How to Determine the Acquisition Price of Your Company

Are you ready to wrap things up? Whether you're retiring, freeing up funds for a new adventure, moving abroad, or simply seeking peace of mind, it's useful to know what your business is worth. In this article, we aim to provide insight into:

1. Buyer valuation methods
2. Business valuation models
3. Use of the free online UNIZO valuation tool
4. Valuation for small businesses UNIZO Business Transfer - Tailored Advice
5. Valuation for businesses with an expected value over €500,000

It's important to have an indication of your business's value. The proceeds from selling your business are a critical supplement to your pension as a self-employed person. Will the sale of your business be enough to maintain your current lifestyle? Also consider the buyer's perspective: does your business generate enough to pay off the purchase sum in a reasonable time? Where are the growth opportunities?

Valuation

Before selling your business, it's important to determine its value. Ensure a professional valuation and realistically substantiate the asking price. This improves your negotiating position. Trust is the essential foundation of a business acquisition. Even if the valuation was done by an expert, make it a point of honor to understand how it works.

Is a prospective buyer making an offer you can't accept? Don't reject it immediately. Stay calm and ask for the reasoning. Does it make sense? Is there willingness to negotiate? Continue the negotiations and discuss the factors that led to this price determination. Buyers will decide what they're willing to pay based on a multiple of the profits. Depending on the company's size, they might use EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) or, more likely for most small businesses, a multiple of your business's actual revenues.

The actual revenues are essentially your annual profit increased by all other benefits. These benefits might include your salary as manager, company car, business expenses, etc.

Your asking price is based on your business's value. This can be expressed in two different ways:

1. In a share transaction, it concerns the share value of the entire company: all assets and liabilities change ownership.
2. In a business fund transfer, it concerns the enterprise value. Only the elements needed to operate the business are transferred.

Read also: 3 main differences between acquiring shares or business.

Online valuation tools

Precisely determining the value is not easy. That's why it's often said that the precise value doesn't exist. There are various valuation methods to calculate a business's value. Each method leads to a different outcome, sometimes with significantly different results. Valuation is not an exact science.

1. Online valuation tool for companies. The UNIZO Valuation Tool is an ideal tool for an initial estimation. The UNIZO Valuation Tool is free to use, applying different valuation methods for companies with a corporate form.
2. Online valuation tool for sole proprietorships. Following the UNIZO online valuation tool for companies, VLAIO launched an online tool for sole proprietorships. This new, user-friendly tool also allows you to make an initial estimation of your business's value.

All these valuation methods can be divided into 3 approaches

1. What are your business assets? The substantial or intrinsic value. The substantial or intrinsic value of a business equals the sum of the current real value of each of its components. In a sole proprietorship, you'll need to make a statement of the actual value of all business components: inventories, machinery, furniture, etc. For a company, this is based on the balance sheet. After valuing the assets (land, machines, receivables, etc.), debts to third parties are subtracted. Usually, the main balance sheet items are adjusted. A business building may be worth € 50,000 on the balance sheet after depreciation, while its actual value, due to rising real estate prices, could be closer to € 100,000.

2. What does your business yield? The return value. This approach starts with the past profit of a business. Here are some guidelines to get an initial indication.** **Such guidelines are just an indication.

• 4 x the net profit (or the sum of the profit over the past 4 fiscal years)
• 0.3 x to 1 x the annual turnover
• 3 x to 9 x the EBITDA depending on the sector and the size of the company (refer to the annual Vlerick M&A monitor)

The value of a business is mainly determined by its future return and the free cash flow remaining after normal (replacement) investments.** **Besides return, the intrinsic value is also important. This is the company's equity corrected for the surplus or deficit on the company's assets. Rule of thumb: with the future free cash flow, you should be able to earn back the acquisition price within 5 to 7 years. Beware that different rules apply if a business has a substantial share in real estate.

3. What returns will your business yield in the future? With this approach, the results (net cash flows) in the future are the starting point. The value of a business can be determined using the cash flow approach, known as the 'discounted cash flow method'. This method is based on future net cash flows. Thus, a forecast for the next 3 to 5 years. This method estimates the future performance of the business, which in theory, should provide the most accurate picture of the business’s value.

In summary
The methods outlined above give an idea of the variety of calculation methods and principles used. It is often suggested to work with some form of combination of methods. Whether a particular valuation is suitable or not will need to be assessed on a case-by-case basis. It usually remains a complex matter, and depending on the intended goal, you should best consult a professional advisor.

If you want to correctly estimate your company’s value, it's best to get advice from experts. The SME advisor uses various valuation methods for this. They provide you with a clear insight into your business's valuation and a personalized explanation.

Based on a professionally substantiated valuation, you can:

• Prepare in time to make your business ready for transfer
• Conduct better negotiations with the buyer during price discussions
• Develop a realistic price for a family transfer

The specialized SME advice is a contractual and paid service. The SME advisor gives you a clear view, free of jargon, on your business valuation. Click here to request SME valuationO.