What Will My Business Sell For?

Most owners of manufacturing businesses have a number in their head long before they decide to sell. Very often that number is too high. For most owner-managed manufacturers, the realistic price is the total value of the assets in the business plus whatever goodwill the earnings can genuinely support. Starting from that honest figure is the single best thing a seller can do to get a deal done.

Where the unrealistic numbers come from

The number an owner carries around rarely comes from a buyer. It tends to come from three places.

• Friends and peers. Someone at the golf club sold for what sounded like a large multiple. What you did not hear was how much of that was deferred, conditional on performance, or paid for property rather than the trading business.
• Advisers keen to win a mandate. A high indicative value is an easy way to get a signature on an engagement letter. It is much harder to defend when buyers start asking questions, and by then the owner has spent months anchored to it.
• Headline multiples from other sectors. Software, healthcare and consumer brands are valued on different terms from a contract manufacturer with a press shop and a toolroom. A multiple read in the financial press says very little about a precision engineering business in the Midlands.

None of them is writing the cheque.

Asset value plus goodwill

A buyer of an owner-managed manufacturer will usually start with what is physically there: plant and machinery, tooling, stock, debtors, cash and any property the business owns. These are valued at what they are realistically worth, not at what they cost or what sits in the fixed asset register. Obsolete stock and debts that will never be collected carry none.

What the business owes then comes off, and in most deals the bank debt and other borrowings are settled out of the proceeds at completion.

On top of the assets, the buyer will pay for goodwill only to the extent the profits justify it. Goodwill is the buyer's view of how reliably the business will keep earning once you have gone. If the earnings are modest, erratic or depend on you personally, the goodwill element may be small, and the price ends up close to asset value. For many sound businesses that is simply the honest answer.

What moves goodwill up or down

The same level of profit can support very different amounts of goodwill. In most deals we see, the difference comes down to a handful of things.

• Owner dependency. If the owner holds the key customer relationships, prices every job and signs off every quote, the buyer is really buying a job they cannot do. Goodwill falls sharply.
• Customer concentration. One customer taking a large share of turnover is a risk a buyer will price in. Losing that account after completion could change the whole business.
• Contracted or recurring revenue. Long-term agreements, schedules and repeat part numbers give a buyer confidence that the order book will still be there next year.
• Approvals and certifications. AS9100 or ISO 9001 certification, customer approvals and first article history take years to build and are hard for a competitor to copy. They support goodwill, provided they will survive the change of ownership.
• Management depth. A capable second tier who already run the business day to day is often the strongest single argument for paying more than asset value.

Most of these can be improved before a sale, though reducing owner dependency or building a management team takes years.

Why an honest number early matters

A sale that starts with an inflated asking price tends to fail in one of two ways. Either serious buyers decline to engage, and the business sits on the market until it looks stale, or a buyer agrees a high headline figure in heads of terms and then chips it down during diligence. The second route is worse. By then the owner has told staff, spent money on lawyers and lost the negotiating position.

Starting from a realistic figure does the opposite. It attracts buyers who can actually complete, it shortens diligence because there are fewer surprises, and it gives the owner a clear view of whether selling now makes sense or whether a few years of preparation would produce a better result. Sometimes the right answer is to wait, or to look at a management buyout instead of a trade sale. Our piece on MBO, MBI and trade sale options sets out the differences.

Where we fit, and where we do not

We help owners form a realistic view of value from the way the business actually runs, and we tell them plainly if the number in their head is out of reach. We are not valuers or tax advisers. A formal valuation should come from a qualified valuer or corporate finance accountant, and the tax treatment of a sale, which can make a large difference to what you keep, needs proper advice from your accountant before you agree anything. More on the mechanics is in our article on how to value a business for an MBO.

If you are thinking about selling in the next few years and want an honest view of where you stand, our business exit and sale service starts there. Get in touch.