How do I value my family business?

How do I value my family business?

When you’re building your own business, it can be hard to find time to look at the big picture, including when it comes to valuing your family business. While often associated with big moments such as a sale or raising capital, determining the value of your business can provide important strategic insight on your direction and planning, determining everything from when you can retire to where to invest.

Gary Heywood explores how to assess, grow and manage value within your family business, as well as the advantages that oversight can provide.

 

 

Why do you need to value a family business?

The goal of building a business is to create value. This includes the short term value – drawing a salary, dividends and providing for your team – but also the long term value accrued by the business itself, ready to be one day released.

For this reason, owners should regularly value their business even if not planning to sell in order to evaluate the condition of the company. The value of your business is a measure how much you can recoup or pass on, which can have a direct implication on:

• Choosing the right time to sell your business

• Planning your retirement from the business based on how much capital it will provide you to live off

• Structuring your tax needs when selling or transferring ownership

• Planning investment to grow the value of the business

• Allocating shares in the business

 

One of the key differences when it comes to valuing family business is managing the role of your team. In any business sale or valuation, human expertise is a key component, along with existing relationships and networks. Family businesses tend to have a significant portion of the team drawn from within the family itself – meaning that if it’s passed out of the family, their role may no longer be assumed.

Any sale that will involve losing existing family expertise, including that of the owner, risks having to sell at a discount. To solve this issue, owners can either invest in second-tier, professional management from outside the family that will stay with the business on sale, or put in incentive schemes to lock in key members. In some cases the owner themselves will stay for a set period after the sale.

 

 

What are the factors that determine the value of a business?

Fundamentally, the value of the business is what someone's willing to pay for it. The art and science of a business valuation is evaluating the material and non-material assets of the business to determine what a new owner could expect to make from it.

This is most commonly done on a multiple of profit – how much money the owner could expect to make per year over a certain time. This uses a mixture of historic data and forecast data to determine a reasonable estimate of annual profit, which is then multiplied by a certain annual figure, usually between three and six years.

This multiple can be greater or lesser depending on market conditions – if your market is poised for significant growth, in a high value industry or particularly distinct in its offering, you may be valued at six-eight times your average profit.

In addition to profit, there are other key assets that can add value to your business depending on your industry, including:

• Unique IP

• Customer goodwill

• Predicted future cash flows (for pre-profit businesses)

• Fixed assets such as property or machinery

 

How to improve the value of your family business

The key reason to value your business before you need to sell it is to find what’s going well and what you can improve. By planning ahead, you can put plans in place to get the best result, whether that’s a price or an asset to pass on to the next generation.

Key factors to consider when growing the value of your business include:

• Strong leadership: Create a management team that can continue to provide value once you move on. This can be based on hiring outside experts, using EMI schemes to lock in key employees or incentivising your team with shares to give them a sense of ownership.

• Clean history: Ensure that your buyer is not going to inherit any pre-existing issues which could reduce your valuation, such as compliance issues, audit errors or customer disputes

• Modern systems: When a new owner takes on your business, they want to start running it ASAP. You can make this easier by modernising your business processes, centralising information such as contracts, tax records, staff files and supplier information to ensure that all the information they need is easily findable and accurate.

 

Building value with Haines Watts

At Haines Watts, we understand family businesses. Our experts can work with you through the complete valuation journey, from valuations and audits to putting in place the right structures and processes to safeguard your capital on sale. When it comes to finding a buyer, our extensive network can help you market your business to the right audience, compare offers and close the deal with peace of mind.

 

Get in touch to get the advice and support you need to build a family business that delivers long term value.