A secret strategy to put a price on your business
A significant proportion of company sales are originated by a buyer making an unsolicited approach.
If you've a successful business with a strong value proposition, it could easily happen to you. You should consider what you'd do under those circumstances. It could be that you're in the "just say no" camp, but most firms take the sensible view that it is only worth considering engaging with the approach if there looks to be a significant enough financial premium involved.
We're fans of the following way of responding when in a growing business:
- we quite like you, Mr. Buyer - we think there are commercial synergies and a good cultural fit
- but we weren't thinking of selling yet
- in fact, we have a slam-dunk strategic plan that delivers substantial growth and value creation over the next 'X' years
- we'd like to engage, but you're going to have to pay now (most of) the value the business will have in 'X' years' time
- you can afford to pay that price now because our growth together will be even stronger - remember those synergies?
The spreadsheet we've uploaded here puts a bit of flesh on the bone.
There are lots of comments in the sheet, so we'll avoid repeating them here - but the basic calculation is:
Value we want now = value in today's money of the after-tax profits surrended by selling early plus the value in today's money of the cash that we'll get in 'X' years' time when we sell.
The biggest assumption is on the 'exit multiple' (multiple of profits) you might get for the business. Some research will be needed to set that for your sector. However, for the purpose of this article, the interesting comparison is the multiple you're asking for to make it worth selling early (cell B37) vs the typical market multiple (cell B30) - using the 20% compound growth plan and other defaults as set in the spreadsheet, this represents a premium of about 60%. (Note that this is highly dependent on growth rates.)
This is getting a bit heavy, so here's a picture of a place you can visit when the money from the sale comes in:
Reprising and fleshing out the reponse we described above, using the spreadsheet defaults:
- we quite like you Mr. Buyer - we think there are commercial synergies and a good cultural fit
- but we weren't thinking of selling yet because - on a typical industry multiple of 7 * our profits - our company would be valued at just £2.8m. That's not enough for the investment we've made, the platform we've created and the potential of what we're building.
- in fact, we have a slam-dunk strategic plan that nearly doubles our profits in the next three years - our business will be worth nearly £5.0m by then, so we're better staying stand-alone and selling later
- we'd like to engage, but you're going to have to pay at least £4.5m now - that's the discounted value of the value we'll get in three years' time (plus our profits in the meantime)
- you can afford to pay that price now. You'll have about of £1m of after-tax cashflow in the next three years, plus the residual equity value of nearly £5.0m by then. And that's valuing the acquired business before the synergies!
- *new* oh: you're shocked by that, Mr. Buyer? Your approach has started getting us thinking we might be able to realise value earlier than our original planning horizon - perhaps we should speak to some other potential buyers earlier than we thought...?
Tactically, of course, you wouldn't express point (2) openly unless the buyer had already put forward a suggested multiple. Indeed, putting a prospective valuation (or a multiple) to an interested party early on isn't always the right approach - I'd always like them to show their hand first, in fact - but it is helpful to get a sense of the valuation gap early.
Incidentally, you can play with the spreadsheet where there are orange cells to put in your own financial data, or change the assumptions if you think we're being too conservative or aggressive with them.
Love to hear your views.