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Valuing your business
- here are the most important factors

If you are the owner-manager or co-owner of a business you are considering selling, it is interesting to know what selling price you can expect to achieve.

The immediate answer is "The value of your business depends on who buys it".

Business Brokers have experience in valuation from more than 200 business transactions. That is whyKlaus Termansen, partner at Business Broker , is happy to give a more specific answer as to what influences the valuation of a business.

How to value a business

"Cash flow is the most important factor in how a company is valued. Because cash flow gives an indication of when a new owner can expect to recoup the invested capital," says Klaus Termansen.

He points out that Business Broker use themultiple calculationmodel to value small and medium-sized companies.

"When we do a multiple calculation, we assess, among other things, how many times the company's cash flow a potential buyer will pay. If we estimate that a buyer will pay five times the cash flow, this means that the deal is based on an expected return on the buyer's investment of approximately 20 percent per year, excluding tax and financing. Thus, the simple payback period of the transaction is five years," explains Klaus Termansen.

Whether five years is a long or short horizon depends on the risk associated with the transaction. For example, customer contracts and service agreements that provide a high degree of certainty that cash flow will be stable in the coming years have a positive impact on valuation.

Valuation parameters

When determining the market multiple in the valuation calculation model, assessments in the following areas are also included:

Is your business dependent on key people?
Is the company in a growth market and what are the opportunities to scale operations?
Does the company have special rights such as patents?
What is the competitive landscape in the industry?
Does management have good strategic awareness and has it demonstrated the ability to meet budgets?

"Key internal factors in the valuation include whether you are in a growth market and whether it is easy for a potential buyer to copy. Assessing whether your services or products are scalable is also important for the valuation," says Klaus Termansen.

The same applies to external factors such as economic conditions, interest rates, and the willingness to invest in society, which are also included in the assessments when Business Broker companies prior to a sales process.

What is the purpose of a valuation?

With a qualified valuation in hand, you have a starting point for negotiation. However, the valuation doesn't tell you exactly what you can get for the company.

A valuation is a stand-alone calculation that the company initially uses internally as a tool in the sales process. In some cases, a higher price can be successfully realized. A buyer who has an eye for synergy by taking over the company will typically offer a higher price than the stand-alone valuation.

Klaus Termansen gives an example:

"If I were the owner of a cleaning company, for example, I would probably be able to sell it for a higher price to, say, a facility management company selling canteen or security services than to another cleaning company. Because the facility management company can achieve cross-selling synergies by offering its customers cleaning as an additional service. Therefore, it will typically bid higher than the other cleaning company, which does not have complementary services to the purchased company".

Choose a professional advisor for valuation

Klaus Termansen recommends that business owners who are thinking of selling should consult a professional business broker who can prepare a serious valuation and implement a structured sales process to the optimal buyer. It also requires strong negotiation skills, because as Klaus says: "There is no price that is more right than the one that the buyer and seller can agree on".

At Business Broker , the valuation Business Broker of the initial, non-binding phase, where we get to know each other. This gives you a solid basis for your decision before you decide whether you want us to guide you through the structured sales process.

Read Business Brokers on how to sell your business at the optimal price.