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Sterling Corporate Finance Book Helps to De-Mystify the Business Sale Process
In the second extract from his forthcoming book, How to Sell Your Business, Andrew Rose, partner with Sterling Corporate Finance, explains some of the terms used by advisers when determining a sale value. To request a copy of Andrew Rose’s book, email info@sterlingcf.co.uk .
When determining a sale value, certain phrases are commonly used, which are everyday jargon for professional advisers. Let’s demystify these phrases.
Adjusted profits
The Information Memorandum of a business for sale will often contain the phrase “adjusted profits”. Most businesses are owned by the directors who might take higher remuneration rather than dividends and have management costs significantly higher than the costs which would be incurred if the work was performed by an employed manager. It is only correct to add these excess costs back as they will not be incurred after the sale of the business. This means that the maintainable profits will be higher. There may be other one-off costs that can be added back but care must be taken not to stretch credibility as this could create a negative impression that a business has been “dressed up” for sale.
Surplus net assets
An assessment should be made to identify any assets that are surplus and not required to support the ongoing working capital requirements of a business. Any assets, usually cash, which are deemed to be surplus should be excluded from the completion date net asset target when determining the value of a business as they will, subject to appropriate tax advice, be capable of being retained by the vendor either by way of an additional dividend at completion or enhancing the consideration received for the sale of a business.
Cash free/debt free valuations
Debt free means that if there is a bank overdraft or loan, then the vendor will be required to settle the liability to the bank at the date of completion or the purchase consideration will be reduced by a similar amount.
Cash free means that the cash, which is deemed to be surplus, as discussed above, will be extracted from the business, either by way of a dividend or as an enhancement to the consideration payable upon completion.
Summary
The value of a business is not determined by a simple, mechanical number crunching exercise. The points made above will enable a judgement to be made as to the worth of a business in the open market and the price achieved will be influenced by how well that business is presented to potential purchasers and the skill of your negotiator.
In the next extract, from How to Sell your Business, in January 2011, Andrew Rose addresses the different types of buyers for a business. For more information, visit www.sterlingcf.co.uk
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