04 Apr 2016 10:28 AM

One of the biggest misconceptions in the SME marketplace is company valuations.  Many experienced and astute businessmen believe they can ‘call up’ a value for a business and know its exact worth. ‘Wrong‘

To get a better understanding of valuation methodology, we should look at the Art world.  If we ask for a valuation of the family heirloom - being an optimist let’s say a Picasso or Hirst, we’d know that the valuation was a ‘base line’ figure, below which it would be foolish to sell.  We’d also be aware that if we put the treasured heirloom up for sale at Auction, we’d have a good chance of exceeding the base figure and might achieve a substantial uplift if a bidding war broke out between eager purchasers.

And there in a nutshell you have the definition of the value of an asset not listed on a recognised exchange - the price agreed between a willing seller and a willing buyer – albeit not every asset will reach the US$179M selling price that Picasso’s Les Fennes d’Alger’ achieved at Christies.

However, back to our SME business that’s up for sale. There will no doubt be an absence of mysterious individuals on their phones delivering competing escalating bids.  If the business is not in dialogue with interested Predators, our valuation will be based on a theoretical value. To reach this valuation we will be using tried and tested assumptions based on sound and commercial principles.

The valuation expert will look at a plethora of financial and market intelligence including earnings and dividend history, asset values, the people, intellectual property and will benchmark the company against its peers.

There is no doubt that the valuation will be sound but the real premium value, if any, will only be known if and when an outside independent corporate (Predator) puts in a bid.  That value will be based on what the company is worth to the Predator and not based on the vendor’s current business model.  Premium value is achieved when another business believes the target company can enable it to enhance its own business model.  The uplift in earnings potential for the Predator will often be, in an ideal world, far higher than is available to the vendor.

The above underlines a key strategy when selling a company and one that can make a difference to the value that is put on, and achieved by the business. Identify, target and communicate with Predators. The ideal Predator will not only have the resources to execute a deal, but will potentially pay a premium over and above the core assets that will enable the vendor to achieve a maximum value.