Do want to sell or buy a Business? A few things to consider

1. Do you wanna pimp your Business?
August 23, 2017 | Markus Schwarzer

2. The Train Trip
On a recent train trip I got talking with a fellow passenger.
After the usual introduction, her name was Conchita, she asked me:
“I would like to sell my current business and then buy a new one,
that is better suited to my interests. But how do I value my
business?”
“ Well” I responded,” good question indeed. The answer torments
business sellers and buyers for some time. There isn’t one
precise method that establishes a valuation beyond argument.”
Company Value
“Conchita, “ I said “the value of a company can vary
greatly. Depending on the respective viewpoint of the parties
involved.”
Conchita kept persisting: “ok, understood, but how easy (or
complicated) is it to estimate the true value of a business?”

3. Company Valuation Reasons
A company valuation can have different purposes. The most common
one are:
• attracting new investors, egg for expansion
• takeover or merger
• adding or changing shareholders
• purchase and sale of a company due to retirement or health
reasons
• compulsory part calculations in inheritance division
Value not equal Selling Price
The company valuation serves as a basis for decision-making for
both:
• the Seller (which maximum amount can I demand?)
• the Purchaser (which minimum amount should I offer?)
• In my experience, Seller and Purchaser are generally colliding with
their respective views between the value of a company and its
(selling) price.

4. In my experience, Seller and Purchaser are generally colliding with
their respective views between the value of a company and its
(selling) price.
• As with every commodity, the price is determined supply and
demand.
• A starting point for negotiating the sale or the takeover price.
• Both parties should (ideally target) a company value that is as
realistic as possible.

5. Many Valuation Methods
There are many valuation methods. Most can lead to different results.
There is no binding method.
I said to Conchita: "Choose the method that best suits the size of the
company. Your capital and asset structure as well as your specific
industry. Then test the result with at least two methods."
Typically, Seller and Purchaser regard the financial side from different
angles.
Seller is…
• often emotionally connected to their company and
• most of the time their evaluation is based on the past.
Purchaser…
• approach the valuation more rationally and
• are interested in the growth potential
• ultimately, they want to pay as little as possible.

6. Overvaluation
It is not uncommon for the seller, and also their consultant or
accountant, not to know how to determine a realistic price for the
company.
In the case of an overvaluation, there is a risk that the seller party
will ‘overplay its hand’. The search for potential purchasers interest or
indeed the subsequent negotiations could be at risk or fail completely.
Non-operating factors influence pricing
Although the company value is ideally determined according to
objective criteria, other factors are often decisive for price
determination. These can be:
• Personal influence of the current owner in his/her company
• Anticipated (but not realized) sales and profit development
• Degree of innovation of products or services (niche)
• Size of the company and competence of the internal organization
• Strength or presence of Competition
• Number of takeover offers and purchasing candidates
• Age of successor
• Financial and family situation of both parties

7. More than just A Selling Price (just like the song 'It's
more than a feeling?')
I said to Conchita: "Involve your banking partner in the valuation.
The value of your company is also a reflection of the company’s
creditworthiness.
Which in turn leads to favorable credit rating and favorable
credit conditions such as interest rates."
Several methods are available for determining the company value.
For simplification I am just listing the following:
The Asset Value Method
Pro:
• Relative easy to carry out
• Based on current data that can be accessed easily
Contra:
• Purely based on current information
• Disregards external factors, e.g. economic environment
• Does not take into account future growth (potential)

8. The Asset Value Method

9. Discounted Cash Flow Analysis (DCF)
The DCF analysis is one the most thorough method to value a
company.
This method is used to calculate the value of a company from
the discounting of future cash flows.
Pro:
• High degree of recognition internationally
• Used by most financial practitioners
• Based on future data
Contra:
• Involves some guesswork of future cash flows
• Requires Excel and Financial Analysis skills

10. Pimping your Business
I don't know what you, the reader, would recommend to
Conchita.
My final comments, before I disembarked at the
Hauptbahnhof: "Conchita, keep in mind that getting a
company ready for sale or indeed its valuation is not a
straight forward thing.
The price which an investor would be willing to pay for your
company's equity depends on supply and demand. And also
a number of Emotional Factors.”

11. The Author
Markus is a Financial Professional, specializing in
Process Improvement and Financial Reporting.
He also works on a voluntary basis to improve
Financial Literacy for Indigenous People In New
Zealand.
Contact Markus
email info@certo.net.nz
phone 0064 27 973 2236