Company Valuation Help!!!

[G. Lasagne]

Hi Guys
My wife is selling her 50% share of her company to her business partner (the other 50% shareholder).

My wife has spent last four years building a team that now runs the business without out her, the plan being to make herself effectively redundant so she can exit and the business will run just as well without her.

The business partner has presented my wife with a valuation which was carried out by an accountant who is also the business partners close friend and not known to my wife.

With this in mind we were wondering if any of you clever on here could help with any of the below questions and if any of the assumptions made seem to favour the buyer (the business partner)?

1) We think reasonable management salaries that are in their seems high as this is based on both business partners taking £60k each (which they haven’t reached yet) plus as my wife is leaving and won’t be replaced does this really need to be doubled making it £120k?

2) Figures to be used for ‘weighting’ - what does weighting mean and what are the numbers 2, 0, 1 below each column used for?

3) Industry average PE multiples - how is the average figure (in this case) 30,4295 used?

4) What does the ‘Discount 60-80% ... for non marketability’ mean?

5) On the basis of company being sold in entirety they state a figure of £418,939 (50% share of that being £209,469) yet they apply a hefty 65% discount for 50% minority interest, which brings their proposed purchase fee to £73k - why is any discount needed or such a large discount?

Guess question 5 is the one I’m most confused with but I know I’m asking lots so an answer to any of the above questions would be hugely appreciated.

Thanks in advance.

 

[Mr D]

Valuation is what you want to value it at. Ask a bloke down the local pub you can get a valuation from him too. Based on whatever.

Realistically the value of her 50% shares is what she wants to get in order to sell. If she agrees with the amount offered then great, if not then reject and suggest they come back with a better offer. Or no offer - she doesn't have to sell if she doesn't want to.

No clue what a 65% discount on a 50% minority interest would be. Last I heard 50% was not a minority interest it was half interest!

 

[G. Lasagne]

Cheers Mr D, yep we’re purplexed on the 50% ‘minority’ interest too.

 

[dan1990]

non marketability is a discount because it's a private company meaning that the shares are a lot harder to sell then shares from a public company, 60-80% is really high.
Obviously shouldn't have a 65% discount for minority interest.

How much money profit does the business make out of interest?

 

[G. Lasagne]

Hi Dan 1990, their operating profit last year was £126k. Thanks!

 

[Mr D]

Hi Dan 1990, their operating profit last year was £126k. Thanks!

And offering £73K????
Darn, sounds like a bidding war should happen.

 

[UKSBD]

A majority is more than 50% i.e. 50.01%

If you buy 100% of something an have total control and ownership of it for £400k, would 50% be worth £200K when you don't have total control and ownership?

The 65% discount is your bidding point.

Get an expert to do a similar valuation on behalf of your wife, then start negotiating

 

[G. Lasagne]

A majority is more than 50% i.e. 50.01%

If you buy 100% of something an have total control and ownership of it for £400k, would 50% be worth £200K when you don't have total control and ownership?

The 65% discount is your bidding point.

Get an expert to do a similar valuation on behalf of your wife, then start negotiating

Ahhh ok this is starting to makes sense now! Without the control it’s worth less. Thanks UKSBD

 

[G. Lasagne]

And offering £73K????
Darn, sounds like a bidding war should happen.

You think this seems on the low side Mr D? If so (and I know prob an impossible question) but what price range wouldn’t you be as shocked by?

 

[The Byre]

Nothing here makes sense - the valuation 'multipliers' least of all!

 

[obscure]

Unsurprisingly the valuer works for the other party and the valuation reflects that. Nothing the other party (or their solicitors/advisors) say should ever be taken as truthful or accurate until it has been confirmed by your own solicitors/advisors.

One major factor they have omitted from the valuation is the "irritation multiplier". Your wife owns a 50% share. Assuming both shareholders have the same share type she can sit back and get 50% of any dividend issues.... forever. This will soon start to irritate her (former) partner. Additionally her partner won't be able to change this, as any company restructuring would require majority shareholder approval, which he won't have. As a 50% shareholder she can block a multitude of things and make life difficult which will cause further irritation. The irritation multiplier often starts out being quite low but as her partner realises what a pain she can be and becomes more desperate to get her out the irritation multiplier can increase and so will the price they are willing to pay.

 

[Clinton]

With this in mind we were wondering if any of you clever ...

The clever people would need a lot, lot more data to do any valuation.

Valuation is not something you do on the back of a fag packet. It takes a qualified valuer several hours to come up with a valuation ... and even then it's not a number but a range of numbers and they are dependent on several variables.

In this case your wife's business partner has made the smart move and hired someone who's come up with some very good stuff. Your wife needs to do the same!

What your wife needs is not some free opinion in a forum but someone fighting her corner and challenging assumptions made in the valuation and providing relevant corporate finance backed arguments for what she believes the price should be.

I recommend you don't try and do this on the cheap but appoint someone who is both expert in valuation and an expert in negotiation.

 

[UK Contractor Accountant]

Why don't you both agree to an independent valuation being carried out and that forms the basis of the buy out figure for the 50% interest.

Put in writing or draw up a share purchase agreement to that affect with both parties signing and witnessed.

 

[Clinton]

The problem with an independent valuation is that ... it is independent!

People often misunderstand valuation. There is no one fixed value you can attribute to a business. It's a highly fluid thing and can be significantly influenced by the seller. So, for example, a seller can add 10% - 50% to the value of their business simply by offering to defer part of the payment. Or by making part of the payment contingent on post-sale performance. Or by offering to act as a consultant for a long period post-sale.

Last week I wrote a blog post about this here.

I think the £73K offer is extremely reasonable in the light of all the details the OP has provided (the net profit, the 65% discount etc). One could argue a higher figure but it takes someone with the right skills to do that. For example, what are the net assets on the balance sheet here? There has been no mention of that! And how were the intangibles valued ie. the assets not currently on the balance sheet? (Caveat: It's not always the case that net assets / intangibles can add to the value derived from a multiple of earnings calculation.)

I believe the OP's wife would benefit not from agreeing to abide by a neutral third party's valuation - which could be extremely risky for her - but by having someone represent her to provide accounting based arguments for her own valuation and to explore how she can add value for the buyer (and, therefore, take home a larger cheque).

 

[UK Contractor Accountant]

I believe the OP's wife would benefit not from agreeing to abide by a neutral third party's valuation - which could be extremely risky for her - but by having someone represent her to provide accounting based arguments for her own valuation and to explore how she can add value for the buyer (and, therefore, take home a larger cheque).

been invlolved with those ones - was never ending with arguments from each side, cost a fortune in professionals fees, meetings after meetings with solicitors, Accountants, valuations experts (alledgely!), took forever, and at the end of the day got nowhere. Just my personal experience!

 

[Lisa Thomas]

I haven't read all the replies so apologies if I am repeating something but I would suggest your wife obtains her own valuaiton and you meet in the middle.

I can recommend a valuer if you DM me.

 

[Mr D]

You think this seems on the low side Mr D? If so (and I know prob an impossible question) but what price range wouldn’t you be as shocked by?

Just thinking that the shares are potentially worth a lifetime of dividends and the business appears to be doing pretty good. How much is restricting the other shareholder from doing what they like and keeping all future dividends worth?

 

[UK Contractor Accountant]

Who has the casting vote in meetings if you are both 50% shareholders? - need to check your Articles as this may have a bearing on 'CONTROL'.

 

[dan19900]

The problem with an independent valuation is that ... it is independent!

People often misunderstand valuation. There is no one fixed value you can attribute to a business. It's a highly fluid thing and can be significantly influenced by the seller. So, for example, a seller can add 10% - 50% to the value of their business simply by offering to defer part of the payment. Or by making part of the payment contingent on post-sale performance. Or by offering to act as a consultant for a long period post-sale.

Last week I wrote a blog post about this here.

I think the £73K offer is extremely reasonable in the light of all the details the OP has provided (the net profit, the 65% discount etc). One could argue a higher figure but it takes someone with the right skills to do that. For example, what are the net assets on the balance sheet here? There has been no mention of that! And how were the intangibles valued ie. the assets not currently on the balance sheet? (Caveat: It's not always the case that net assets / intangibles can add to the value derived from a multiple of earnings calculation.)

I believe the OP's wife would benefit not from agreeing to abide by a neutral third party's valuation - which could be extremely risky for her - but by having someone represent her to provide accounting based arguments for her own valuation and to explore how she can add value for the buyer (and, therefore, take home a larger cheque).

73k for 50% of a business with 126k operating profit? Doesn't sound very fair to me unless OP has left something major out. OP can just sit and do nothing for 18 months and they'll of made more than that.
I obviously don't value businesses for a living but 60-80% discount for non marketability seems ridiculously high. 65% discount for 50% 'minority' interest also sounds ridiculously high, based on that what would it be if OP only had 49% of the shares, 80% discount?

 

[Mr D]

73k for 50% of a business with 126k operating profit? Doesn't sound very fair to me unless OP has left something major out. OP can just sit and do nothing for 18 months and they'll of made more than that.
I obviously don't value businesses for a living but 60-80% discount for non marketability seems ridiculously high. 65% discount for 50% 'minority' interest also sounds ridiculously high, based on that what would it be if OP only had 49% of the shares, 80% discount?

It gets a tad (ok a lot) more complicated than that when looking at how much to spend to buy a business.
How much the buyer wants to spend to buy the remaining half of this business we know - would the buyer be willing to sell their 50% for the same price?

 

[Clinton]

Doesn't sound very fair to me...

It doesn't matter what sounds fair to you. Or me.

When you have just one buyer he's got you by the short and curlies.

In his place I would have squeezed harder and applied a Key Person Discount as well - ie a key person is leaving. That's another 65% off of the value.

73k for 50% of a business with 126k operating profit?

In terms of profit, that would be a little over 1x profit. That's not unusual for small firms, especially one man / two man bands. Unless you have someone who can make a good case for why it should be more.

 

[Paul Norman]

I am not going to repeat what Clinton has said. But I do urge you to read each of his posts on this thread.

In fact, print them out. Put them together.

Because they are bang on. I have spent a lifetime valuing businesses, and it is a complex process, followed by a negotiation in which both parties start pushing in different directions. Not all of my valuations resulted in a deal happening, obviously!

But for sure, most people valuing businesses to sell do value them rather generously.

 

[dan19900]

It doesn't matter what sounds fair to you. Or me.

When you have just one buyer he's got you by the short and curlies.

In his place I would have squeezed harder and applied a Key Person Discount as well - ie a key person is leaving. That's another 65% off of the value.


In terms of profit, that would be a little over 1x profit. That's not unusual for small firms, especially one man / two man bands. Unless you have someone who can make a good case for why it should be more.

Ok well I've personally not seen any businesses listed for 1x profit, not 1x genuine profit without the owner working for free anyway. Even affiliate websites ranking with spam sell for 2-3x profit

 

[UK Contractor Accountant]

HMRC's view on Discounts for Unquoted Share valuations:

Discounts Appropriate for Control Holdings

In addition to any adjustments that may be required to take into account any special rights of the class of shares in accordance with the Articles of Association, other adjustments may be necessary because of the precise size of the holding to be valued.


The capitalised value of the earnings in going-concern valuations, and break-up values in others, gives the value of the whole company.

A discount to reflect the fact that one is not actually valuing the entire issued capital and the differing degrees of control may be necessary on the following lines:

% of votes

50% holding: Neither a majority nor a minority holding. A purchaser of this holding would be comforted by the fact that no one can have a larger shareholding, and would expect to play an active part in the running of the company.
Although not a majority holding, valuation will generally be by reference to the value of the company as a whole less a discount of between 20 and 30% depending on how the remaining 50% of the equity was held. As always, the valuer must read the Articles of Association looking in particular for any mention of the "chairman's casting vote" or the position of a "life chairman". There may be instances where the prospects are that the 50% shareholder will be "locked-in" and the discount could therefore exceed 30%.

 

[Clinton]

Ok well I've personally not seen any businesses listed for 1x profit...

I don't personally care what people "list" for. They can ask for whatever they want... and they usually do!

90% of listings on Daltons, Rightbiz etc have idiotic price expectations - some are based on a multiple of turnover, others on a multiple of gross profit. Even listings done by business agents (especially listings done by business agents)!

Here are some examples of how dumb the "professionals" can be when listing businesses for sale. Listing price has nothing to do with final sale price and I'm going by examples I've seen of actual sale prices (including what I've paid to buy businesses in the past).

I have numerous examples of small businesses that have gone for less than 1x. And there are even courses around purporting to teach people how to buy a solid, profitable business for £1 (so there are many very savvy buyers who'll screw you and pay you far less than 1x)! And, yes, there are several otherwise smart business owners who got played and ended up selling for £1.

The average for OMBs is probably between 1x and 2x (if you back calculate the sale price as a multiple of earnings).

been invlolved with those ones - was never ending with arguments from each side, cost a fortune in professionals fees, meetings after meetings with solicitors, Accountants, valuations experts (alledgely!), took forever, and at the end of the day got nowhere. Just my personal experience!

Yes, that can happen as well!

<added>

OP can just sit and do nothing for 18 months and they'll of made more than that.

LOL. A common argument, and one that we in the industry hear a lot when dealing with first time sellers and/or people not being represented by professionals. It gives us great amusement at office parties. I won't point out the reasons why that's a useless argument in a negotiating room (or in corporate finance logic) but, trust me, it is.

When I was buying businesses you won't believe how often I walked away on that! "Yeah, sit on the business for 18 months, continue running it and bearing all the stress and risk. And come back to me in 18 months if you've come to your senses and want to talk again." In most cases they come back a few months later ...and a bit wiser.

 

[dan19900]

I don't personally care what people "list" for. They can ask for whatever they want... and they usually do!

90% of listings on Daltons, Rightbiz etc have idiotic price expectations - some are based on a multiple of turnover, others on a multiple of gross profit. Even listings done by business agents (especially listings done by business agents)!

Here are some examples of how dumb the "professionals" can be when listing businesses for sale. Listing price has nothing to do with final sale price and I'm going by examples I've seen of actual sale prices (including what I've paid to buy businesses in the past).

I have numerous examples of small businesses that have gone for less than 1x. And there are even courses around purporting to teach people how to buy a solid, profitable business for £1 (so there are many very savvy buyers who'll screw you and pay you far less than 1x)! And, yes, there are several otherwise smart business owners who got played and ended up selling for £1.

The average for OMBs is probably between 1x and 2x (if you back calculate the sale price as a multiple of earnings).


Yes, that can happen as well!

<added>

LOL. A common argument, and one that we in the industry hear a lot when dealing with first time sellers and/or people not being represented by professionals. It gives us great amusement at office parties. I won't point out the reasons why that's a useless argument in a negotiating room (or in corporate finance logic) but, trust me, it is.

When I was buying businesses you won't believe how often I walked away on that! "Yeah, sit on the business for 18 months, continue running it and bearing all the stress and risk. And come back to me in 18 months if you've come to your senses and want to talk again." In most cases they come back a few months later ...and a bit wiser.

Ok well I guess I won't ever be selling a small business then, really still not making much sense to me why a hands off business would be valued at 1x yearly profit but you guys are the experts.

In all honesty if you'd of offered me the same as OP was for one of my businesses and then knocked another 65% off because a key person is leaving, leaving me with about 5-6 months worth of profit for selling my passive income business then I'm pretty sure I'd be the one walking out and waiting for you to want to talk again

 

[Clinton]

There are small businesses that have gone for very high sums. If it's a hands off business then it could attract a higher price. But why are you a "key person" if it's a hands off business? Surely it's either dependent on you or it's not dependent on you, it can't be both!

Don't ever contradict yourself like that when you're selling a business or you'll immediately lose some prospective buyers! They won't even get to the point of asking for your NDA.

A large reason why the multiples are so low for small businesses is ...they are high risk. The smaller the business, other things being equal, the greater the risk. The more you can remove risk for the buyer the higher the price you can expect.

Small businesses are ridiculously difficult to sell. If you don't like the kind of price that the market is paying for small businesses then ... why don't you remortgage your house and go and buy some of those businesses? That's surely an opportunity, no?

Here's what I wrote for UKBF on this topic.

 

[dan19900]

There are small businesses that have gone for very high sums. If it's a hands off business then it could attract a higher price. But why are you a "key person" if it's a hands off business? Surely it's either dependent on you or it's not dependent on you, it can't be both!

Don't ever contradict yourself like that when you're selling a business or you'll immediately lose some prospective buyers! They won't even get to the point of asking for your NDA.

A large reason why the multiples are so low for small businesses is ...they are high risk. The smaller the business, other things being equal, the greater the risk. The more you can remove risk for the buyer the higher the price you can expect.

Small businesses are ridiculously difficult to sell. If you don't like the kind of price that the market is paying for small businesses then ... why don't you remortgage your house and go and buy some of those businesses? That's surely an opportunity, no?

Here's what I wrote for UKBF on this topic.

It was you who did that, OP said it was hands off in his opening post, you said you'd of knocked another 65% off because a key person is leaving. But I've already said I definitely won't be selling any of my own businesses at those sorts of prices anyway.

Well I probably will buy some in the near future if that's roughly the going rate, as I said I've not seen any around those sorts of prices before. Can't remortgage the house as the wife would kill me but I'll start looking and raid the piggy bank

 

[Clinton]

Well I probably will buy some in the near future if that's roughly the going rate, as I said I've not seen any around those sorts of prices before.

Excellent! See you on the other side (and, again, don't go by "asking prices", not even if backed by impressive spreadsheets! More fiction is written in Excel than's ever been written in Word.)

 

[Financial-Modeller]

The clever people would need a lot, lot more data to do any valuation.

Valuation is not something you do on the back of a fag packet. It takes a qualified valuer several hours to come up with a valuation ... and even then it's not a number but a range of numbers and they are dependent on several variables.

In this case your wife's business partner has made the smart move and hired someone who's come up with some very good stuff. Your wife needs to do the same!

What your wife needs is not some free opinion in a forum but someone fighting her corner and challenging assumptions made in the valuation and providing relevant corporate finance backed arguments for what she believes the price should be.

I recommend you don't try and do this on the cheap but appoint someone who is both expert in valuation and an expert in negotiation.

This is excellent advice.

If only OP could find somebody, able, qualified, experienced, and available now, to work for her to build a robust valuation that more closely reflects her ambition....

 

[G. Lasagne]

Hi everyone, just wanted to say thanks very much for all the help and advice.

Based on your comments my wife decided to seek professional Corp finance advice and eventually settled for £107k lump sum payment.

In terms of next steps, and assuming the fee is set at £107k is it vital she appoints a solicitor if the other side are drawing up the share purchase agreement?

She’s had quotes of between £1500-£4000 which feels steep now the deal is agreed. To remind you, she’s selling 50 ordinary shares to her current business partner who already owns the other 50%. The business partner looks after finances so our thinking is no guarantees or covenants should be required. My wife has also been out of business for a few months on mat leave meaning the business partner is much more up to speed on current business position and affairs than she is.

As always, great advice given on here that stopped us going round and round in circles and make an informed decision, so thanks again!

 

[Clinton]

... is it vital she appoints a solicitor if the other side are drawing up the share purchase agreement?

Yes.

She’s had quotes of between £1500-£4000 which feels steep ...

It's not steep.

My wife has also been out of business for a few months on mat leave meaning the business partner is much more up to speed on current business position and affairs than she is.

Irrelevant.

 

[G. Lasagne]

Yes.

Thanks for coming back so quickly Clinton. Why do you feel it’s vital?

 

[Lisa Thomas]

Duplicated post. See the response on your other thread - your wife should seek her own independent advice to ensure the sale is fair and she is protected all round. £1.5k for a £107k sale is not steep!