Finding a buyer, valuation and competition

When considering buying and or selling a business the following points made in relation to finding a buyer, valuing a business and competition generally ought to be considered.

Finding a buyer – business agents and your own networking efforts are often the best mediums to use to find a good buyer. Venture capitalists and business angels can also be approached but they will have a different take on things as they are highly experienced investors/buyers and the terms proposed by them and safety nets they will put in place to protect themselves will be reflective in their offer.

Valuation – the seller’s accountant is usually the first port of call when considering what the value of the business is. The accountant will look at the historic performance of the business and usually use a multiplier of the profits with a heavier weighting given for recent years. A weighting can also be given for the future prospects of the business. Whilst I would agree this is a useful starting point this is not the be all end all in determining a valuation. Other factors that could perhaps be more appealing to a prospective buyer are the client base of the seller, the synergy/ fit between the buyers and seller’s businesses, the potential to grow the business in the hands of the buyer etc. These factors alone could result in the buyer willing to pay a premium for the seller’s business.

Competition – if you have a business that is appealing to more than one prospective buyer then that will create competition between buyers and this is likely to be a positive thing. Firstly, the price is likely to go up as the prospective buyers bid between them. The terms of the deal may also vary in that one buyer may offer more cash upfront to the seller compared to what is put in escrow or a retention account. Any seller would prefer to maximise what he can take out of the business on the day of signing as that is something that is safe and not contingent on future events. Also the speed of the transaction and issues relating to minority warranty claims will also be in favour of the seller. A prospective buyer is less likely to get bogged down with these issues when he knows that there is another prospective buyer waiting in the wings and the seller may just withdraw from the transaction if the terms on offer do not sit well with it.

If you’re interested in buying or selling a business and would like to find out more, please contact Izaz Ali on izaz.ali@lawdit.co.uk.

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