What Is Your Business Worth Before You Approach Buyers?

In a targeted search, the buyer list is short. If an owner’s expectations are far from what any buyer could justify, the best-matched buyers may simply stop engaging — and they are not easily replaced.

A realistic range also shapes who is approached. Some buyers will not consider a business above or below a certain size, so knowing roughly where you sit helps target the right ones.

Most buyers of an established, profitable business start from the profit they believe the business can keep making under new ownership. That figure is usually last year’s profit adjusted for one-off items and for costs that relate to the owner rather than to the business.

Buyers will test every adjustment. A conservative, well-evidenced figure carries more weight than an optimistic one.

A headline valuation is not necessarily the amount shareholders ultimately receive. In a typical share sale, an agreed enterprise value may be adjusted for items such as debt, cash and the level of working capital delivered at completion. The precise calculation depends on the agreed deal structure and completion mechanism.

The amount ultimately received by shareholders can also be affected by the treatment of director or shareholder loan accounts, deferred or contingent consideration, transaction costs and tax. Your accountant and solicitor should advise on how these apply to your transaction.

Value is often described as a multiple of earnings. The multiple is not a fixed number for a sector; it reflects how confident a buyer is that the earnings will continue and grow. We do not quote typical sector multiples here, because a generic figure can be misleading for any particular business.

• Recurring revenue — income that repeats without being resold.
• Customer concentration — how much depends on a few customers.
• Owner dependence — whether the business runs without you.
• Growth — a credible record and outlook, not just a forecast.
• Quality of information — whether the figures are reliable and consistent.

A trade buyer may value the business partly on what it adds to their own: customers they can sell more to, staff they cannot recruit, a region they want to enter, or costs they can share. That can make the same business worth more to one buyer than to another — though not every strategic buyer will pay more, and many price cautiously.

This is one reason direct buyer research matters in an off-market sale. The aim is to find the buyers for whom the fit is strongest, rather than the buyer who happens to respond to a listing.

A buyer with a clear reason to acquire will usually be more willing to pay for it. A buyer with only a general interest will usually price more cautiously. Understanding each buyer’s rationale helps you judge whether an offer reflects the business’s value to them — or only its standalone figures.

• Well-matched buyers may withdraw early rather than negotiate from a large gap.
• Time is lost, and more information is shared, with buyers who were never going to agree.
• An owner may reject a sensible offer, then find no better one follows.

Offers differ in how and when the money is paid. Some is paid at completion; some may depend on future performance or be paid later. A lower headline figure paid largely at completion can be worth more to you than a higher one with a large conditional element.

When comparing offers, look at the amount paid at completion, the conditions attached and how certain the buyer’s funding is.

At the anonymous stage, financial information is normally shown in ranges — turnover and profit bands, for example — rather than exact figures. Exact accounts are shared only after an NDA and your approval of that specific buyer.

Ranges let a buyer decide whether the business is the right size for them without making it identifiable to someone who knows the sector.

Before buyers are approached, aim to agree a range you would regard as acceptable, the lowest figure you would seriously consider, and the terms that matter most to you besides price. That gives you a fixed point when interest arrives.

An indicative view of this kind is a starting point for conversations. It is not a formal valuation and it is not a promise of what any buyer will pay.

Some situations call for a formal valuation from a suitably qualified professional — for example where shareholders disagree, where tax planning depends on a figure, or where a valuation is needed for legal reasons. Offsell does not provide formal valuations; if you need one, your accountant is usually the right first contact.