Why Reasons, Ranges, and Reliability Matter When Valuing Your Company

It’s not unusual to come across people who can clearly express one or two of these when exiting their business, but not many can hit all three.?

You may be familiar with them or know them in different terms;

Reasons are very often referred to as the seller’s motivation,

Ranges EBITA or revenue multiples according to the market or the industry your company is in,

Reliability is often referred to as your accountant and legal team’s criteria, what you trust.

Let’s break this down a bit more.?

Reasons?

You’ve likely heard the good ones and the not-so-good ones; someone who wants to retire and voluntarily looks for an exit having fulfilled their life purpose and now looking to reap the benefits of what has been built over many years, or, people who struggle with their company - not only financial struggles but perhaps management disagreements over company direction, shareholder disputes, or other direct and non-direct stresses such as divorce or other grievances in a family business.?

Bear in mind; all reasons are justifiable with the right emotional triggers. Many people are turned around when certain emotional triggers are pushed. It doesn’t have to come from a mean intent; simple circumstances can be a trigger.?

Everybody is talking about recession as I’m writing this article. Yet, not all analysts mention that since the industrial revolution there has been “recessions” occurring. A few I remember include the end of the 79’/82 OPEC oil crisis, another one in the early ’90s, and another with the 2008/2009 financial crisis. We’ve also experienced another “catastrophe” in the COVID-19 pandemic. For the right mindset, these events became massive opportunities to reset and restart on a better path or methodology or they can even awaken a whole new industry.?

Be aware of your own emotional triggers; you don’t want to justify an impulsive decision because someone close to you or the media pushes your emotions around.

Ranges

This can sometimes add more stress than anything else. It’s one thing what the accounting team may say the value of your company is, and another what you believe it’s worth.

The question is, Is that all? Just what you think and what the balance sheet shows? That is why range can play an essential part in this process. Being too close to something may blur your perspective, you can’t see the wood for the trees. Here’s where networking and having your finger on the pulse of your industry helps. Getting to know your competitors and others in complementary industries gives you greater information to access as you determine how your type of company in that particular industry is valued. It may take a bit more time though you’d have a better range for flexibility.

Let’s put it in a different situation, though a good example.?

When people apply for a job, HR interviewers frequently ask: What are your salary expectations? A designed test question (we won’t get into analysing here). The funny thing about this is that the salary is often already published which leads people to say the published figure or slightly more. However, one of the best outcomes is for people that answer along these lines:

“I have researched the salary ranges in this market and industry. The industry salaries survey published this year shows that people in similar positions range from A to Z salaries from junior to senior positions. Given my qualifications, experience, time in these types of roles and what we discussed so far about the company’s expectations and plans, I believe that we can work out starting at 75% of that range and discuss the path to growth in the coming 6 to 12 months when I demonstrate my value and contribution to the organisation.”?

Which candidate sounds more grounded, confident and credible? The one saying give me the money or the one that has researched, valued and proposed a path to growth in exchange for performance, delivery and demonstrated value added?

Like your company, you can discuss your valuation with your accounting team and advisors, though dig a bit further. Indeed, you’d find that there may be a range out there that you and the seller will believe can be worked out rather than having one or two opinions.

Reliability

Here is something that many people miss entirely, doing themselves no favours when considering exiting their business.Who are you relying upon to get that valuation or range of price?

I will illustrate this with an example;?

My brother drove a 96’ Ford Escort. It was running perfectly fine, had no issues, mechanical or structural, and was well maintained. He would regularly service the car, replacing any worn or broken parts, etc. An excellent owner. He firmly believed there was no need to upgrade to a newer model. Finally, problems started to surface, not with the car, but with the regular technical inspection and the insurance company. Both wanted to write off the vehicle as too old to insure and classed as not roadworthy. After a couple of years fighting back and getting less insurance coverage at higher premium for the “risk” that the car represented, he finally gave up and sold the car for nearly nothing. As the car was so well maintained, he brought it to a garage for a symbolic write-off price in exchange for a newer model.

What my brother came to know later shocked him. The garage sold the car. Not for that symbolic price, but for a rather significantly higher figure than that he was told the car was worth by those he discussed it with (mechanic, insurer, friends and family). The buyer was a vintage car enthusiast. Things would have changed for my brother had he researched the vintage cars world a little bit.

1 - He could have insured the car for approx €25 per year

2 - The car didn’t have to pass exhaustive technical inspections

3 - He was required to be a member of a vintage car club (approx. €15 yearly membership)

4 - He could drive the car anytime, anywhere he wanted driving less than 10,000 km a year (he was)

5- or, he could have sold it directly to the enthusiast for a very reasonable price instead of using it as a symbolic exchange against a newer car.

The moral of the story -?

Get in contact with specialists in your industry, sector, vertical etc. You can listen to generalists, but the “we know a lot because we’ve seen a lot and will get you a good deal” merchants won’t necessarily be the best you can do for your exit.?

So there you have them, Reasons, Range and Reliability.?

Something to think about before closing a number when exiting your company.

Disclaimer - This article does not constitute legal, accounting or tax advice and is for educational purposes only. You are fully responsible for sourcing third-party independent advice from reputable professionals on the matter.?

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