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What Can Affect The Valuation Of Your Business Post-Offer

Garry Stephensen

Article Author: Garry Stephensen
Position: Managing Director
Read time: 4 mins

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In the world of mergers and acquisitions, determining the value of a business is a multifaceted process, often relying on the multiples approach. This methodology assesses a target company's worth by comparing it to similar entities within its industry, considering various key metrics specific to the Australian market. These metrics include factors such as:

  1. Customer and Supplier Dependency
    Assessing the degree to which the company relies on key customers and suppliers for its revenue stream and operational needs.

  2. Future Growth Prospects
    dentifying the potential for growth and expansion within the Australian market, which can significantly impact the business's valuation.

  3. Barriers to Entry
    Evaluation of market entry challenges, such as regulatory approvals and contractual obligations, affecting companies in the respective industry.

  4. Profit Margins and Unit Economics
    Analyzing the profitability and cost structure of the business to understand its operational efficiency.

  5. Revenue Stability
    Examining the consistency of revenue generation over time, which directly influences the company's valuation.

As seen in the Financial Review and the Courier Mail.

Once a potential buyer has established an initial valuation for the target business, several crucial factors come into play that can affect this valuation.  Here are some common factors that can reduce a business's valuation, even after an offer has been made:

  1. Urgency of Sale
    In cases where sellers need to expedite the sale due to factors like health issues, the valuation may be adjusted to facilitate a faster transaction.

  2. Handover Period
    A well-defined handover period is critical to ensure a smooth transition of knowledge and relationships. If buyers perceive the handover period as inadequate, it may lead to a reduction in valuation.

  3. Quality of Financial Records and Systems
    The integrity of financial records and operational data is crucial during due diligence. Poor record-keeping can erode buyer confidence, possibly leading to a lower valuation.

  4. Competitive Sale Process
    Running a competitive sale process is essential to maximize shareholder value. If a bidder believes they are the sole interested party, they may revise their offer downward.

  5. Poor Trading Performance
    Initial offers consider historical and forecasted trading performance. If the business's performance declines significantly without a reasonable explanation, the buyer may adjust their offer accordingly.

What Can Affect The Valuation Of Your Business Post-Offer

One key element for business sellers in Australia to consider is EBITDA add-backs. These are adjustments made to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) to reflect the true economic benefits of owning the business. EBITDA add-backs are essential because they help potential buyers understand the business's profitability better.

Here's a simplified example of how to calculate EBITDA add-backs:

Category Amount (AUD)
Non-recurring expenses $60,000
Owner's salary $100,000
Depreciation $20,000
Interest expense $10,000
Total EBITDA Add-backs $190,000

In this example, $190,000 is added back to the EBITDA, representing expenses that are not expected to continue under new ownership. This adjustment provides a more accurate picture of the business's true earnings potential, which can positively impact its valuation.

For Australian businesses navigating the complexities of M&A transactions, understanding these factors and the importance of EBITDA add-backs is crucial. It's essential to proactively address these considerations to maximize shareholder value and ensure a successful sale process. While these are seven common factors, the dynamic nature of M&A transactions means that businesses should remain vigilant for any emerging factors that may impact valuation throughout the sale process.

Business Broker - Garry Stephensen

Managing Director
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Lloyds Corporate Partner - Mergers & Acquisition Specialist
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