New Report: What Affects The Value of A Business?
“…a great insight into what drives the value of privately held businesses.”
The UK remains on top, despite a slight downward shift in optimism
The latest report* from The Value Builder System™ on the value of privately owned businesses worldwide has been released, providing a great insight into what drives the value of privately held businesses.
The headlines reveal a continued drop in the overall value of business sales. The only change from last quarter within the UK & Ireland is a slight reduction in owner optimism around growth over the next 12 months (see Owner Optimism below).
Click here to download the entire report – The Sellability Tracker Report Q1 May 2016
Firstly we’ll look at the overall global market for business sales, with comments from Paul Dodgshon, Certified Value Builder and Business Broker at Uscita Solutions Ltd:
• The Business Liquidity Index (BLI) has dropped to its lowest point on record, from 90.9 to 81.8 for the quarter ending March 2016.
Each quarter, The Value Builder System™ measures the proportion of business owners who received an offer to buy their business. Expressed as an index, 100 being the average.
• The average offer multiple has slipped from 3.64 to 3.55 times pre-tax profit
The strength of an offer is presented as a multiple of pre-tax profit. Moving in line with the BLI, the average offer received by users of The Value Builder System™ in the first quarter of 2016 dropped to 3.55 times pre-tax profit.
Paul comments: “this latest update shows that over the last quarter, a smaller proportion of business owners received an offer to buy their business compared with the previous quarter, and that the value of those offers fell slightly. For those of us advising business owners, it is even more important we do everything possible to maximise the value of a client’s business, if they wish to sell. The numbers below confirm the need for us to focus on the charecteristics of a business that directly impact the price acquirers are prepared to pay.”
When asked “Do you expect your revenue to increase over the next 12 months?”, around the world fewer owners answered “Yes” this quarter. The only exception being the US. Despite this the UK still remains the most optimistic market with nearly 90% of owners expecting growth.
When asked “Is your industry growing?”, the response is mixed depending on geography. The UK and US are less optimistic, whereas owners from Australia, New Zealand and Canada are more optimistic than last quarter, albeit from a much lower base.
Paul comments: “Maybe the continued uncertainty around our position in Europe has taken a small toll since last quarter – hence the downturn in optimism. Despite this slight shift, UK business owners remain the most optimistic for growth in their industry the world over.”
Now let’s look at the detail behind the findings of this latest Value Builder survey, and what directly affects the value of a business.
In brief, the key factors that affect value are:
- Demonstration of growth – either industry wide or company based
- Scalability – either geographical or the capacity to cope with demand spikes
- Standardisation – the more the better for an acquirer
- Recurring revenue streams delivering at least 50% of sales
- Size – the higher the turnover, the better
- Future potential for increasing market share
- Having a monopoly thanks to a competitive advantage
- Proof of market influence
- Owner Reliance – the business needs to run without the owner
- Financial and procedural record keeping
- Owner age being between 50-59 years old
- Having a Value Builder Score* of 80+
Growing companies receive higher offers. If a firm is showing over 30% growth, they will receive offers 25% higher than average. If they are showing this rate of growth AND ARE IN THE UK, they will receive offers at least 40% higher than average.
Paul comments: “Buyers place value on the growth potential of a business. If your client can demonstrate consistent growth, delivered by a systemised business, then higher offers will be received. As with last quarter, the optimism and interest shown in UK companies, growing at a rate of 30+%, is greater than anywhere else in the world, with a multiple of 5.21”
1.1 Growth Industries
Companies in growing industries will receive higher than average offers, ESPECIALLY IN THE UK.
Paul comments: “Despite the slight softening in the last quarter, this measure demonstrates that regionally, the UK market for business sales is still out-performing the rest of the world in terms of buoyancy and optimism. Companies in growing sectors in the UK typically receive even higher multiples of 4.34, compared to the global average of 3.96.”
2.0 Geo-Scalable Businesses
Businesses with international reach are more likely to receive a higher than average offer. ESPECIALLY IN THE UK.
Paul comments: “If a business has been built to scale-up geographically, it can expect average offers around the world of 4.06, but in the UK this increases to 4.35.”
Presented with the following options, owners were asked to consider their ability to accommodate 5X demand:
- Very Difficult
- Fairly Difficult
- Fairly Easy
- Very Easy
If a business rated this increase in demand as ”Very Easy”, their offers will have been 4.56 times pre-tax profits, compared to 2.94 for those who answered “Impossible”.
Paul comments: “Consider a business sale from a strategic buyer’s point of view – if a substantial increase in sales represents short-term problems with staff, cash-flow, storage, premises etc, of course he will reduce his offer, to reflect any further investment he has to make. A business with in-built scope for huge increases in demand is much more appealing, especially for a buyer with plans for growth.”
3.0 One Size Fits All
Companies offering high levels of standardisation (with little or no customisation) are more likely to attract buyers, PARTICULARLY IN THE UK.
Paul comments: “When considering an acquisition, a buyer will look for as many ‘scaleable’ elements as possible. Contrary to what many of our clients may think, bespoke work – whilst being more profitable – is not always more valuable. So the more complex the delivery of your client’s product or service, the less interested a buyer may be. This is borne out by the average offers made to businesses with high levels of standardisation, being 3.99 times pre-tax profits, compared to 3.55 overall. In the UK the multiple is higher still at 4.18, suggesting that UK markets value standardisation more than most.”
4.0 Recurring Revenue
Businesses showing recurring revenue within their sales streams are more likely to receive offers, and they will be higher.
Paul comments: “Recurring revenue represents guaranteed income, a major comfort to a buyer. As a result, businesses with annual subscriptions, membership fees or renewable contracts, enjoy higher than average offers when they choose to sell. If your client can achieve at least half their sales through recurring revenue, their offers will be higher (4.14 Vs 3.55).”
5.0 Size Matters
If a business can hit turnover of £7m+ they will enjoy offer multiples 43% higher than the average.
Paul comments: “UK businesses even with £2m+ turnover receive dramatically higher offer multiples than average (4.73 Vs 3.55). Simply the larger the business, the less risk it represents for a buyer.”
6.0 Market Share
If your client’s business currently serves only a small share of their market, they will receive a higher than average offer from a buyer. The report tells us that owners who were either unsure of their market share, or thought most people wanting their product or service were already customers, received below average multiples.
Paul comments: “This is about the room for growth. If a company already serves the majority of their potential marketplace, although a sign of success for the incumbent owner, it can be of little interest to a new one. Not knowing your market is an even bigger sin for buyers.”
If your client has a monopoly in their market, they will receive offers almost 50% higher than average. Again, if they have a MONOPOLY IN A UK MARKET, this increases to almost 70%
Paul comments: “Competitive advantage wins the day. Indeed businesses with a monopoly in UK markets receive offers wth an incredible average multiple of 6.0! Across other regions this is only as high as 5.43, showing the UK again as the place to be for owners of businesses that can occupy a unique place in their market.”
The higher the number of subscribers to a client’s newsletter, or social media followers, connections, likes etc, the higher their offer will be.
Paul comments: “It appears social media has a measurable value, but in reality a buyer is looking for a business with market influence. With 100,000 opt-ins or followers, the average offer rises by nearly 1 year’s worth of profits. This compares to a below average multiple of 3.02, for businesses with no proof of their market reach and influence.”
9.0 First Name Terms
The closer an owner’s direct relationship with their customers, the lower their offer multiple will be. Owners of businesses sold in the last quarter, were asked to rank their relationship with their customers as follows:
I know each of my customers by first name
Usually customers want to deal with me rather than my employees
I know some of my customers by first name
I don’t know my customers personally and rarely get involved in serving an individual customer
If they answered ‘4’, their business will sell for an average multiple of 4.54, compared to 2.92 for those on first name terms.
Paul comments: “This is a key risk for buyers. If an owner deals with customers directly, the survey proves that he is risks losing up to 1.5 years worth of profits from the sale price of his business. Not only that, in my experience, the deal will also result in an earn-out, increasing the risk for the seller.”
10.0 Record Keeping
Good news for Accountants. The better a company’s financial record keeping, the higher their offer will be.
Paul comments: “As you will understand only too well, business owners who present their financial records to you in a shoebox are time consuming to deal with. You have to work hard to get down to the real numbers behind the business – this is exactly how a buyer views it! Their preference will be for firms using accounting software at the very least and audits are best.”
11.0 Age of Owner
Younger owners are more likely to receive an offer than older owners, but the offer will be a lower multiple.
Paul comments: “These findings are unsurprising, but what should be focused on here is the optimum age to sell a business. Basically, in terms of offer multiples received, the optimum age for your clients to sell their businesses are when they are aged between 50-59 years.”
12.0 Value Builder Score
The average score is 59.1 (out of 100) and businesses with this score typically receive offers of our average multiple 3.55. We work with clients to build their Value Builder score before sale. When scores reach 70-80, average offers increase to 5.10 x turnover. If they stick with us and hit a score of 80+, they will receive, on average, 6.27 times turnover.
The Value Builder System™ is a statistically proven method
for increasing the value of businesses.
If you think this service may be of interest to any of your clients, please contact us today and we will be happy to help. For over 10 years, Uscita has specialised in business valuations, brokering sales and acquisitions as well as developing growth for SME owners. To read more about our services please click here or contact our office in the strictest of confidence, on 01606 535020, or call Paul directly on 07875 173104.
*The Sellability Tracker is a quarterly study designed to track worldwide trends in the liquidity of privately held businesses. This study was conducted by the team at The Value Builder System™— a cloud-based software application that allows business owners to evaluate the “sellability” of their company. We analysed data from over 20,000 users of The Value Builder Score from around the world between July 1, 2012 and March 31, 2016. The majority of participants were from the United States, the United Kingdom, Canada and Australia. 96.4% of business owners surveyed had revenue (annual turnover) of less than $20,000,000; 3.6% had revenue in excess of $20,000,000. Findings are considered accurate +/-0.81% 19 times out of 20.