All sorts of rules of thumb are used to establish business valuations, but gut instinct and a crystal ball still play a huge part. That has never been the case more so than now.
“Right now buyers are putting a premium on resilience, on businesses that have proven to be resilient through the pandemic,” says Anya Cummins, lead partner at Deloitte Private Ireland.
That is currently to the advantage of businesses that are in any way related to digital transformation, as well as those in healthcare, certain kinds of medtech, life sciences and renewables.
While some sectors have flourished, others have flatlined, including non-food retail, hospitality and travel.
On top of that come fluctuating earnings across all sorts of businesses, sometimes driven by successful, and unsuccessful, pivots, all of which is making it harder than ever to establish accurate valuations.
And not alone has market volatility to be factored in, but the impact of Government supports must be stripped out.
“Trying to get a handle on sustainable profitability and the outlook for the future is more complex in terms of valuing businesses,” says Cummins.
There is appetite out there for deals, including pent-up demand from private equity firms who sat on their hands for the early half of last year and who are now out scouting for profitable, established businesses to invest in.
One way to respond to current uncertainty is to structure deals so that they contain a high level of deferred considerations, including delayed payments, loan notes and performance-related earn-outs.
For the seller, agreeing to such terms can help achieve a better price, while for the buyer they provide greater downside protection if things don’t work out as they hope.
Market recovery
There aren’t as yet distressed companies coming to market, but buyers still have to take a view on market recovery, says Jan Fitzell, partner Mergers and Acquisitions at Deloitte.
Some businesses have seen a bump such as, for example, those connected to the roll out of vaccines. “Buyers are taking a view whether or not that is sustainable,” he says.
Adding to their difficulty is knowing which sectors are likely to remain permanently altered.
“It is difficult to form a view as to when, or at what rate, people will travel at in the future, for example,” says Cummins.
“When it comes to leisure, will we all stick with Netlix or go back to the cinema? And what about the low-cost gym around the corner from the office? There are definitely question marks about the new normal and changing consumer habits.”
She says most of these businesses are not even trading now, but are in “hold mode”. Only when the Government takes the stabilisers off will we know which businesses will start moving again, and which will wobble and fall.
Even then there are challenges, not least because for businesses currently preserved in aspic, starting back up again costs money, putting pressure on cash flow. Working capital issues will likely emerge, and, as most companies fail not for want of sales but for want of cash, the great reopening will in itself be a time of commercial concern.
Sectoral standards
Even in normal trading conditions, when there are all sorts of multiples people can use in relation to EBITDA, profits or revenue, as well as handy sectoral standards for reference, in the end “there is no exact science to a valuation”, says John Bowe , partner in Mazars Corporate Finance.
Conflicting interests between buyers and sellers compound the issue which is why it can help to bring in a third-party adviser, both to take the emotion out of the room and to ensure the deal is structured in such a way as to maximise value for both parties.
That includes tax efficiencies, says Bowe, who suggests that for the seller this could include setting up a holding company as a tax efficient way to handle the proceeds of a sale.
The holding company sits on top of the business. When you sell the business instead of being hit by 33 per cent capital gains tax, the money from the sale goes to the holding company, giving the seller more money overall and more options about what to do with it.
It is of particular use to businesses worth well in excess of €1 million. For businesses worth less than €1 million Entrepreneur Relief allows the owner to sell at a tax rate of just 10 per cent. Such considerations can be factored into a business valuation.
The biggest risk for the seller is leaving money on the table. It’s why all owners are advised to run their business as if they were preparing to sell it even if they are not.
“Preparation is the key to value,” says Bowe. “The more preparation you have done, the easier it makes for others to value your business.”
