How do I get the best valuation in today’s market?

By Harry Walker – partner, FRP Corporate Finance

Businesses have a lot on their plates. From staffing and skills shortages to supply chain disruption, soaring energy costs, rampant inflation and slowing consumer spending, firms are operating in a hugely dynamic environment – with big changes continuing to come thick and fast.

This dynamic environment means new challenges when it comes to valuing a business. Quite simply, fundamental economic factors like interest rates and inflation that have been relatively stable for so long are now increasingly unstable and unpredictable – adding complexity to the pricing metrics that buyers may benchmark against.

Similarly, looking back at historical performance figures, which usually have a significant role to play in the valuation process, is particularly challenging given the disruption of the pandemic and the uneven recovery paths the different businesses, and sectors, have taken.

Some elements of a valuation will always be linked to the level of demand from buyers, which is linked to the availability of capital. After an extended period of cheap money, that has recently become a lot more expensive; just this year we’ve seen a series of interest rate hikes, up from 0.1 per cent to 3 per cent, and we can confidently imagine that more are to come.

But with all this said, the market remains relatively healthy, driven in part by private equity investors’ large war chests, supported by public market money, which means we expect to see appetite for good quality firms remain, even through the current turbulence.

And trade buyers will also be seeking ways to futureproof their businesses, with an eye out for quality acquisitions.

The bottom line is – there’s still huge opportunity for buying and selling businesses.

And it will remain imperative for shareholders considering a sale to ensure they’re getting the most they can for their business – even if there are new considerations to keep in mind when it comes to the valuation process itself.

So, how can firms get the best valuation in today’s market?

Value drivers

The good news is that the fundamental factors that affect valuations are, very often, those that attract buyers to a business in the first place.

Purchasers will be scrutinising the historical financials of a business – the first port of call for any valuation. But as well as considering the value of assets, cashflow strength and profitability today, buyers will be looking at its potential for growth and cash generation well into the future. Many factors feed into this potential, and being able to highlight these can help firms increase their value.

Understanding the market a business operates in, its position within it and how defensible its revenues are is also key. Contracted, recurring sales to a long-term customer base are usually more valuable to buyers than large one-off sales to infrequent customers or low-value sales of generic products to the general public. Equally, if a market has fundamental growth drivers, such as demographic trends, then businesses will generally be more valuable than those in structurally declining markets.

What a business sells, as well as how a business sells, is also important. Although not relevant for every business, possessing intellectual property (IP) is hugely valuable – and something the right buyer may be willing to pay a premium for. Even if the IP hasn’t yet reached market maturity, it could be a game-changing technology that evolves to do so in the future, and buyers may price this in.

Businesses that do things in a different, better, way from their competitors, even if that method isn’t patented, will also be attractive to buyers and therefore attract higher values. For example, a business operating in a traditional manufacturing sector might find it is able to scale more quickly and more profitably than competitors by outsourcing production and developing a direct-to-consumer channel, whilst retaining design, branding and sales in-house. This business is likely to be more valuable due to its growth potential than a traditional competitor doing everything in-house and therefore requiring more cash investment in capital expenditure and working capital to grow.

Demonstrating the strength, depth and experience of a management team is another factor that can improve price. This is not only because a buyer’s investment will be in safe hands, but also the team will drive a firm’s future growth and the buyer’s returns on investment.

The elements that matter most to buyers – and therefore determine how much they will pay – will, however, be specific to each company, and can vary between private equity investors and trade buyers.

Private equity investors will be more focused on return on investment, with an eye on a profitable exit. They may be willing to pay a premium for businesses in niche market positions, or where there are opportunities to make further acquisitions. Demonstrating this potential can be advantageous to a seller in securing a higher price.

Trade buyers may, however, have more strategic priorities, like buying complementary businesses that can help them achieve efficiencies or enter new markets. Being able to highlight clear opportunities for synergies can go a long way in increasing the price they’re willing to pay.

Ask the experts

Ultimately, a business is only worth what someone is willing to pay for it, and this will vary from buyer to buyer.

Determining core value is a key first step in making decisions around selling and investing in your business. But maximising this value will then be about finding the right buyer and presenting them the opportunity in the right way so that they understand and are excited by what you have to offer.

Having the support of a third-party professional valuer will help you develop a robust market pricing expectation. Combining this with the expertise of a partner who can then help you identify and approach potential buyers with appetite and present the opportunity to them in the right way is key.

At FRP Corporate Finance in the East Midlands, we use our extensive experience to help give companies and their stakeholders an independent view of their market value. We then leverage our expertise to help prepare a business for sale, identify the right pool of potential purchasers, present the opportunity the right way to those buyers to highlight all of the key value drivers for the business and compare and negotiate the offers that come in.

For more information on how our East Midlands team can support you in understanding your valuation and potential sale strategies, get in touch: harry.walker@frpadvisory.com.