Business Valuation Reports for an M&A | Hilton Smythe

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Business Valuation Reports for an M&A

Business valuation reports are a critical part of deciding an appropriate value for a business by leaving no stone unturned at the order of an independent professional.

Mergers and acquisitions (M&As) represent an exit strategy for some and a growth opportunity for others. Since 1985, the UK has seen more than 103,000 M&As for a total value of more than £5,688 billion. However, the one thing that hasn’t changed is the challenge of determining a fair value for both sides.

How do you know a business is undervalued, overvalued, or just right?

Business valuation reports are a critical part of deciding an appropriate value for a business by leaving no stone unturned at the order of an independent professional. Here’s what you must know about the role of these reports in M&A deals.

The UK just so happens to be one of the most vibrant M&A markets on the planet. In Q1 2024 alone, there were more than £6.1 billion in inward M&A deals conducted, but there were also countless deals that fell through due to disputes over valuations.

Commissioning a report provides an objective valuation of what a business could be worth.

Some of the main factors these reports examine include:

·  Assets

·  Liabilities

·  Company reputation

·  Brand value

·  Observable growth

·  Market competition

·  Business history

·  Prospects

It must be mentioned that business valuation reports aren’t legally binding, and two professionals could come to different conclusions. Likewise, valuers may deploy different valuation methodologies to arrive at a value for a particular company. However, typically, they will examine the same factors.

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Business valuation reports aren’t a legal requirement for any merger or acquisition. In fact, companies are free to determine what they want to pay without any professional instruction whatsoever.

For example, some companies go for billions of pounds, but you also see companies that go for a single pound. DIY chain Homebase was one example of a firm that sold for a pound, with Australian owner Wesfarmers selling for the token sum after the catastrophic failure of its UK expansion.

Despite this, business valuation reports remain essential for buyers and sellers alike because they provide independent reference points for negotiations. Just because your business might be valued at £2 million doesn’t mean you won’t sell for more or less than this figure.

Generally, having one of these reports in your arsenal is always beneficial to ensure you aren’t paying/receiving substantially less or more.

Business valuation reports have several roles in UK M&A deals. Consider these reports to be an investment whether you’re buying or selling.

Here’s a rundown of the main benefits of having one of these reports done before committing to any deal.

Know your value

The first and most obvious benefit is knowing what your business is worth. Some companies rely on internal valuations for every quarter or financial year, but this has its obvious flaws, such as:

·  Lack of expertise

·  Lack of experience

·  Natural bias

Plus, from a seller’s perspective, the lack of an independent valuation often makes it difficult to trust that conclusion. Business valuation reports are produced by independent professionals with no stake in your deal.

Valuation reports provide a figure both sides can trust, serving as a benchmark for future negotiations. In other words, they set the foundation for negotiations.

Assess growth value

Businesses are purchased because of what they could bring to their existing operations. Nobody is likely to buy a failing business with no future prospects.

Part of a valuation report’s conclusion focuses on the growth opportunities a firm could unlock under the right leadership. They analyse the gaps within how a company currently operates to find areas of improvement to enhance the value of that business further.

Uncover strengths and weaknesses

Buyers want to know which areas they must focus on after completing an M&A deal to drive the brand to greater heights. Independent valuers run through the data to provide a thorough assessment of where a business’s strengths and weaknesses lie.

For example, perhaps a buyer has an operation that relies on worker productivity to get the most from every quarter. They’re experts in turning companies around that are failing in this respect. Through a valuation report, they discover a lack of productivity is precisely what’s holding back the business they want to buy. It’s a plus point that could turn a good deal into a great deal.

Discovering progress

Valuation reports are also valuable if you want to track a business’s history. Just because a company brings in millions of pounds in profit every year doesn’t mean it’s on the right path.

For example, a company could have made £10 million in profit last year, but if they were regularly bringing in £20 million in profit five years ago, this is a sign that there’s something wrong.

Remember, valuation reports are mere snapshots of an organisation’s standing at a particular time. This is why sellers also benefit from commissioning these reports long before they actually come to the point of listing their businesses for sale.

Set benchmarks

Another aspect determining whether buying a certain business makes sense is where a brand sits within an industry’s ecosystem.

Setting benchmarks against competitors enables buyers and sellers to assess growth opportunities and any obstacles that might pop up. Plus, buyers often want to know what buying a business will do to their position in the industry, including their anticipated market share.

Financial forecasting

Business valuation reports don’t purely analyse where a business is now but also where it’s going. Each report contains sections on future financial forecasts based on its current trajectory.

Buyers and sellers alike face the immense challenge of trying to predict the future. It’s easy to get into a scenario where one side is overly optimistic, and another is overly pessimistic. Valuation reports balance out the two and offer established mechanisms for determining what a business could be worth in the future if managed correctly.

Remember, buyers are looking at what value they’re getting now as much as they are at what value they could be getting a few years from now.

As you can see, business valuation reports are among the most critical documents in any M&A deal because they address the most significant sticking point: pricing.

At Hilton Smythe, we leverage decades of experience from across the UK’s business landscape to support companies in commissioning reports they can trust. To learn more about our valuation report services, speak to the team today.

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