Business Valuation – It’s Not Just About The Numbers!
The value of a business is not based solely on the numbers. There are a raft of non-financial data that any serious buyer will be interested in. For the most part they will want to determine where there is risk. At Succession Plus we use a similar tool to the financial analysis to score various operational and other areas of the business. It will be these areas that ultimately affect the multiple you can achieve on sale. But these are also the areas that are largely in your control. Some can be improved relatively easily.
Questions a buyer will ask are:
- Do you have an up to date company profile and website?
- Is all of your intellectual property registered and up to date? For example, business name registrations, trademarks,
- Are your financial statements, payroll and tax returns in order?
- Are there monthly or quarterly management accounts?
- Do you have an annual budget for the current year?
- Are you conducting monthly management meetings, and do you have minutes of those meetings?
- Is your accounting system robust enough to allow you to run reports on top customers, top suppliers, debtors, creditors, KPIs?
- Are employee agreements in place for all your employees?
- Do you meet your obligations re employees — leave balances, pension contribution, award rates, payroll tax, workers compensation?
- Are all your vehicles registered, insured and lease payments up to date?
- Do you have the lease agreements for your premises?
- Are your company registration documents up to date? e.g. Articles of association, shareholder agreements etc.
- Have you documented key processes, job descriptions and procedures (such as a safety manual, induction manual) in your business?
- Do you have a board of directors or advisory board and do you communicate regularly?
- Has your IT system been reviewed lately to ensure it meets your needs?
- Do you have back-up facilities in place and a disaster recovery plan?
A prospective buyer will see the non-financial measures of your business as a reflection of how you manage your business — your attention to detail and compliance, your ability to plan and execute, how easily the business can operate without you, the quality of your staff, and whether they are locked into the business. They will also look not just at your financial performance, but how well you manage and use financial information.
Many small companies have no business plan and no succession plan, and they haven’t had the business benchmarked. So, they don’t really have a strong direction to determine the future value of the business. They also don’t have a clear remuneration strategy or an employee share plan, which does expose some risk of staff turnover despite some good HR practices.