Succession and Exit Planning – Determining the value of your business

Why Exit ?

You own a successful business that has been operating with its normal ups and downs for 10-30 years. You are starting to think about a succession and exit strategy, because you:

• have decided the time is right for you to sell

• have lost your enthusiasm, energy and/or drive (your mojo)

• want to do something else.

• want to reap the benefits of a business that, in your view, is worth a considerable sum of money.

• want to spend more time boating, at your holiday home, travelling and/or with family.

• want to protect your (ailing?) health from the ongoing stress and 24/7 nature of the business.

• have experienced some major personal setbacks or tragedies and you have reevaluated your life path.

Now you have made the decision, you want to sell your business to the highest bidder as soon as possible. In our experience the process normally takes a lot longer than “as soon as possible”, especially if you want to maximise the price you obtain.

What is my Business worth?

We all know that the Boomers are moving through the demographics increasingly into retirement. Many will have been involved in owning SMEs for a good portion of their working lives. While every business is different or has its own idiosyncrasies, for small businesses, selling or winding down your involvement in the business will rarely be something that can happen straight away.

Those businesses in the service industry relying on chargeable hours for their income may typically be harder to sell – or at least, harder to sell at the price you think the business is worth. Even those businesses producing widgets may not be able to sell as readily as you might think.

Businesses that are listed at least have a mechanism to determine their value, albeit at times perhaps flawed, especially if the shares are closely held and trading is sporadic. But even for these businesses, when they get a formal valuation done there is never a single figure that conveniently drops out of the bottom of the calculation. Normally there is a range of potential values – and strangely, the independent valuation obtained by a seller is normally different from that obtained by the buyer. Go figure!

Small closely held businesses are notoriously difficult to value – a guide for bigger businesses, especially listed ones, is market knowledge of sales of comparable businesses. However, for most SMEs, that sales information is not normally readily available. An equity valuation normally relies heavily on recent financial results (maintainable EBITDA) say for the last three years and perhaps a forecast element for the current year if it is close to year-end.

Then comes the issue of what multiplier to apply. Very simply, and ignoring other adjustments for normalised cash flow and debt, the estimate for annual maintainable EBITDA is multiplied by a factor to determine a possible valuation figure. For hourly-based service businesses a multiplier of 3x – 4x is often achieved but certainly could be a lot lower than this depending on several factors. We have certainly seen sales with much lower multipliers although, by the same token, some with considerably higher multipliers.

At Management Response we  work with business owners to help develop and implement the strategy around their succession plan and ultimate exit from the business. In some instances, the process of determining a succession and exit strategy and successfully implementing it could take years (which for one of our client’s has already taken more than five years and counting, whilst delivering outcomes along the way that have significantly exceeded the owner’s expectations).

Management Response does not do professional business valuations. Our expertise and focus is on working with the owner to develop the optimal succession and exit strategy for them. What I have been talking about here is valuation and value multipliers – there are also a series of other things to consider about planning for succession and/or exit before getting to this point which we would be happy to discuss further with you. Give Management Response Limited a call for a free, no obligation discussion.