Entrepreneurs who want to sell company, often wonder what the valuation of their company is. Our first reaction is often 'what the hell will give'.
Although this is a well-substantiated method with a clear vision, we understand that this answer may be too short-sighted. In this blog you will receive a number of No Monkey Business tips to arrive at a good valuation of your company.
We give you insight into market averages, explain our 'what the hell' approach and discuss common valuation methods, such as the Adjusted Present Value and the goodwill method.
Indicative company valuation with market averages
Let's start with some market averages. This allows you to arrive at an indicative valuation of your company. The method is very simple.
Take the average gross profit (EBIDTA) of the past 3 years and multiply this number by a so-called multiple.
Brookz gives in its annual Acquisition Barometer insight into the average multiples of the Netherlands. In SMEs, the average multiple is 4.9. In concrete terms, with this multiple, with an average gross profit of, for example, €200,000, you arrive at an indicative valuation of €980,000.
Tip: Already an indication of the value of your company? Start with the ExitCalculator and click the button below for more information.
However, it is important not to count yourself rich. The average multiple differs per sector. Media & Communication companies use an average of 4.6, while the IT & Online sector is a positive outlier with 6.1.
The disadvantage of this indicative valuation is that it does not pay attention to the potential of a company. And that is precisely one of the first factors a buyer looks at.
Low EBITDA? No problem!
You often read that companies that make little or no profit at all are sold for high amounts. How is that possible? Well, those companies have enormous future potential.
For example, because they have made investments – often with a view to growth – the EBITDA figures for the past three years have lagged. That can be a very conscious choice.
In that case, it is crucial to work with financial forecasts for the next 5 years. A potential buyer thus immediately gets a feel for the payback period of his purchase price.
Tip: these are the success factors for a dream exit
This Adjusted Present Value valuation method therefore looks at future financial performance in the form of free cash flows.
Do you want to further increase buyer confidence? Then create multiple scenarios, such as a pessimistic and a realistic scenario. With this you show a future buyer that you are not selling castles in the air, but that you have thought carefully about the sharp edges.
As a third possibility, you can make an optimistic scenario. This is especially valuable if you intend to stay on for a few more years after the sale.
Tip: Use historical figures as much as possible. Optionally, you can use market averages that are publicly available. It's all evidence that builds buyer confidence.
'What the hell gives' method
Recent headlines prove it: the "What the hell gives" method is stronger than ever.
“Dutch software farmer sold for 21 million.”
“Amsterdam software maker sold for 80 million dollars.”
“Siemens pays 600 million for Rotterdam software company.”
These are just a few examples where sometimes a multiple of more than 20x EBITDA has been paid! But how do you do that?
Let the buyers bid
The answer is simple: let the buyers bid. It is advisable to manage this process well. You don't approach every business associate and his mother. You make a long list of buyers who you think will immediately experience added value when buying your company.
These are often strategic buyers. These are companies that can increase their market potential with your product or service. Companies where your solution is the missing link can be to grow further.
Our founder, Martijn van der Hoeden, has tackled the sale of his company Assistance Software in this way.
He approached his long list based on an investment memorandum and financial forecast. Each potential buyer was given the opportunity to make an initial offer based on this information. Martijn not only made an inventory of the price, but also the global conditions and next steps.
He then compiled a short list based on the responses and conducted interviews. Ultimately, Martijn successfully sold his companyt to Unit4.
Tip: this is why you sometimes have to say no to new customers
Tip: if you apply this method, it is important to work with NDA agreements. You don't want potential buyers to run off with your company information!
Other Business Valuation Methods
There are several other proven business valuation methods. Such as valuation based on the intrinsic value, profitability value, the Goodwill method or the Discounted Cash Flow method.
A warning is in order. Put three different business valuators to work and they get completely different results with different methods.
If you want to have an official valuation carried out, make your own choice for a specific method. Get advice on the method that best suits your business model.
Know that this is a costly affair. An official valuation can easily cost you €5,000 to €15,000. In addition, buyers always want to carry out a valuation themselves. You can therefore ask yourself whether a valuation in advance adds a lot.
Do not immediately put a 'for sale' sign in the garden
In conclusion, it is good to know that as an entrepreneur you can play a major role in increasing company value.
If you put a 'for sale' sign in the garden today, you are guaranteed not to get the best price for your business. Think about your exit early and take the time to prepare well.
It also makes sense to 4 Step Exit Program® to read. This program shows you how to get well prepared. Ask for help! We ourselves have all sold our company.
We have also experienced that a mentor/coach ensures that you take the right steps. You only have one chance to to sell company. So get everything out of it!
