Secret Seller episode 4 – Understanding the firm’s value

Our Secret Seller’s sale journey is now reaching an incredibly important part of the process – understanding the firm’s value.

So, if you’ve been following their journey, the next episode is below. If you haven’t read our most recent episode, “Meeting with the buyers”, check it out.

When exiting your business, understanding exactly how much your firm is worth and what you’ll need from the sale can often be daunting.

Thankfully, Brian and the team are specialists when it comes to getting the best possible outcome for both buyer and seller. He worked closely with our secret seller to help them understand how much their firm was worth.

Our Secret Seller says: “Before I get to the offers, there was one small thing which hadn’t really been discussed – money!

“In all my conversations with Brian, money just hadn’t come up. But what was my business worth? In my mind, I had the figure I was looking to take from the company more than 10 years ago, when I thought I’d be looking to go down a succession route, but this was different.

“I had looked at the calculator on the website, which had started well. I’d looked at turnover, the number of households, the average age of clients, and the amount of recurring revenue and so on. Yet, when it got to the earnings before interest, taxes, depreciation, and amortisation (EBITDA) page, I just didn’t have the answers. This was because my accounts don’t consider my self-employed consultant, who was also exiting! (Sorry Brian!)

“So, I raised it on one of my many calls with Brian – and of course, there isn’t a black and white answer, unless you count “whatever someone is prepared to pay for you!” – which is, of course, the right answer!

“So, it turns out there are two ways someone will buy you, either through recurring revenue or using the EBITDA calculation.

“Calculating using EBITDA turned out to be really complicated for my accountant when I asked them to consider my self-employed adviser – who is also exiting. They managed to come up with a figure five times less than the other offers we’d received. This was slightly concerning; perhaps we wouldn’t be retiring after all!

“Putting the accountant to one side, Brian and I created our own EBITDA for the company, and retirement was back on the cards!

“The other option was recurring revenue, where you are paid your recurring revenue multiplied by a number (Brian explained that this usually sits between three and four times – depending on how the market is at the time, number of clients, average age, where the client money is, what adviser fee is being taken, and many other factors).

“The other important factor is how the money was going to be paid. With many IFA sales, it works on the basis of 50% upfront, 25% at the end of year one, and 25% at the end of year two – I wanted to make sure that the 50% upfront figure was going to make me happy.

“My concern with EBITDA was the lack of control I would have going forward. Also, if a company absorbed our business into their own, how would EBITDA work at the end of years one and two with our second and third payments? Plus, in regard to my self-employed consultant, how would that work moving forward? My inner control freak didn’t like it.

“Whereas with recurring revenue, the second and third payments would be intrinsically linked to how our clients respond to the merge and how good a job we do with the handover.

“With all this in mind, all I had to do was wait for the offers to pour in…”

Get in touch

If you are looking to sell your business and want an organisation that looks after you and every single aspect of the process, speak to Melo. Email hello@melo.co.uk or call 0113 4656 111.