nursery business. In our opinion, this is completely incorrect as many wholesale nursery businesses are relatively unprofitable and the trading potential is hard to sell whilst the asset, land, infrastructure, glasshouses and ancillary buildings can be really quite valuable.

The best method where available is evidence of comparable transactions which is again why you need to instruct valuers undertaking this work on a regular basis because although there are databases that tend to provide comparable sales data, the data is usually very thin since most acquirers don’t want the terms of their deal published.

A final note on multiples – buyers love to use multiples when businesses are trending upward because they can under value the business by using historical information and when businesses are trending downwards, they tend to switch to projections of cash flow since these projections may lower the indicated value.

5. A Valuation Can Act as a Security Measure to Protect You if Legal Issues Arise

Establishing a value upfront can limit much political infighting and uncertainty in a situation, yet it can only be accomplished if the appraisal is conducted by an independent party.

It is important that the valuation is transparent to the client as this allows for a solid foundation for multiple levels of planning so that when a sale is to occur we can be confident in our ability to increase and achieve the value of the business and to prepare the business owner properly for what lies ahead.

Simon Quinton Smith of Quinton Edwards has been buying, selling and valuing garden centres, plant centres, horticultural properties and businesses, farm shops, etc. for over 30 years and has detailed levels of comparable evidence.

In a recent 12 month period, Simon undertook 98 valuations at a total value of £268 million.

The wide experience and industry knowledge that Simon Quinton Smith brought to the valuation of our business and the subsequent negotiations with the Wyevale Garden Centre Group enabled shareholders to maximise their expectations whilst illustrating the potential still locked within the company. Selling any business is an emotional rollercoaster and Simon proved to be both a wise counsellor and a pragmatic dealmaker.
Ray Kennedy, Director, Wych Cross Nursery Ltd.

If you would like to consider a valuation for any reason, whether for formal purposes or for sale purposes, please contact Simon Quinton Smith in the strictest of confidence on 01635 551441.