At one time or another I’m sure we’ve all asked ourselves that question. Just how much is my business worth? So how do you go about attaching a value to it assuming you wanted to sell it.
First things first, you need to determine what you are selling. Would you sell it as a going concern or would you just want to sell your client base on. What I mean by that is do you place a value on your business as a whole so that someone else can step in and just take over the running of it, or would you prefer to shut up shop, walk away and pass the clients on to another company.
Regardless of which way you decide to go, the value will depend greatly on the type of contracts you have with your clients. You do have contracts with your clients don’t you? If you decide to sell your client base to another company, the value is often derived by looking at the revenue created from your contracts and then multiplying that by a factor of X, so you can see how important it is to have signed contracts in place and preferably assignable contracts (ones that can be assigned to another company/supplier of the services).
We’ll come back to what X is later, but what happens if you don’t have signed contracts? Not having signed contracts means that what your selling is termed as goodwill. In other words, you’re placing a value on the trading that has taken place between you and a client over a period of time, but there is no guarantee that they will continue to trade with whoever you sell the client base to. This is particularly true of one man bands when the relationship is very much between you personally and the client. This will drastically effect the value. Without contracts you really have nothing to sell other than your client list of names and addresses. If you don’t have signed contracts it’s time to get over to Karl’s site and start learning all about them and managed services. To offset the problem of having no contracts you could offer to have a handover period whereby you work alongside whoever is taking over for a set period of time. This way your clients are less likely to look elsewhere and this can be figured in when agreeing a value.
So how do you determine what X is? How much would someone be prepared to pay for your contract base? Try looking at it from their point of view. How quickly would you want to realize your return on investment (ROI)? one year, two, five? It’s reasonable to assume that you would want to see a return in 3 years. Different market sectors have different multiplying factors depending on how well that market is doing. Lets assume that the IT SME support sector is currently running at a factor of 3. Take your contract base revenue for the last 12 months, times it by 3 and look at the figure. What does that look like? Do you think someone would be willing to pay that amount for it? Maybe a more realistic way is to look at your Gross Profit (GP). Lets assume your contracts bring in £100,000 a year and you know your GP is 60%, so £60,000 a year.
£60,000 x 3 years = £180,000
That’s probably a more agreeable figure to a buyer.
But what if you want to sell up as a going concern. The valuation method is somewhat different as you are effectively selling not only your creditor book but your debt book as well. A going concern is likely to come with office equipment, plant & machinery not to mention employees and possibly even premises & vehicles. Obviously that isn’t something that can be valued without some serious thought and consideration (and a long discussion with your accountant). The buyer is much more likely to want to look at your bottom line figures, in other words your net profit and prepare a valuation from that. So if your net profit is £10,000 a year a calculation might look like:
£30,000 x 5 years = £150,000
There may then be some negotiation over the final figure based on how much of the profit is from recurring income such as contracts, monthly charges for hosting etc. and how much is based on 1 off sales and goodwill.
Now don’t go running off saying “Steve Wright said my business was worth…” ! Ultimately your business will be worth what someone will pay for it. An accountant friend of mine who specializes in mergers & acquisitions says he regularly sees IT companies going for 3 or 5 times what you might expect them to at the moment. In a few years time that may not be the case.
In some circumstances the buyer may want to build in a phased payment plan for your business, deducting an agreed amount if some of your clients decide to take their business elsewhere in the first 12 months. This often happens if there is doubt that your clients may opt to choose another supplier or if you have 1 or 2 large clients that account for a large percentage of your revenue. The payment terms can be anything but are often something like 50% on signing the deal, 25% 12 months later and the final payment less deductions as above 12 months after that.
Exit plans. Do you have one? If not, get one. You need an exit plan. Without an exit plan you drift along without any real purpose or sense of where you and your business are heading. Having an exit plan is a major step towards running a business for profit rather than being a geek with a screwdriver! That may sound harsh but it’s true. An exit plan will help you focus on where you want the business to be when you finally decide to get out and retire to that sunny island in the Bahamas. Everything else works backwards from there. If you want to retire at 50-55, write down short, medium and long term goals that will help keep you focused on getting to where you want to be.
Once you’ve decided what you think the value of the business is, and more importantly what you would be willing to pay for it, how do you go about marketing it so that prospective purchasers know about it? You have to be careful here. You want the competition to know there is a business for sale that may be of interest to them, but at the same time you don’t want them to know it’s you - at least not yet. One way of achieving this is to engage a 3rd party that can handle it for you. Your accountant is a good starting point here. If they can’t help they probably know someone who can. Alternatively there are several companies that specialize in buying and selling businesses on your behalf. Whichever method you choose your business needs to look as attractive as possible to prospects.
If you decide to handle the marketing yourself the first stage is to send out a “taster” document to whet the prospects appetite. If you get no enquiries from this it may be you’re pitching it at the wrong prospects or maybe your valuation is too high. It may be better not to disclose the sale price at this point and see what reaction you get. The taster would normally include a high level overview of the business with some top line figures. Assuming they are interested the next step may be asking them to sign a non-disclosure agreement before providing more detailed information. This will in turn lead to a face to face meeting. Once the deal is roughly agreed you will get to a stage referred to as heads of terms. This is the point you will want to get your solicitor involved if you haven’t done so already.
You’re almost there! The next bit is due diligence. The buyer will most likely want to visit your premises and see first hand your signed contracts, or a sample of them if you have a lot of clients. They will also want to scrutinize your figures more closely in case there is something you haven’t disclosed, which brings me to the final point. There is many a deal that has turned sour at the 11th hour due to something that comes to light at the last minute. Therefore it is a good idea to have a written document of disclosure which covers anything that might cause issues later on.
Obviously this is a very brief overview of selling your business and it goes without saying you must take professional advice at the relevant stages. Very few people start their business thinking about how they are going to sell it! But starting to think about it now can make a massive difference when you do come to sell up.
