There are several common mistakes people can make during the valuation of their FM business but these can be avoided, says Henry Campbell-Jones.
Mistake 1: Relying on vague estimations based on approximations by non-buyers
It may seem obvious that any company valuation should be detailed and rounded, and not just based on vague estimations. But it’s a point often missed; business sellers regularly fall for attractive valuations without questioning what the figure is actually based on. Worse still, they use these higher valuations to measure the potential effectiveness of the broker.
Solution: Beware of business brokers who offer a high valuation figure while failing to ask questions relevant to your specific business.
Mistake 2: Basing your valuation on recent financial performance
To ensure that you receive a meaningful and robust valuation, it is essential that your company is assessed against a range of financial and non-financial criteria. Here are just a few of these:
- Revenue and profit profile for the past three years and the expected growth trajectory;
- Current shareholders’ roles and the company’s dependency on these roles;
- Shareholders replacement costs and whether there is planned succession within the company;
- Size of customer base and customer revenue concentration; and
- Proportion of contracted or recurring revenue, which is particularly relevant in the facilities management sector.
Solution: Be sure to be thorough and include long-term financial performance.
Mistake 3: Following your heart and overrating your business
Most people are familiar with the cliché that any company is only worth what a buyer will pay for it. The more elegant way to express this is that provided a broker does their job properly, the ultimate price of any company will be dictated by the market appetite for that company.
Companies are typically not marketed with a specific market price and instead offers are invited from potential buyers. Even if the broker has been a little conservative in a valuation, the market will soon make this clear.
Solution: Trust the broker. It is better to have it this way than wondering why you are receiving much lower offers than you were led to believe you might!
Mistake 4: Be tempted to go with a broker who promises to achieve the highest price
Receiving an inflated initial valuation may negatively impact the eventual sale of your business. Serious buyers will not take the valuation seriously, resulting in a protracted sale process.
Solution: It is better to have a broker that is aiming at the optimal value after a careful assessment of your business.
Mistake 5: Looking at macro-economics rather than business prospects
The key attribute of a FM business – whether they are oriented to commercial cleaning or to security – is that the business model is based on a monthly recurring revenue supported by a service contract.
In terms of a sale, there are advantages to being either single or multi-service, the ultimate goal of an FM business is to be able to provide the full range of services to its client base so that there is the potential to cross-sell services and grow more quickly.
Single-service companies will be of strategic interest to trade buyers that are looking for a particular service to add to their suite of services and will provide an immediate client base into which their existing services can be offered.
Solution: Instead of being influenced by what people say about the market, focus on the potential of your business model and select a broker who is taking this into consideration.
The good news
While Brexit and the coronavirus dominate the news, we find that buyers tend to remain positive about the future, and we remain busy with business as usual. Since the Brexit vote, we have completed several successful FM deals. These included a commercial cleaning company (turnover £853,000), a well-established 30-year-old building mechanical services business (turnover £3.7 million), and an IT support and hosting company (£1.2 million).
There is a strong demand for our FM sales mandates, and we see it as very much a seller’s market. There are many buyers and too few acquisition opportunities.
Henry Campbell-Jones is director of Hornblower Business Brokers