When it comes to maximising the value of your business, there’s a lot more to consider than meets the eye. An uncertain market creates the opportunity for businesses to review their strategic options with a view to unlocking embedded value and accelerating growth.
There are a number of options business owners may consider when appraising, looking to increase or ultimately, realising value.
Questions we are often asked, along with our answers, are outlined below:
1. How might I value my business?
Business valuation is very subjective depending on the size and nature of the firm. However, recent transactions in relevant sectors involving similar-sized businesses provide a great basis for determining defensible valuation ranges. Looking at multiples achieved by companies in your sector that are listed on the public markets are also a good indicator. Naturally a significant discount factor should be applied to account for the much-reduced liquidity of privately-held shares. In addition, you could use a discounted cash flow.
2. Who might buy it?
Depending on what stage of the lifecycle a business is at, buyer options tend to vary. Fast-growing and earlier stage businesses may be suited to venture capital or private equity funds. Whereas, for more steady-state businesses, trade sales are often optimal. For smaller businesses, it may be more appropriate to look to high-net-worth investor groups that look to invest modest capital in a range of companies.
3. What might I do to increase the value of my business?
If you or your client are considering selling a business in a few months or years’ time, rather than right away, taking advice as well as investing that time and effort now can positively impact the value of the business at the point of sale.
This may include managing working capital effectively, optimising the capital structure and ensuring an appropriate debt/funding structure. Owners may also look to acquire relevant businesses, expand into new and more popular markets as well as integrate a strong Tier 2 management team who can readily take over so that as an owner you can gradually step back from the day-to-day running of the business.
4. How long will the process take?
Each transaction takes a different amount of time, largely depending upon the complexity of the business being sold, the intricacies of the transaction and also drivers to the disposal process. To run a full process with a view to achieving maximum value, it might take six to eight months.
5. How much tax might I pay?
Even if not a full disposal it is possible under partial exits to apply Entrepreneur’s Relief which is currently 10%, albeit successive governments have legislated restrictions as to its application on share disposals. With repeated political pressure to scrap Entrepreneur’s Relief, significant changes could be made to this relief in the near future which may eat 30% or more of an owner’s value on exit if the rates begin to approach comparative income tax rates.
Quantuma is an independent advisory firm which helps organisations and individuals overcome a range of operational and financial challenges. Established in 2013, we have over 170 employees across the UK and Cyprus. www.quantuma.com
Quantuma are at Accountex on Stand 331.