Valuing a business for retirement
The question
I am looking to retire and wish to sell my business. How do you go about valuing a business that has been running successfully for 20 years and has a loyal client base?
General principles
Generally, businesses are valued on the basis of the future value that can be extracted from them. This is either by way of future profits that can be generated and distributed to shareholders, or from the realisation of cash from the disposal of any surplus assets or cash that the business might be holding onto.
The methods that are used by valuers include:
- Establishing an estimate of the level of future profits that can be generated consistently into the future and multiplying this by a suitable multiple.
- Alternatively, preparing cash flow projections out into the future that are then discounted back to give a present value for the business. This is rarely used in the hotel and restaurant sector as reliable and robust long term projections can be hard to come by.
- Where a business is consistently loss-making (which is not the case here) it is often valued on a break up basis – i.e. the value that can be realised from closing the business and selling off the assets that remain individually.
Because it can be difficult to obtain reliable comparator information and because the information that is available can be very limited, there is often an element of subjectivity in how values are derived and so different valuers can often come up with different values for the same business.
Expert advice
There are a number of particular issues that face businesses in the hospitality industry generally at present. The recent recession and the continuing challenges being faced in the economy have had a very significant effect on the sector and depressed values considerably.
There are a number of well-established valuers that specialise in particular parts of the hospitality industry and a good first step might be to talk to one of these to establish how much the business might be worth. This is best done some time before you plan to retire as discussions with them might establish some actions that could be taken to enhance the value that could be achieved. This is also a process that can take some time in itself.
A key part of a successful sale is bringing the accounting and other business records up to date and organising them appropriately so that a prospective buyer can quickly become confident that the business is organised and that the trading history can be clearly traced. This includes data on key performance indicators such as number of covers, average cover value, occupancy, and average room sale rate.
A key element at the moment is to decide how realistic you want to be in terms of the value you can realise as you could always delay your retirement and continue trading until the economy improves.
Checklist
- Confirm the decision that you want to sell and consider whether delaying retirement might help realise a greater value for the business
- Ensure all your records are tidy and that you have sufficient data to satisfy a prospective buyer.
- Speak to a valuer that is conversant with valuing business in your specific part of the industry.
- Establish in your own mind the minimum value that you find acceptable.
Beware
A particular factor that is often overlooked is the “personal” goodwill that can arise in hospitality businesses. Loyal customers are created as a result of the total experience that they have and they can often be very loyal to the owner personally and they can quickly drift away when he retires or leaves. Many prospective purchasers of businesses in this sector have learnt this the hard way and have ended up buying a loyal client base that doesn’t turn out to be that loyal after all.
Robert Holland is a Partner at James Cowper LLP, accountants and business advisers in the Thames Valley. He can be reached by email: rholland@jamescowper.co.uk. For more information visit www.jamescowper.co.uk.