UK Starting Business

When selling a business it is important to achieve the highest price possible. Whilst the amount for which a business is disposed of for will depend on a number of factors, any final amount will ultimately be determined by the sum a potential purchaser is willing to pay.

After all, it may be very well declaring the a company, sole trader or partnership operation is worth some much but if there is not a buyer out there with both the funds and the inclination to pay that amount that figure become arbitrary and almost irrelevant.

Other factors which might influence the disposal price achieved for a business include:

1. The uniqueness of the business. If it is possible for a would-be purchaser to easily replicate the business which is being sold, then they would be unlikely to place a high value on it. It would just be as easy for them to start from scratch and within a short time have a similar operation.

If on the other hand the current organisation is unique in one or more ways, for example, it has coveted technology, customers, scale of operations or other attributes, then the value of that business would probably be judged to be higher.

2. Transferable success factors. Under this category would be elements such as if the current business’ success was largely due to the present owner or other key member of staff. On disposing of the operations and the vital ingredient leaving the business, it might well experience a downturn in the level of activity.

The value attached to those specific individuals who are responsible to the major successes might actually be higher than that given to the remainder of listed assets of the business.

In such cases it is not unusual for these key persons to be contracted in to aid the business following its sale in either a consultancy capacity or on a part time basis.

Another type of agreement which is also common in these circumstances is that of a restraint of trade. This is essentially to prevent the key staff or owner from selling the business on one day and then setting up a competing operation on the next.

From a buyer’s perspective the success of the business would be product or service based and not centred on specific individuals and certainly not the outgoing owner.

An additional protection against the risk that the purchase results in less than expected sales and profits is an arrangement whereby the agreed disposal price is remitted in stages and variable according to the actual activity experienced post sale.

3. Value to the Owner. On the basis that the business is profitable or at least shows signs that it will be at some stage in the future, that fact will lead it to have some value to the current owner.

Put simply, if the business is estimated to earn £500,000 profit over the next two years, leaving out statistical present value for the moment, the minimum price for which the owner would be willing to dispose of those operations would be at least this amount.

Other intangible factors such as any nostalgic value seen as inherent in the business, for example, if it had been passed down through several generations, might affect the minimum the proprietor would be comfortable in accepting.

4. Professional Valuations. These are usually carried out by Accountants who would seek to allocate a price to both the physical and intangible elements which make up a business.

Their work often focuses on current valuations of similar organisations where an amount has been already ascertained. This figure can then be adjusted to reflect both positive and negative aspects of the selling business where there are differences between the two sets of operations.

In essence, the objective is usually to obtain a benchmark which acts as a starting point. The intricacies and idiosyncrasies of the business being disposed of is then assigned a value which will either increase of reduce the benchmark price.