The true value of your business is what someone is prepared to pay. Business sellers love an auction process – buyers don’t.
Had we gone to market with a defined bid price such as R100m, that’s what we would have settled on and missed the opportunity to sell for R200m. So, essentially the value of your business is what the right acquirer could achieve with your business post-acquisition. In the above illustration, a foreign company could push new products to new customers through the local business’ channels, unlocking value for their group – on top of what this acquired business was achieving on its own.
Valuations also require a “sense check”. For instance, if it is an asset-heavy business with a lazy balance sheet, a sense check would involve valuing the business by net asset value, whereby one could determine that the profit performance is 80% backed up by assets. In the case of annuity-based software-as-a-service companies, the valuation is typically based on multiples of revenue.
A potential buyer is looking for a balance of growth combined with profit so that they can grow with the business. If there is either low growth or low profit projected, it becomes a tough sell.
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