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Buying a business for MSPs. Chapter 6. Qualification, Part B.

There are a few ways to value a business. It’s important to look at the potential value of a business through different lenses, if nothing else, because it’ll give you a more balanced view. Certainly, the banks and other lenders won’t have as optimistic a view as the vendor, broker, or possibly even you, and they’ll potentially charge you between 2,000 and 20,000 just to value the business. So it makes sense to quickly get a handle on the book value, i.e. the net asset value, which is usually the method they use.

Accountants typically use the NBV method as well. Please note, if you pay for an appraisal, you’ll retain control and can keep it to yourself. You can share it with the vendor if it helps your cause. Do bear in mind that it’s a risk they could use that information for other buyers. If the vendor pays for the appraisal, it will likely be biased. The book valuation method coldly looks at the value of the company’s cash and other realisable assets, for example, stock, equipment, receivables, minus all the liabilities, debts, depreciation, wages, taxes, etc. This method will typically provide the lowest value of a business, which is why banks and other lenders use it. After all, they’ll want their money back if there has to be a fire sale.

It’s important to look at the assets objectively. Just because a business owner spent, for example, 50,000 pounds on a stunning trade exhibition, it doesn’t mean it’s worth anything to the bank or indeed anyone else. On the other end of the spectrum, most business owners like to think that the value of the business should be reflected in terms of historic goodwill, future cash flows and potential. The trouble is, you can’t cash goodwill at the bank. Multiples of net profit More specifically, it’s usually quoted as EBITDA, which is earnings before interest, tax, depreciation and amortisation.

It’s probably the valuation method that is most banded around. You can Google the specific multiplier for your industry. Remember that for smaller businesses, you’ll need to adjust for the owner’s salary and drawings and insert the relevant salary for an off-the-shelf managing director to arrive at a more accurate profit figure, which will add any significant assets such as property.

Finally, consider the entry cost valuation, i.e., how much money and time would it cost you to create and build a similar business from scratch. In reality, the minimum and maximum values you arrive at will be derived from referencing a mixture of the above models. There are other models too. You’ll likely look at how much the business has been making over recent years and how much the business owner has been taking out. Look at the industry multiplier and book value and compare with other businesses in the sector, whilst taking view of other factors such as the age of the business, its reputation and goodwill, the opportunity to improve future cash flows and profits, industry trends and comparables, the reasons the business is being sold, relationships with clients, suppliers, and staff, and its strategic value to you. As a tip, remember goodwill is the ability to earn a premium. In the service-based industry, evaluation of intangible assets is far more important. This could be location, branding, customer perception, et cetera. The value of the employees is often overlooked.

Their skill and morale needs to be assessed. If projections don’t show enough profit levels, examine what would be needed to achieve the profit. Don’t simply increase projected revenues. Obviously, if this doesn’t work out, just walk. These are businesses to avoid, ones that are too expensive, likely overvalued by sentimental owner or via another dealer or broker. Those overly in debt or about to be in debt soon, for example, through an imminent tax liability. One with too few assets, no property or contracts or stock or debtors to leverage against.

Ones with a poor reputation, bad reputation can be hard to take off, if ever. And poor staff, if it’s not just one or two, rehiring can be overly expensive and time consuming. Businesses where the revenues are low or unstable, or with low margins that can’t be fixed. Businesses with complex ownership structures, for example, other family members, investors, and distant shareholders. Those with insurmountable upcoming legal issues and challenges, either from customers, staff, suppliers, or indeed to the general public. Or unreasonable owners who won’t give you information or stick to agreements, or who are disruptive.

Trust your gut instincts. Ask yourself, does the business stack up? Do I get a bad feeling about it? Can I work with the vendor? And do I get a good feeling about them? Consider hiring a business broker to consult with you, especially if it’s your first purchase. You could accelerate your learning and get a professional to help you, one that is not financially motivated by the sale and only gets paid for the independent advice they dispense.

MSP Marketing in bite-sized bits. It’s easier than you think with MKLINK. To get more of MKLINK’s MSP MBA Marketing and IT training resources, make sure that you’ve registered for your account for free now at www..MKLINK.org.