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7 factors that can hurt the valuation of a business even after a buyer has made an offer for purchase

See all articlesValue of a business
Business valuations
Kieran Ellis
Kieran Ellis
December 13, 2022
minute read

Understanding what can impact the valuation of a business

There are several ways to determine the value of a business, including the commonly used multiples approach. This method is used commonly by buyers to establish a value for a target company by comparing the target company against other similar businesses in the sector in which they operate, including comparing key metrics such as:

  • Barriers to entry for companies operating in the industry, including key contracts or approvals
  • Margins and unit economics
  • Degree of reliance on key customers and suppliers
  • Revenue stability over time
  • Future growth prospects

Once the buyer has established a value to include in their offer for purchase, there are several other factors that need to be considered and managed which can potentially impact the valuation of the business that had initially been proposed. Nash Advisory have provided 7 of these factors that Nash Advisory most commonly see during a sale process.

If you are looking to value your business, you've come to the right place. The team at Nash Advisory can give you a fair and balanced outlook over the valuation of your business, giving you ways to improve its value before you sell.

1. Strength and depth of the Management Team

Often with a sale of a business, the purchasers will meet with key management and staff towards the latter stages of a process. In addition, the owners of the business often hold key responsibilities either in the day-to-day operations of the business or by providing key market and strategic knowledge. The purchasers of the business will need to assess whether the senior management team, or employees of the business, can fill the void left by the sellers of the business, or whether new hires will be required to take on unallocated responsibilities. The cost of any replacement hires may negatively impact the valuation initially proposed.

Nash are strong believers in having the business well positioned and set up for sale in order to maximise sale value, which includes building the depth and quality of the management team before the sale of your business.

2. Minimal handover of the business

It is common for a purchaser to ask the sellers of the business to continue in their normal role for a defined handover period. A common handover time frame is between 6 months to 12 months. The handover period will also involve transferring key knowledge and relationships in order for the business’ continued performance. If the purchaser feels like the handover period is inadequate to transfer all required knowledge or impacts the business performance, then a discount to valuation may be proposed.

3. Quality of financial records and systems

An offer for the purchase of a business is commonly made upon review of the marketing collateral presented and prior to due diligence being performed. During due diligence, all supporting documentation and the integrity of the financial and operational data will be verified. If the quality of financial records are poor, and the purchaser cannot reconcile and verify the necessary information, the purchaser may not have sufficient confidence to pay the full value proposed in their initial offer and may seek to revise their offer.

4. Ensuring there is more than 1 party in a sale process

It is crucial to run a competitive sale process in order to maximise shareholder value and to ensure there is no discount to valuation. If a bidder is aware that they are the last remaining interested party, there is a risk that they will amend their offer. Nash Advisory quite often hear of instances where owners of private businesses have been approached by a purchaser who has made an offer for their business, who at the last minute will revise their bid, following months of communication and negotiation with no other options to consider.

5. Understanding the bidding strategy of prospective acquirers

Understanding the bidding strategy of each potential acquirer is another factor to consider to ensure the level at which the initial offer was made for the business is maintained. Nash Advisory are aware of many parties who use the strategy of bidding high for an asset, with the intention of sharing any red flags as late in the process as they can, to ensure they are included initially in the sale process with the chance of purchasing the asset at a discount. For example, this year Nash Advisory has encountered on transactions:

  • A Human Resources issue identified in the latter stages of the Due Diligence process claiming a significant underpayment of staff and a reduction in the valuation. Nash Advisory were able to assist with this issue with no impact to valuation.
  • An elevated offer had been made for an asset, in which the bidders only intention was to gather intel as to who the other participants in the process were.

In order to understand the strategy of parties approached during a sale process, Nash Advisory will perform background checks and communicate with industry peers who have worked with potential acquirers on previous transactions.

6. Urgency of sale

If the sellers of a business are required to sell the business in the short-term due to poor health or other pending factors, then a reduction may be made to the initial valuation provided to facilitate a faster transaction for the vendors.

7. Poor trading

When a potential acquirer makes their initial offer for the business, they will take into consideration both historical trading and also the forecast trading of the business. As a sale process can take anywhere from 3 to 12 months, it is crucial for the business to continue trading towards forecasts provided. If trading is poor, and insufficient explanations can be made for the downturn in performance, then the purchaser may amend their offer in line with the revised downturn in performance. Poor trading can be managed through the course of the process, however, this is time consuming and will require regular trading updates and strong negotiations.

It is crucial to identify and prepare for any factors that can potentially impact the valuation of a business for sale in order to maximise shareholder value. Nash Advisory have provided 7 of the most commonly seen factors, yet there are many factors that may arise that must be considered prior to and during the course of a sale process.

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