Yahoo Finance Ask John: Ignore valuations: the only figure that matters is what a buyer will pay
Q I’m getting on and need to sell my business to fund my retirement. I don’t like the idea of selling up, but with no one to take it on, it has got to be. But I’m particularly stressed, as informal feedback has thrown up wildly different valuations. Is there a good sniff test?
A I’m not surprised that you’ve had conflicting advice. There are many mathematical ways of pricing a business, by using the asset value or taking a multiple of earnings, which can produce a widely different range of answers.
Sellers can enhance the price by ignoring interest, depreciation and exceptional costs when calculating earnings, while buyers may apply a deep discount to the value of the assets stated in the balance sheet.
To my mind, the numbers game played by professional advisors, trying to set a proper and fair price, is irrelevant. In the end, the only figures that matter are the sum that a buyer is willing to pay, and the minimum amount that the seller will accept.
Different businesses with exactly the same level of profit can command a big variation in price. A tenanted pub in a poor location will not be as attractive as a team of plumbers with a long list of repeat customers. And, for reasons that I can’t understand, Snapchat (Snap Inc) is valued at $25bn (£19.5bn) while Sainsbury’s is only worth £6bn.
Your minimum requirement seems to be the cost of funding your retirement, but have you worked out how much money that means? You need to account for the costs of doing the deal and capital gains tax (which, with entrepreneur relief, should be 10pc). I assume that you’re planning to invest the proceeds and live off the interest. Even with a modest lifestyle, you will need a significant capital sum.
Every seller needs a bit of luck. Without a serious buyer, you can’t do a deal, but if you’re lucky, two or three bidders will be keen to acquire your business, boosting the price and promising a prosperous retirement.
But not everyone’s that lucky. Be prepared for the possibility that no one is willing to pay your minimum price. When you say that there’s “no one to take it on”, I assume that you’re referring to management by a family member. But perhaps there’s a colleague who can step up and run things, taking away the day-to-day hassle, but still giving you a dividend to fund your retirement until the perfect buyer appears.
Q Following the NHS cyberattack, I’ve tried to persuade my team to take digital security more seriously, but they’re not interested. How can I bring something as abstract as IT home to them? After all, getting it wrong could lead to a potential catastrophe.
A The NHS can’t blame their nurses and doctors for the recent unhappy hacking episode, and you shouldn’t expect your front-line colleagues to be the first line of defence. It’s good to hear that you’re taking computer security seriously, which should help your company to take a proper approach to disaster planning. This regular review of risk used to concentrate on the consequences of fire, flood and industrial unrest, but today, digital security should be top of the worry list. Your IT department are the key defenders of your computer systems, but they can also help to make every colleague aware of how a hacker could beat your system.
To make the message stick, give every colleague all the tips that they need to prevent an outsider invading their own personal network. Once they realise that threats exist on their own smartphone or tablet, they will also become aware of the warning signs when they appear on a company laptop.
Two days after the NHS had its hacking incident, I met a surgeon and asked him what difficulties he had faced. “To be honest, it wasn’t a problem,” he replied. “I went back to the way we operated in the days before computers started to run our lives.”
Perhaps, as part of your risk assessment, you should see whether there are areas in which computers are getting in the way of doing the job.
John Timpson is chairman of the high-street services provider, Timpson. His latest book, Keys to Success, is available from the Telegraph’s online bookshop at tgr.ph/keys. Send him an email at askjohn@telegraph.co.uk
