Value and market your business for sale

There's a range of key factors that can affect the value of your business.

Finance

• Historical, current and projected profits and cashflow
• How well you control costs
• Need for capital expenditure in the near future

External factors

• State of the economy, interest rates and the level of demand in your market
• How similar businesses are valued
• How many potential purchasers are interested in the business
• How many similar businesses in your sector are on the market

Intangibles

• Goodwill and intellectual property such as patents
• Strength of customer relationships - and how profitable they are
• Your business' growth potential
• Economies of scale a new owner could leverage

Assets and liabilities

• Value of assets such as property, equipment, debtors and stock-in-hand
• How full your order book is
• Level of debt and other existing liabilities

People

• The management's record of success
• How dependent the business is on your own skills - and the likely extent of your future involvement
• Experience and commitment of key staff

While some of these factors are outside your control and may affect the timing of your sale, you can take steps to make your business as valuable as possible. You need to start planning well in advance. Consider inserting an exit strategy into your original business plan.

Remember that any valuation you and your advisers come up with is likely to be subjective. Business owners often place too high a value on their business. The value of your business is only as much as a purchaser is prepared to offer.

There's a range of ways to value a business. Valuations based on multiples of future earnings and the capitalisation of future cashflows are the most common. There are a number of common valuation methods:

• Businesses with a record of sustainable profits are often valued at a multiple of earnings. Profits are adjusted for any unusual, one-off items to arrive at an estimate of 'normalised' earnings. Smaller businesses are usually valued at a lower multiple than similar, larger companies.
• Mature, cash-generating businesses can be valued in a similar way but based on cashflow. Future cashflows are estimated and discounted - this is known as discounted cashflow. Long-term cashflow is worth less than cashflow due shortly.
• An asset valuation might be appropriate for stable businesses with significant tangible assets - property or manufacturing businesses, for example. Your starting point is the value of assets stated in the accounts - known as the 'net book value'. These figures are then refined to reflect factors such as changes in the value of assets or bad debts.
• The cost of creating a business similar to yours can be used as a basis for valuation. Costs could include buying equipment, employing staff, developing products, attracting customers, and so on. It may be possible to estimate this 'entry cost' as a benchmark of your business' value.
• In some industries, there are established criteria for valuing businesses, eg by the number of branches an estate agency has.

A potential buyer may use more than one method to get a range of values for your business. In the end, however, any price will be a matter for negotiation.

The sales memorandum is the initial marketing document you use to spark interest in your business. Your corporate finance adviser or business broker, if you have one, helps produce this as a key task in selling your business.

The sales memorandum provides potential purchasers with basic information about the company and what the sale might include. It should contain details of:

• the preferred sale structure, eg assets and goodwill or share transfer
• which industry your business is involved in and how long you have been trading
• key financial figures such as profit, cashflow, value of assets and total debts
• similar financial figures for previous years and how they have changed
• number of employees, with job titles, and location of premises

The sales memorandum should of course be truthful while presenting the business as positively as possible. You should highlight any special features of your business, any opportunities for growth or profit improvement. The aim is to interest potential purchasers, so that they want to know more.

Pay attention to presentation. Use clear, concise language and present financial information in a way which is visually appealing, ie through charts and tables.

The document shouldn't include confidential information such as names of customers or your pricing structure. You can reveal more detailed information later on in the process of marketing your business, when you have had a chance to gauge how serious prospective purchasers are.

Target those who you think would be prepared to pay a good price for your business because:

• you're the market leader in a particular segment - a competitor might want access to your customers so they can cross-sell their products
• you may have a product that fills a gap in their product range
• they might be able to use your distribution channels to sell their product range
• they might benefit from economies of scale in areas such as purchasing, production and sales
• they might want access to your people and skills
• you can show an excellent potential for growth
• an overseas company might want to expand into the UK market

Make sure you identify every likely candidate for your business - including private individuals and investment groups. At the same time, you want to be sure that any potential purchaser is serious. Crucially, you should satisfy yourself that they would be able to afford to buy your business. Your advisers should be able to help you establish this.

Potential purchasers of your business are likely to come from a number of key sources:

• Competitors, customers or suppliers
• Trade magazines, business directories and the financial press may provide you with ideas.
• An employee buyout
• Your existing management team may be interested - but you'll need to be sure they can raise the necessary finance.
• Your corporate finance adviser or business broker should be able to help you identify possible buyers, both in the UK and abroad. They will have access to databases of prospective purchasers as well as an extensive network of contacts. They will also be able to help you assess whether buyers are capable of funding a purchase.
• For certain types of business it can be worth advertising for potential buyers. For example, to find buyers for a shop, hotel, restaurant or pub you can advertise in publications such as Daltons Weekly or use online business for sale listings.

Together with your adviser, you should draw up a shortlist of potential purchasers to approach. It can be a good idea to split this into two - a list of favoured prospective buyers you'll approach first and a back-up list if this doesn't produce results.

It's important that you don't focus all your efforts on a single prospect. If the buyer knows they are the sole interested party, they can call all the shots.

Most sellers prefer to approach potential buyers through their adviser to help maintain confidentiality. Knowing that the business is for sale could upset your customers and employees. Competitors may also try to use the sale to find out your trade secrets.

Using your adviser also leaves you free to concentrate on running the business. Remember that the time taken up making initial contact with and providing further information to buyers can be significant.

The adviser starts by writing to potential interested parties to assess their interest. After their interest has been assessed, the adviser sends a sales memorandum or summary brief to a shortlist of potential buyers. Before giving them any more information, the adviser assesses how serious they are. Your adviser may try to keep your identity secret in the early stages.

Prospective buyers are usually asked to sign a non-disclosure agreement (sometimes referred to as a confidentiality undertaking). They agree not to use or pass on any information they find out about your business.

Once buyers are seriously interested, they usually want to meet to ask more questions. Your adviser may sometimes ask them to make an opening or indicative offer before they meet you.

After this, you become involved in more detailed negotiations.

Read our guides Selling a business: understanding contracts and Complete the sale of your business.