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  • Laura Landmark

YOUR BUSINESS IS ONLY WORTH WHAT SOMEONE IS WILLING TO PAY FOR IT, OR IS IT?

Your business is only worth what someone is willing to pay for it, and in the world of SME’s (small/medium enterprises) a crucial part of selling your business for a desirable price is negotiating with your potential investors or buyers.


It’s hard to negotiate however when you have a weak starting point and are uncertain what your company is worth on paper, relying on gut feel or loose comparisons ain't gonna cut it.


Now, as the title says, at the end of the day, the business is only worth what someone is willing to pay for it, BUT, they are likely to be willing to pay more if your business case is made with clarity and conviction and is backed up by cold hard figures!


As a long prequel to any sales negotiations, regularly valuing your business could help you focus on areas of weakness that might need plugging or fixing well before the intended sale date so they don't drag the value down when the time comes. This will give you a proven track record of good performance instead of a last-ditch effort a few months before your buyers start their due diligence.


Building value into the business up front could include: -

  1. Diversifying risk, ensuring you are not relying too much on one main customer or supplier for example - this doesn't look good to a buyer!

  2. Building systems and processes so that you can create confidence in your buyer about the solid underlying foundations in your company

  3. Showing the path from where you have been to where you are now, and where you intend the company should go. You can do this by keeping records of Board meetings minutes and cataloging the minutes of your Strategy meetings over a long period of time for example. Make it all readily available for your buyer to review, and this will instill a huge amount of confidence.

All of this helps, but still at the end of the day, to build a valid case to justify your desired position you need numbers!.

There are rules of thumb that could be applied in certain industries to help you come up with a number which represents the value of your business, or you could for example go the simple route of adding up everything you believe would be necessary to recreate the business you have today. But even these “simple” calculations take time to complete, and at the end of the day, they are not very convincing.


As a solution to this we have recently created a rolling driver based valuation model. It works like a dream, the user just plugs in or updates their assumptions about the future performance of their underlying drivers in an “input template”, and then model sucks the historic performance and joins it with the projected performance, then calculates the value today based on the discounted cash flow method (DCF) and ‘Bobs your uncle’!


The beauty of the DCF method of valuation is that it is very comprehensive, as it includes all the major assumptions about the business. It basically crunches all these assumptions, and looks at the businesses ability to generate money in the future then discounts that to today’s value.


It is hard to argue with the DCF method since it is so detailed, and when built on a cloud-based Business Performance Management (BPM) platform it is also very robust and isnt prone to errors like it could be if it was run in excel.


The cloud based automated model is also lightening quick, so you can refresh it every month, week or day if you like, to keep your eye on that elusive number.
"THE" number which will determine the quality of the rest of your life (maybe!).

The thing I like best about our automated model however, is the ability to use it for scenario planning. If you have a goal of exiting your business in 5 years say, and the desire to buy a beautiful holiday home, complete with pool and palm trees, then you had better get your ducks in a row and your exit plan tight!



Photo by Vita Vilcina on Unsplash

Scenario planning will involve playing around “on paper” (online digital paper of course!) with the steps you need to take to hit that goal.


This means flexing up and down the drivers and different elements of your plan to see what the likely outcome is. For example, what will happen if you employee 2 more people next year, and their output is x. Or maybe you want to adjust some balance sheet assumptions to see what will happen if you invest in a new fixed asset in two years, or repay a loan earlier than expected +++


You can then break the resulting master plan down to your current reality and start creating concrete actionable steps to propel you towards achieving your targets; creating milestones which lead you from your “current reality” to your “luxury beach villa”!


Having a rolling valuation model will help you stay on track as to whether you are moving closer of further away from your multi-million dollar exit! Your planned exit date will effect your discount factor, but it is easy to dial this back and forwards once you have all the underlying data in place.


Of course, I am being a bit crass here, I realize not everyone is purely motivated by a big exit cheque from their business, but may have higher, loftier goals. Maybe you are building the business for the next generation, or leaving it in the will to the cat. But no matter why you are in business, it is likely you are aiming to create something of value… for someone. at some point.


The rolling valuation model is a tool I can highly recommend for serious growth businesses, and it is super fun to play with!

In closing, I should state there is no perfect method of valuation, it is subjective and dependent on a number of non-financial related facts. Ideally when you get to the point of selling you will use a number of different valuation methods to make sure the price is right, as well as hiring in some specialists from the bank or an industry focused valuation agency to get you the best possible outcome from the sale of your business.


Here are a few screen shots with masked numbers of the valuation model which we have just finished building.


For the purposes of this, we used one of our partner products, a software called Bizview365 made by Bizview Systems to create the model.


Bizview365 is fantastic software which sits on top of your other financial and operational systems. It is open on the back end, so allows us to suck in numbers from diverse data sources. This can be very useful if you are trying to track non-financial measures or make calculations based on non-financial business drivers, in other words for number crunching numbers that are not available in the accounting system.


I invite you to contact me for a conversation if you would like to know how we could create the same kind of rolling model for your business. Then you can just sit back and watch your value grow!


The model:-


After updating the underlying drivers in an "input template" (not shown here) the P&L gets automatically calculated and updated. In this case we have actuals rolling back the last two financial years and actuals year to date (YTD) for the current year in the third column. The other columns are projections which are calculated based on the driver based "input template" (not shown here).



auto calculated driver based P&L


auto calculated balance sheet


auto calculated cash flow statement

auto calcuated valuation using DCF method, you wanna aim for the number in the red circle!


This model rolls forwards five years, so calculates a value at today's date based on all the likely activity from 1/8/2019 - 31/12/2023.

At mantle we specialize in creating rolling forecasts of all shapes, sizes and forms for small / medium sized business all over the world.


We work mostly along side accountants and CFO's either in practice or in industry, empowering them with technology based solutions in order to transform the businesses they work with.


Accountants, imagine if you had this working model connected to your accounting system so that you could use with all your high growth clients. Being able to offer them this kind of insight must surely count as a value adding service!

Contact me (Laura), I would love to have a chat with you on ll@mantleanalytics.com

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