Company valuation is the process of determining the economic value of a company. It may be conducted to provide an accurate picture of the company’s financial standing to present to current or potential investors. In the case of changing the company’s ownership through a sale, a valuation of its worth is imperative. Selling a business is one of the many strategy exits adopted by many companies.
Below are considerations before selling a company.
1.Intangible Assets
Intangible assets are the long-term resources of a company, but have no physical existence. They derive their value from intellectual or legal rights, and from the value they add to the other assets. Whereas tangible assets add to a company’s current market value, intangible assets add to its future worth. An approximation of the monetary value of a company’s intangible-assets is computed, by deducting the net value of its tangible assets from its market value.
They can include trademarks, domain names, leases, operating manuals, supplier contracts, logos, patents, databases, websites and most importantly, customer lists. When selling a successful business, the value of intangible assets normally greatly outweighs the value of planted equipment or chattels, so it’s very important to maximize the value of goodwill and any other intangible assets because they can be even more important than tangible property.
Arrangements should also be made to have the company’s reviewed by an intellectual property attorney, in order to get an expert opinion. The arrangements should be in writing and it should be clear who owns what within the company. Ownership ambiguity often makes for bumpy negotiations with a potential buyer or investor.
2.Tax
Tax is compulsory monetary contribution to the state’s revenue, assessed and imposed by a government. Most countries impose tax on companies operating within the country.
Selling a business comes with tax implications. It is therefore important to review the company’s tax situation and consider any forthcoming tax changes. A review will also help the company identify things it can put in place to allow more room for tax mitigation. A tax attorney or advocate can be useful in helping with the reviews.
It is therefore important to consider the entire spectrum of tax consequences when determining how to structure a business sale.
3.Employees
Employees are a vital asset to a company. A careful review of the employment contracts would be recommended. Will the employees want to stick around after the change in ownership? What would keep the employees from leaving or competing with the business? A change on ownership can also result in the loss of jobs and valuable employees can be fired by the new owners.
It’s important to communicate with the employees and let them know whether they’ll be transferring across to the new owner or ending their employment due to the sale of the business. Therefore one needs to ensure all current employment relationships are up-to- date. One also needs to make sure that the best employees will work hard towards making a successful sale.
4.Financial records and reports
Potential buyers of a company will need verifiable and audited financial claims. They will want to see the company records and documentation and know where everything can be found after the sale. It is therefore imperative for the current owners to make sure that management information systems are working smoothly. The financial records and reports including invoices and bank statements should be up to date. A good idea would be to hire an external and reputable accounting firm to make sure that all the financial processes and accounting methods are good to go.
5.Vulnerabilities
Every company faces an operational vulnerability. This includes the risks faced by the company and the extent to which it is susceptible to degradation. Company leaders should therefore fully understand its vulnerabilities. The leaders should allow a realistic assessment of the company to better position it for a successful sale. They should embrace the company’s operational weakness.
In addition to the vulnerabilities that are known, company leaders should also find those that are yet to be discovered or understood. They should be aware of contingent liabilities so as to know how to eliminate them. If it is not practical to fully eliminate the weakness before the transaction, acknowledging and owning the problem before the potential buyer discovers it will allow the company to formulate a plan for how to best disclose and control the message to the buyer. It will also help the management to cover its interests when the transaction contract is drafted.
6.External Factors
There are external factors that may affect the worth of a company and the viability of its sale. Such factors include the company’s competitors, the political system, the legal system and the economic system. A complete and thorough analysis of the factors should be made so as to maximize on the sale of the company by selling it at a time when the factors are most favorable to the sale. The company management should also take advantage of high market prices and make the sale before the market prices fall and the market declines, thus shrinking their options
Once these six factors are considered before selling a business, both the buyer and seller stand to gain from the sale.
