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“Are the valuations for a business a science or an art?”

Updated: Jan 23, 2023

Business valuations are both part art and part science.

Beware the M&A advisor that claims otherwise!


It is incredibly satisfying to google your neighbour’s property on Rightmove and just assume that your own house has also appreciated in value. It sounds easy but looking at comparable prices can be very much part of any scientific valuation.


Unfortunately, for shareholders of small to medium TIC businesses, no such easy comparator exists to determine the value of your business. Just like the property sector, the TIC Mergers & Acquisition’s market has never been hotter! But it is nearly impossible to find genuinely comparable companies to support the valuations of another.


The difficulty is twofold. Partly the public information of actual prices paid, and valuation approaches are largely reserved for large scale transactions performed by publicly owned TIC corporates who have a disclosure obligation to their shareholders. Frequently there are no verified small to medium sized business examples.


Secondly whenever a significant transaction is announced, both the seller and buyer take credit for transacting the sale of the century and it becomes difficult to differentiate between a “frothy” valuation and a “real” one.


What relevance if any do these transactions have for small to medium business valuations?


Here is where many get confused between the art and the science of valuations. Many advisors will collect such valuation precedents like they would keep a stamp collection. They roll them out to potential clients as justification of the potential worth of their business – proof of how they will deliver similar premium valuations merely by identifying a market price some other company has achieved. This is pseudo-science at best.


While such an approach (as with your neighbour’s house price) may be flattering, business owners should be wary of such flashy claims. They reflect both a failure to understand a buyer’s attitude or recognise different market forces or different conditions of the company being sold - all of which significantly affect valuations.


Advisors who lure you into an engagement with the promise of public quoted valuations are disingenuous to shareholders and failing to educate you in the optimization of a business’s value.


One of the real arts is to look behind these published deals and valuations, significant deals usually involve global, multi-divisional businesses, ones with a well-known management team and a proven growth trajectory (including M&A). Investment bankers (who seem like corporate magicians and are a law unto themselves!) create competitive tensions between private equity (looking to use the business as a future growth platform) and corporates looking for the deal to achieve market entry or consolidate their leadership position. The premium valuation is a result of this competitive tension between private equity, desperate to deploy surplus cash, and corporates, looking to mastermind a strategic coup and deliver significant cost synergies to justify their (at times “over”) valuation.


This is not to say that a good advisor cannot attempt to drive competitive tension for small to medium businesses, it can be done, but it does not happen by accident.


Setting out a strategy to develop the key values of a business.


Any professional M&A advisor should seek to engage with a business owner who wants to sell, not with a lure of unrealistic market valuations but rather with a clear strategy to improve the key value drivers within the business itself and an explanation of how this can be harnessed to achieve the best price. Conceptually, this may not seem different to selling your house, which often involves some decorating. However, this is a dangerous analogy to make since it underestimates the strategic and complex evaluation that buyers go through when contemplating an acquisition and the scrutiny they give to a business, its management and growth strategy.


Work with a team who have a wealth of relevant market experience.


We believe that a potential seller should have an ally unequivocally on your side.


At Red Swan Partners our team has extensive experience from growing and selling their own businesses, being TIC corporate’s M&A executives, as well as working with a wide range of TIC business owners to support them in developing their own exit strategy. This wealth of relevant market experience allows us to identify the key value drivers within your business, understand how a buyer will evaluate them, and develop a strategy to overcome any areas within your business that may destroy value. Collaborating with Red Swan to deploy such a strategy allows shareholders to focus on how a business will be best presented whenever deemed the right time to sell. This enables businesses to be successfully marketed and creates competitive tension between potential buyers, allowing the market forces (and not the “M&A advisor”) to determine the optimum market price.


The whole process is part science and part an art. The science of optimizing key metrics and adopting best practice is crucial, but so too is the art of positioning a business for sale and truly understanding the different motivations of any potential buyer.


You deserve the whole picture.

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