Valuing your company

BUSINESS SALES AGENTS

Using this route traps the majority of business owners and leaves them disappointed

Most serious company buyers simply refuse to deal with them – which slashes the available market for your company tremendously. The larger the sales agent company, the worse this is. Believe it now or believe it when the company has been on the market for over a couple of years. Business owners tell themselves that they have never sold a business before, so they seek the help of a business sales agent: whilst it is the largest obstacle to them making the sale.

Do you have your business on the market through a sales agent? Not selling? If your company has been on the market through a sales agent for more than 3-4 months without a sales process beginning, your company is unlikely to sell for a very long time.

This is how it works (fails). Business Sales agents work exactly as estate agents. From the first contact between seller and agent, either the agent cold calls the seller or the seller seeks out the agent, the agent tells the seller that they have a waiting list of potential buyers. The seller signs the contract to sell with the agent, which locks them into that agent. The agent puts together the Information Memorandum (IM), the sales brochure for that company. The “waiting list” of potential buyers is a list of emails of companies who have made an enquiry with the agent in the past. The agent emails the IM around to their list, Simultaneously, the agent posts the company for sale on their own website (puts a picture in the estate agent window) and places an advertisement on the business-for-sale website (advertises the house on Rightmove etc) – and then – does nothing. Throughout this, the sales agent “invites offers”. Asking the potential buyer to be buyer and seller at the same time – now this element really does waste everybody’s time and engenders great mistrust. The agent will always try to convince the seller that they will negotiate the price up, with such methods as, creating competition for a bidding battle upwards – there are too few buyers for any particular sellers for buyers to indulge in this game.

Those companies which are actively looking to acquire will be registered with one or two sales agent companies. These potential buyers will receive the circulated IM. If your company is not very close to what these potential buyers seek, they do not enquire. For any new enquirer, raised by the business for sale advert who enquires, the agent will “vet” them to the extent that the potential buyer has to work rather hard for the agent to reveal who the selling company is – with question such as how the seller will pay for the company, how much deposit they will put down. If the potential buyer chooses not to reveal details of their own company or does not show the agent a bank statement showing a huge balance of cash, the agent will often not pass on the enquiry. You, the seller will often not know about many enquiries.

When an agent puts a new company on the market for the first time, the above techniques trigger a flurry of interest, potential buyers alerted to this new acquisition opportunity. This is the most likely time that the company will sell: duration, a few months at most. Once this activity dies down, the seller is left waiting for enquirers to be searching the business for sale adverts and dropping lucky.

At this point, if you do wish to sell, you will need to take action yourself, advertise it yourself, contact “buy-side” agents who are often working on assignments to find companies wishing to sell but are not on the market – but your contract with the agent prevents you from doing this?

OR

WHAT TO DO ABOUT IT – sell the company yourself. Start with us – This suggestion is not that you break your contract with your agent, assure them of their fee, honestly disclose to them the sales price that the company achieved, which sets their fee and is what all their posturing is about. Here you have nothing to lose – if a potential purchaser, eventually comes across your agent’s advert (when he could have found yours) and you and the buyer put up with the drama through the agent to finally sell the company, you would be paying the agent’s fee anyway. Bypass all the obstacles, contact us – if your company is not the most appropriate sector for us – we will know who to steer you to, to find your buyer.  

You went to the sales agent because you didn’t know what price to ask? Neither online business valuation calculators nor business sales agents can value your company’s intangible assets. So both err on the side of overvaluing – raising the vendor’s anticipation of his sales price.

And why would you trust either to make a valuation?

Business sales agents often put such a wall around their client that potential sellers do not hear of many enquiries because the agent is demanding lorry loads of gold bars for the companies, deterring buyers, and, worse, (i) will not let their client, could be you, know that you have an enquirer (ii) do not trust you to work it out with the enquirer.

VALUATION ACCOUNTANT

The most independent method is to use a Valuation Accountant

The most independent method is to use a Valuation Accountant, they will be cheaper than a sales agent’s commission, rather than your own accountant – most “accountant firms” are bookkeepers, not enterprise valuers, they too will overvalue their clients – it is in their interest to deter the sale, they are quite likely to lose their clients when they are sold.

“A Post-Script: when you have obtained your company valuation from a Valuation Accountant, advertise your company for sale on the range of Businesses for Sale websites yourself. That’s all the sales agent is going to do. You can still do this incognito to obtain the signed NDA.”

What is the framework for manufacturing companies in the 20%, which will sell?. The most likely buyer of a manufacturing company is another manufacturing company – US?

Leaving price aside, to speak only of principle, the closer the two companies are in their sector for an acquisition to result in a merger, through similar products, to extend the range for the buyer, or related enough to create a group of companies, the more likely the purchase.

WHAT PRICE?

You know you have a business in the 20% which will sell

Since every tub stands on its own bottom, every business is different and therefore, unlike the sale of commodities with multiple providers for competitive price ranges to become established, there is no comparison datum line for the sales price of a business – but there is “rule of thumb”: which is how your house is bought/sold.

EBITDA does play a significant role as a price range setter. As a rule of thumb, UK, Small to Medium Enterprise (SME) “jobbing” (so-called contract manufacturer) companies, which gain their business from other companies outsourcing the work, change hands for between 2.5 to 3 times the, audited, EBITDA figure.

The majority of companies active in manufacturing take their income from contract manufacturing services. In large part, why should one contract manufacturer buy another?. Common thoughts are to:

• reduce the competition
• to widen their manufacturing scope.

However, It is a huge bite into the profits to buy another company, when

• simply outbidding the competition
• buying additional machinery

are far more affordable routes, particularly when additional machinery is easily affordable through leasing or hire purchase.

OWN IP, OWN BRAND

What is the best differentiator?

To increase the sales price above the 3x EBITDA multiple? What does a company add to simply “build-to-print”?

Why should another company buy a company which does exactly the same? Let us say. To increase turnover quickly in a single step. Sure but if all the profits of the acquisition are going to be absorbed in providing a return on investment through repaying the outlay for the purchase, what attraction is there? The longer the payback period has to be, the more setbacks along the way are possible and discourage the purchase.

Buyers are more likely to be attracted by what they do not already have. Such as: own IP, own brand – products designed, manufactured and marketed by the one company with a saleable product, even better, a range of products, allowing a company to manage its own direction and destiny: increasing attractiveness to buyers who are seeking to expand their unique selling position. This does not have to be unique markets on the market. It is simply more attractive to buyers to purchase companies which provide something the do not have already.

This still leaves the company sales price to be established by what the seller is prepared to sell it for, versus what a buyer is prepared to pay for it. While true, given a free choice by both, the seller will always want the highest price and all the money. The buyer will never want to pay what the owner wants nor have risks at closing. How is this apparent gulf closed?