1. The first stage is to understand how the acquisition of your businesses will be financed, as this is pivotal in positioning your company at an attractive IRR. Talking to a finance firm, bank or broker who specialise in M&A deals in your sector will allow you to confirm the current level of debt to equity that current deals are based on. Once you have this information you can use this ratio and apply it to your value expectations to see whether they are realistic in the current market. Using the example of a £2 million value expectation, for simple terms let's say that an appropriate debt-to-equity ratio in the current M&A environment is 50% debt and 50% equity. In this case, an acquisition of your business could be financed as £1 million in debt and £1million in Buyer's equity.
2. The next stage is to determine the forecast sales, overheads and free cash flows of the business over the next five years, including the cost to service the debt amount used in the acquisition.
3. Calculate the equity remaining for the Buyer, assuming that the company will be sold after five years at a conservative multiple of EBITDA (usually the same as the entry multiple).
4. Use the initial equity investment determined in point 1 above, the free cash flows after debt servicing in point 2 and the equity remaining for a Buyer upon a subsequent sale in point 3 to calculate the potential IRR on their investment.
Hopefully, this analysis proves that the valuation of your business will earn your Buyer a return on investment in line with industry standards, or ideally a much higher and more attractive uplift. If not, you might have to reassess the reasonableness of your valuation expectations. Effectively in this analysis, you have taken the Buyer’s IRR and used it to your advantage, creating a ‘win-win’ scenario when negotiating a deal.
Valuing a company involves a lot of common sense and relevant experience. There is no absolute science or magic, and of course every Buyer will value you differently. The key is to find the Buyer who will pay the highest price and effectively has the greatest need for the acquisition to occur. If you are prepared to instruct advisors who know the market and how to tailor information for each individual Buyer, you can work towards getting the valuation, and ultimately the total consideration, you want.