What is my business worth ? and how can I maximize it's value
Posted on November 13, 2014 by FGL
I’ve done some work this week for a Company where one of the Directors wants to retire and sell his 50% shareholding to his co-owner and they have debated long and hard on how much the business is really worth.
Fortunately, they are pragmatic and realistic and having taken advice on what it could be worth based on historic performance (pretty low) and what it could be worth based on future potential (quite high). They have reached a good compromise that they are both happy with and, more importantly, one that the Company can afford !
The most tax efficient way to achieve both their goals was for the Company to buy back the retiring Directors’ shares – and they are now faced with the choice of how to actually achieve it:-
- Borrow – and pay back out of cashflow/ profits over 5 years
- Pay out of ‘reserves’ – and possibly put pressure on cashflow going forward.
- The remaining Director injects cash ( Directors Loan) into the business to pay for it.
- Agree a phased buy back:
- Sell all the shares now, and agree a payment schedule – which would still maintain eligibility for Entrepreneurs Relief (as the transfer of shares is completed)
- Sell the shares in tranches – eg 25% p/a for 4 years at a pre-agreed value calculation.
Three key learning points came out of this exercise for me.
- Plan your exit Strategy early – so you are in a position of maximum choice ie so you could implement it if you wanted to, but may choose to continue working 12 hour days because you still love what you do !!
- A Business is only worth what someone is prepared to pay for it or sell it for – whatever the ‘experts’ say
- But what got me thinking most of all, was their focus on the future potential value of the Business and using the same principles to maximise the performance and value of a Business now – even if you have no intention of selling it yet!
I suppose I likened it to selling your house and I am sure we’ve all gone through the process at some stage when we think about moving (for whatever reason) – then have a good hard look at the house and garden with ‘ buyers eyes’ on. There are bits you don’t like – so you improve or renovate them and bits you’d forgotten to appreciate and so you make them a ‘feature’ again. And finally you look at the potential of the place, to extend or convert etc.
Apply that process to your business, put ‘buyers eyes’ on and all of a sudden you’ve got a different perspective on your own business. Take a good hard look at it, warts and all and with improvements, challenging of ‘spanish customs’ and creative ways to maximise your potential, all of a sudden you’ve improved current performance and longer term VALUE.
Taking time out to do this exercise is probably the hardest bit but believe me it will be worth it. Our Business Healthcheck is a great starting point. There are 50 best practice activities to look at and the aim is to identify 4-6 performance improving actions. The Questionnaire, with a 2 hour Consultancy session, is probably the best money you could spend so give me a call or email me for further details. David Salkeld Frost Group – Croydon “Great Business Advice – at a realistic price” 0845 260 0101 email@example.com
Our Business Healthcheck is a great starting point. There are 50 best practice activities to look at and the aim is to identify 4-6 performance improving actions. The Questionnaire, with a two hour Consultancy session, is probably the best money you could spend so give me a call on 0845 260 0101 or email me firstname.lastname@example.org for further details.