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Why a Business Valuation is not the same as Deal Value

When they consider the sale of a business, most business owners start with the question, “how much is my business worth?” The answer may influence the timing of the exit and whether to start the sale process immediately or at some stage in the future.

It is vitally important to remember that a ‘business valuation’ and ‘deal value’ are not the same when you are negotiating the sale of your business. Business owners should always explore and consider all the options and find the process that best fits their situation because one valuation formula does not fit all!

What is a Business Valuation?

The traditional business valuation is a largely hypothetical process based around the combined and perceived value of key business elements:

A) How much are the assets (tangibles) worth?

B) How much is the goodwill (intangibles) worth?

C) Future or forecast growth and opportunity. Some elements are straightforward to value, others are not.

This process is usually conducted by a professional with accounting, business sales or other industry knowledge and experience, who is normally instructed by a buyer or the business owner. One of the main challenges with any valuation related to a business sale, is that the final valuation is largely subjective. There are many ways to consider value and there will always be a difference of opinion between professionals, business owners and acquirers, especially around mergers and acquisitions.

This is compounded by the fact that every business is unique. True comparable examples do not exist for goodwill or opportunity value and, most importantly, the ‘third-party’ professional who is conducting the valuation can only consider the business on either a financial or standard valuation formula. For example, a business valuation prepared by an independent accountant is unlikely to see or acknowledge the full strategic value that a trade buyer would gain by the purchase of a complementary business. A ‘one-size-fits-all’ valuation process must not be relied upon.

What is Deal Value?

Deal value or negotiated deal value (NDV) is a negotiation strategy that sits over and above a general business valuation. When you are trying to agree the terms of a business sale, any business valuation should be the starting point of the negotiation, not the finish line.

Firstly, if you own a niche and/or growing business, it’s likely that any acquirer will need your help and support post-acquisition, so do not be surprised if a buyer requests an extended handover of 1 to 2 years. Secondly, many of the best acquisition proposals we have seen have been made by non-competitive buyers, trade acquirers that have identified a market synergy between two businesses and are prepared to offer a premium to secure the opportunity. However, they are going to need your help.

Your extended help and support will provide considerable leverage to the negotiation process by offering the ‘value added’ and ‘low risk’ version of the business, which will be facilitated by you remaining in a supporting role with the business and being the acquirer for an agreed period.

Assuming the confidential marketing and sale is managed and negotiated correctly, the result will deliver a significant uplift in the final deal value for the seller and reduce the risk and transition time for the buyer. A true win-win scenario for both parties.

So how much is a business worth?

Business owners often fall into the trap of thinking the valuation is the sum they will receive when they sell their business, but this is not always the case. The best and only reliable way to find out how much your business is truly worth is to test the market and confidentially engage with more than one buyer who has a strategic interest in your business. Once you have secured two or more written offers you will know the answer.

Vexus, the architects of the Business Sale Programme, are experienced dealmakers and business brokers. Tony Vaughan, Managing Director at Vexus said: “Always remember the golden rule: a business is only worth what someone is willing to pay. Your final sale price is always driven by negotiation, not by a valuation.

“Our Negotiated Deal Value (NDV) process is designed for businesses offering future growth potential, businesses that are either currently delivering double-digit growth or businesses that can demonstrate exciting growth potential but require further financial or operational support.

“In summary, you could secure a far better exit deal by starting the sale process 2 to 3 years before you originally planned.”

If you would like to find out more about our Negotiated Deal Value (NDV) process, contact us at Vexus today.


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