In my previous article we talked about selling a business venture and some important reasons to go ahead with the complex decision of selling to a third party. In this second article we shall look into the valuation of your business and what important factors must be taken into account in order to achieve a successful conclusion of the sale at the best possible price.
First and foremost, we must understand that not every business is the same. It is one thing to sell a medium or large property portfolio which we have created and built up over a number of years to obtain a good rate of return via rental income, and selling a fashion company which operates a manufacturing base in the Far East with 25 shops spread up in a number of cities or even in different international markets. They may very well be highly successful each in totally different fields and markets but ultimately you have to work out a value.
If we take the property portfolio company into consideration, the valuation can be in general terms fairly easy to work out. It would be a clear case of asset minus liabilities valuation, or as it is often done in the trade, one must calculate the exact yield of return to value the company. This last formula is widely used in different jurisdictions and is a good start to mark the price tag of the company.
Let us assume that the property company is yielding US$250,000 in rentals per annum. Hedge funds and investors look at a rate of return of at least 5% and in some markets, they could expect considerably more. So, the given figure of US$250,000 has to be 5% of the total asset worth minus liabilities. We are talking about US$5,000,000 minus liabilities which are normally mortgage bank loans.
If we are considering the sale of a fashion company that is a horse of an entirely different colour. There would be many more important factors to be taken into account, for example the asset value minus liabilities of any property and stocks the company may have. But in addition, one has to think of the sales turnover of the company being sold. And the profit obtained over the last three years and a projection of sales and profit for the following five years. The famous EBITDA (Earnings before interest, taxes, depreciation and amortization) multiplied by a certain figure. It would be very complex here to tell my readers what would this figure be in real terms. It could be as little as times two or as much as times nine or more. Each trade has different ways of assuming the figure by which this is normally multiplied. And there are many more factors to be taken into account. It is one thing to be selling a successful fashion company producing garments under the labels of several well-known retailers, and a completely different ball game to own your own label which is very well established and known worldwide. This last case could achieve a much higher value as we are selling a unique product and brand.
Then we have to know the rules of the jurisdiction in which we are selling our company. For example, in French-speaking countries like France, Belgium, Luxembourg, Morocco and Quebec, the fonds de commerce system is widely used to value a company. The value of a company in France is related to its fonds de commerce, or goodwill. Whereas in English speaking countries the method most widely used is the EBITDA times a certain figure. In reality these are general terms since other factors are taken into account like the assets minus liabilities system.
In the hospitality business a combination of both valuation systems, the fond de commerce and the EBITDA times X may be used. It is important that you have an in house IT Support to ensure that there is no problem. I remember over a decade ago, when Pizza Express sold its three restaurants in France, they were offered to me for an extremely attractive figure. The restaurants were worth gold. There was a branch in Toulouse in the heart of the Capitol Square. That restaurant made a huge profit on its first day of operation and never looked back. In addition, the other two branches located in the heart of Paris, one in Place de l’Opera and the second one in Boulevard de Montparnasse, were also profit makers from their opening days. The English chain wanted out of France and three restaurants were a tiny figure considering they owned and operated close to 200 restaurants in those days.
Sadly, we did not have the means to purchase the outlets in those days of the credit squeeze so we lost a unique opportunity to make an excellent acquisition. The restaurants ceased to trade eventually and were sold for next to nothing; they were worth millions if the usual valuation formulas had been used. None of the above value systems were used to value this small company which proves my point that each case can be totally different. In very general terms a restaurant is worth EBITDA times seven or more. But this is a mere assumption since there are more factors to be considered.
An old friend asked me to give her an idea of how much her estate is agency worth. I have to be honest and say that the question has many further questions to be asked before an accurate answer can be given. All that said it would not be unrealistic to use the asset minus liabilities formula and the EBITDA times X formula. And compare values. Again, this company has a very old historic name going back to the late 1880s, so that is a brand worth having, highly desirable and certainly worth investing into.