Valuation: EBITDA or so much more?

We often get approached with dalliances of 'are you for sale?'. In the week when we launched our new PlanToDig service we received several more from very respectable companies who see opportunity in what we do to enhance their own enterprise.

Having been in business a very long time our well-oiled answer is always the same; 'we are not for sale but we are always open to offers'.

If that is how you approach the possibility of sale is vital to know how you value your business and how you arrived at that valuation. How else could you possibly know if any offer that you do receive is in the ballpark?

In the past we have done an MBO to create one business and have sold previous incarnations of our businesses in both parts and in their entirety - so we know the ropes quite well.

We have worked on outright purchase deals but also on retained Royalty payments.

In some cases we sold to the best offer following intense Due Diligence by a number of potential purchasers, but in one case sold based on nothing more than a reasonable unsolicited price offer.

We have sold at prices based purely on a formula of 'EBITDA x factor' - which was a part-sale to an venture capital investment company.

But we have also sold a business at a price based entirely on someone else's perceived opportunity; an undisclosed proportion of the benefit that the buyer projected that purchasing our business would bring to their existing business (an entire Dial Before You Dig service that we sold to an American Corporation).

There can be a massive difference between what you think you are selling and what the potential purchaser believes they would be buying. It is all about the yardsticks you each use to measure 'worth'.

You do not have any say or influence in anyone else's yardstick. What you do control is how you measure the worth of your business to you.

If you own the business then you are selling a) the entity that gives you income today, b) something you have pegged your foreseeable future on, and possibly c) something that you may well have nurtured from nothing to the point where someone else sees good worth and value.

So you could do some calculations knowing a) and b); c) however cannot readily be quantified; this comes under 'goodwill' (often due to the client-base you have developed). Nothing wrong with putting your own considered valuation on this also.

'Softer' factors are Intellectual Property Rights (IPR) / contracts / licences / databases / copyrights / websites / apps / social media presences etc. all of which are intrinsic to your business so would be required by anyone buying it.

Then there is the very personal stuff to consider. Some of this would be decided by the nature of the offer - which you do not control - but there is nothing wrong in predetermining what you would find acceptable.

Will the people who worked for you be well treated? Would the sale bring opportunities for them also? They are the reason you are in the position of having a worthwhile business - loyalty works both ways.

What happens to all those ideas you had been working on for new product-lines / enhanced services? They have no provable value so you cannot expect to realise anything for them in any sale. Do they wither and die or do you sit on them for developing in a possible future business venture of your own?

Or would you, out of the goodness of your heart, just hand these over too? They may well have been developed to the point of having a projected value; do you just give everything away?

What will you do with all that time you used to spend thinking about it / talking about it / working at it? If you are under a Restrictive Covenant / Non-Competition clause - which any buyer worth their salt will put you under for at least 6 months - you cannot just sell up on Friday, start anew on Monday.

Retention as a 'key resource' working for the new owner is not attractive - but the buyer will want to have you available to at least call upon for advice. That too has a price and a value; not necessarily the same thing.

While you are still present in any capacity the business will still 'belong' to you - staff will defer to you, customers will seek to speak with you. The only way for the business to 'belong' to the buyer is to cut off its old head and replace it with a new one.

And that can involve things such as being moved out of your office for the 'new guy' to take up residence, going to meetings to introduce your successor to clients, being given 'targets' and 'tasks' to achieve as nothing more than an employee. Short or long, a retention period can be very uncomfortable for people no longer used to being given instructions.

You can put values to anything to find price components of how you value your business, e.g. 6 months Non-Competition=6 months not earning full potential, so that too has to be factored in to the value of your business to you in any sale.

The 'Exit Plan'.

A lot is made about having an 'Exit Plan' for a business. It may work for some but I can honestly say in all the years of being in business we have never once had such a thing. We have exited and part-exited a number of businesses in a number of ways but never once under any preconceived 'Exit Plan'.

Properly considered, your own assessment of your business worth forms, not an Exit Plan, rather an 'Exit Criteria'; a measure by which you can quickly decide if an offer is acceptable as at least a starting-point from which to begin to negotiate. An offer that is too wide of the mark means you have incompatible yard-sticks; neither will be able to convince the other.

It does not matter if the maths of your Exit Criteria does not seem to add up to book-value or any other conventionally accepted method of valuation - you do not have to justify this to anyone other than yourself. Unless you choose to.

The worse that can happen is that you turn down what appears to be a very attractive offer and choose instead to keep a hold of your going-concern business.