Exit valuations: What you need to know

Working out the value of your company is a crucial part of running your business.

Whether you are a pre-seed startup looking to raise funds, or you have been established for a while and are looking to create a share scheme for staff, valuations need to be made.

So what about when it comes to selling your company? This is where an exit valuation comes in.

What's an exit valuation?

It will provide you with an estimated value of your business in preparation for its sale. They also need to be made if you are planning for a merger, or an acquisition.

Ultimately, an exit valuation will help prepare you for negotiating with buyers or other parties and determining proceeds from the sale of your business.

Why and when to make an exit valuation

Exit valuations help you to decide on a fair value for your business.

Whether you are considering selling your company, or embarking on a merger or acquisition, you want to be confident that you will be getting what you know to be right from the deal and that your investors will be making a suitable return on their investments too.

Buyers will be making their own estimates on what your business is worth. But your own exit valuation – which is backed up by solid research – will put you in a good position for getting round the negotiating table.

Getting started: the data you need

While fundraising valuations depend a lot on projections and forecasting, exit valuations are largely based on the actual performance of your company to date.

Here are three key questions to ask

1. What is the current revenue of your business?
2. What profit is the business making currently?
3. How many customers does your business have?

Other factors to think about

Beyond the numbers specific to your own organisation, it is also important to think about the current market conditions for your business.

How is the industry looking at the moment? What are some reasonable estimates about where it’s going in the next 2-5 years? How do your products or services sit within that context in comparison to those of your competitors?

We might also want to ask whether your business has any intellectual property attached to it? These could be patents, trademarks, etc. What are their value?

At this point it is also important to consider the costs incurred with the sale of the business.

Key formulas: EBITDA and Exit Multiple

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.

EBITDA = Net income + Interest + Tax + Depreciation + Amortisation

This provides a good initial gauge of your profitability. But it can then be used to estimate your company’s value in the context of the industry you are operating in.

This is achieved by using an EBITDA multiple:

Enterprise Value = EBITDA x EBITDA Multiple

This type of valuation is an example of a market-based approach. The reason for this is that the selection of an appropriate multiple is done by reference to the open market. The multiple is based on industry benchmarks and comparable companies. 

Comparable companies may be listed on stock exchanges where live pricing data is available, or private companies involved in mergers or acquisitions where the transaction details are disclosed.

For example:

If you have a net income of £1,000,000, interest of £250,000, taxes totalling £250,000, as well as depreciation and amortization at £500,000, your EBITDA will be £2,000,000.

Say your business is operating in the consumer goods sector, and the multiple for that industry is currently 4.8, your exit multiple would be £9,600,000 (£2,000,000 x 4.8).

Preparation is key

For most business owners, the decision to sell is a big one – and not one that should be made without careful consideration of the factors outlined above.

It might even be that in making an exit valuation, you ultimately decide now is not the right time.

But with proper analysis of how the company has been performing to date, and an understanding of where the industry is going, you can be confident that the next step for your business is the best course of action for you.

If you know you want to sell – or to try and seek a merger or acquisition for your company – an accurate exit valuation is crucial.

Knowing what the revenue of the business is, what your profits are, and the size of your customer base is the logical starting point.

But market conditions are important too. You will need to research the multiple for your sector, or a range of multiples for similar companies, in order to work out your exit multiple.

In addition to this, you will want to be adding in any intellectual property value and sale costs into your calculations.

Being comprehensive here, and being able to readily speak to the figures you arrive at, will ensure you are prepared to get around the negotiating table.

This will increase the chances that the final deal you arrive at will satisfy your buyers and be fair to you – as well as ensuring that your investors will be getting the return that they need.

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