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Valuations

Business valuations at Suitegum are undertaken by trained specialists with a quarter century of experience in the mergers, acquisition and disposal fields. Our valuations are used for reliable information purposes in respect of preparing a business for sale, part share sales, divorce resolution, shareholder disputes, partnership dissolution, annual reality checks, and many more instances.

Business valuations are like opinions – everyone has one, but not many hold any credence. Certainly there are many ways of expressing a value of any business, whether it is by way of a multiple of sales, multiple of gross profit, multiple of profit before tax or after tax, drawings multiples, factors of owner’s earnings, or whatever the social DIY or braaivleis opinion is this week.

Of course, you are free to express your own opinion of value, based on any combination , sum or product of any of those methods. That’s fine; but it would be a lucky coincidence that a buyer or part investor would maximise your return AND pay that price. Until that test is passed, you have no value.

The braaivleis valuation is perhaps the most dangerous at both ends of the spectrum: they most often result in company valuations which are too high, and therefore breed unrealistic expectations, or sadly; the business valuation model espoused results in an asking price which is far too low, compared to what the market would quite realistically pay.

The tragedy of ending up with an asking price which is too low is two fold:

  • On the one hand the obvious sadness is that a seller accepts a price way below that which his blood sweat and tears over the years should have yielded. There are few purchasers who are going to point out the error of the seller’s business valuation methods. “It’s business, don’t you know?”
  • Alternatively, we have heard of buyers being distrusting of asking prices which are too low. They ask themselves what could be wrong with the business, that the price would be so low. Honest but naïve sellers, just looking for what they regard as a fair deal.

What typically happens at a braai, a party or a chat between mates is the following:

One person tells another that a friend of his has just sold his business. Out of the starting blocks, first hand information is not at hand; but that is ignored as both parties become 3rd grade specialists. The alternative scenario is that the actual seller is party to the discussion, but is reluctant to divulge the real numbers for a host of different reasons; so he rounds figures, either down or up, depending on his personal agenda, and to whom he is talking.

The listener hears with a jaundiced ear: He takes in information selectively, most particularly around issues of what constitutes profits. Are they gross profits, operating profits, net profits before tax, or after tax? Seldom is there any discussion about working capital requirements, inventory (stock) levels, inventory turnover, the rising or falling debtor and creditor days, the resulting cash gap, or any elements of the cash flow of the business.

So having probably chosen the wrong base information anyway, the broad valuation formula error is compounded by employing a generic multiplier. Throughout this discussion we consider a situation where the preacher has sold his business at fair value. But what if his selling price was below par to start with? That makes it even worse for the receiver of such counsel.

Further to this argument, we have not considered that the parties may be from entirely different industries, one may be retail, while the other is a wholesaler or manufacturer. Market valuations differ widely from one industry to another, the nature of the customer, the number of suppliers and whether there is a redundancy of supply built in. How do customers pay, and how many are there? What is the exposure to staff and to impending legislation? What is the seller’s exposure to foreign currency, strikes, economic downturns, public holidays, and so on?

Very often small companies compare themselves to vaguely similar entities listed on the local stock exchange. This is another minefield of mistakes, and usually on the high side. The fact is that any private company valuation is conducted on a completely different basis to that of a company that has to to comply with the requirements of a small army of regulators. Entirely different business valuation methods are employed where large capital bases are concerned, and where management salaries are a fraction of the total salary expense. Small and medium enterprises typically need to account for a large proportion of owner and management salaries in their business valuation templates. Listed business usually have a very high turnover of shares, and investors can get in and out relatively easily – not so for small businesses.

The Suitegum Business Valuation

Our valuation starts with the base information:

  1. We require the owner of the business (or some responsible person) to provide the annual financial statements, plus some other information. This is aggregated into our model. If your business is worth anything at all, this should be very easy.
  2. Then we conduct an interview – a process wherein we interrogate the fundamentals of the operation. We probe to understand the strengths and weaknesses. With only the responsible person present, we look for what prospective buyers may use as an opening to drive the offer price down, and between us, we look for a counter to that wedge. (Remember this is long before a buyer interacts with a seller. So we have time to attend to some emergency aid, if necessary)

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This process of aggregation and interrogation helps us both to understand appreciate the key valuation indicators (KVIs) of your business, so that you will understand how the strengthening or weakening of one particular indicator will influence the personal wealth of shareholders in years to come. This evaluation of KVIs coupled with the numeric data from income statements, balance sheets and cash flow statements gives a solid base for a real, honest and reliable valuation.

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From there, the real decisions of life can be made with some certainty:

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Regular business valuation customers are able to devise their long term strategies around meaningful information. They can implement monthly tactics with respect to employment decisions, asset purchase, debtor and creditor control to the best benefit of the value of the enterprise, always with the personal wealth of shareholders as a guide.

“But my valuation was conducted by my accountant using a valuation formula he was taught in his degree at university”.

Aah accountants; bless them. They are great people and we could not do our jobs without them. We rely on their annual financial statements to get our job done right. But let’s face it: They do not sell businesses, and nor have they made a career out of helping small business owners to sell theirs. They may be exposed to the sale of a business once one of their clients has sold. But they do not get involved in the negotiations.

Accountants and auditors have no idea of the arguments involved – the ebb and flow of justifying different prices as they skid across the negotiating table. For us, on the other hand (forgive me), we engage with buyers, investors, banks, private equity, venture capitalists, seed funders, mezzanine operators, creditors, business rescue practitioners and lawyers almost every single day of the week. And we do so across industries, from one end of the country to the other, and from one end of the value continuum to the end where you might think your business fits.

Many accountants hold Suitegum in their little black books as the “go-to crowd” for conducting valuations on their clients’ businesses for all manner of eventualities:

Life events
  • Divorce
  • Sequestration
  • Death
  • Ilness
  • Emigration
Governance
  • Partnership dissolution
  • Tax planning
  • Dispute resolution
Exit planning
  • Planning to sell
  • Management buyouts
  • Self selling
  • Mergers
  • Acquisitions
  • Liquidations
  • Estate planning
  • Retirement planning
  • Due diligence
  • Annual sanity checks

The truth is you need to have your business valued by someone who is exposed to what is really happening out there. Someone who listens to the theories, but sees the reality. More importantly, someone who makes his living by pushing for his clients to realise the best price for their businesses, every day.

But that is not all. Your business valuer should be someone who has more than an Excel grasp of mathematics; someone who understands which business valuation model to use in which circumstances. You don’t want someone who will easily tell you to “just multiply the monthly free cash by 20”.  You want to find someone who can actually justify using an analysis of key valuation indicators, as to why it should be a multiple of 20 – or 50. Or 10! He should also know which elements of the balance sheet are important in a valuation, and why the cash flow statement looks like that…

Business valuations should be fundamental to every business person’s strategy.

It works like this: If you want to sell your business, you obviously need to know the value. No business broker would try to sell a business without having some idea of the value, and based on verifiable facts. If you intend to sell your business yourself, you should do so at the correct level – within your league.

More fundamental than finding out a value at exit time is to know your business value on an ongoing basis, perhaps every year or so. How else do you know whether or not your business health plans are on track? South Africa is littered with the bones of retired people who understood too late, that their businesses were worth a whole lot more than they eventually sold them for. How sad. Surely it is better to know the truth well in advance of the occasion, and make the necessary adjustments in good time?

Even better though, through the valuation process, your business will be subjected to some objective probing for truths, from people who know – people who have been ducking the BS of business owners for a quarter of a century.

Suitegum’s business valuation

We work on a market related model which encompasses several bespoke and pertinent models, and which returns a realistic valuation which can be relied on. Our model adjusts for circumstances surround any particular business. Annuity income has a balance sheet value which is often way beyond the basic multiple of a sales organisation. Tech businesses often have little value in the balance sheet, but enormous value in their potential. Some manufacturers have their own foibles, just as retailers have other complications.

Cost of Valuation: R 14,250-00 

The cost of our market related valuation study is R14,250, but there are various discounts offered for early and pre-valuation settlement at up to 30%.

If you require a professional, realistic, market-related valuation of your business please call 011 083 6663 or complete the form and submit it.