You can still have a business to sell even if YOU are the business
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Published: 24 Sep 2021
If you were under the impression that you couldn’t sell your business, because YOU are the business, it’s time to think again.
One of the problems with valuing companies in the SME market is differentiating between the value to the company of the owner’s skills from the return that an owner receives from his company as an investor.
The company is paying the owner for his skills, for instance, as a computer analyst, dentist or salesman. Such rewards are normally based on what the current market pays for those services in arriving at the profit before tax for the purpose of assessing
- Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) or
- The Price/Earnings Ratio (P/E Ratio).
The profit in either case would be subject to a suitable multiple as recorded daily in the Financial Times or other regular publications of such data.
Some valuers ignore the owner’s skills and measure the profits before deduction of any amounts payable to the owner.
Normally, they are small service companies which employ little or no staff. The profit multiple used in these cases are lower to compensate. The remaining profits are either distributed as dividends or retained as part of revenue reserves and carried forward. Dividends are paid to the owner as a return on investment.
However, remuneration of directors/owners is usually underpaid and dividends to the same directors/owners are usually overpaid to compensate and obtain increased tax efficiency. An adjustment needs to be made for this in a company valuation.
Some buyers maintain that there is no value in a company that is run by a sole director and owner.
In other words, all the value is attached to the owner and cannot be passed on to another individual with equivalent skills. The classic scenario is in the case of a divorce settlement, where one party owns a business or company that needs to be valued.
I do not agree with that contention.
Provided there is sufficient income to cover trading or professional expenses, including a salary at market rate for the owner for his time in the business, any surplus would form the basis of a valuation of the company.
In fact, a purchaser may be prepared to discount part or all of the owner’s salary where he is buying an existing business or practice which does not require him to build it up over a number of years. It is for this reason that many professional practices are purchased on a factor of recurring gross income.
For further information on the above do contact David Cane at [email protected] or phone 07749 080 806.
