As you debate the pros and cons of effecting a partial, or full exit from your family business, it is likely that valuation will be at the front of your mind. Or at least, it should be.
The business valuation discussion is key, particularly in an Emerging Market, like the UAE. As a successful businessperson, you may be of the view that for most deals, there is a price that can make the difference and turn a bad deal into a good one. Similarly, a well-structured deal, which makes a lot of strategic sense, may not be economically viable at a certain valuation. In all cases, understanding what is the value of your business today and what it may be tomorrow and through the market cycle is key.
That is where having the right advisor at your side is very important, as it is not only a matter of calculating the value of the business, but you will need to form a view on whether this value is compelling enough for you to take a decision on an exit, or not.
Of course, when you are dealing with your life’s work, numbers are not all that matters. There is, understandably, a certain emotional attachment to your business and what it means to you. Having an experienced partner at your side to guide you through this process is key.
Business valuation is more an art than a science for a number of reasons:
The first set of reasons has to do with the inputs that go into the valuation. These include the choice of comparable industries, and within those, the exact companies selected. These vary by size and by country and many key decisions need to be taken in this selection process.
I have often come across companies in Saudi Arabia, Oman, Dubai and Abu Dhabi, where the business mix is relatively unique and makes it difficult to compare them to a single company. Sometimes, in this case, we analyze each business segment separately and value it by comparing it to other “pure-play” companies in that sub-sector. Then we add up the valuations of these sub-segments using a methodology called the Sum of the Parts (SOTP).
When using the Comparable M&A transactions method, another factor that comes into play is the choice of the period during which comparable transactions are deemed to be relevant.
Finally, when calculating a Discounted Cash Flow (DCF) valuation, there is a myriad of decisions to be taken to build the projections and, more importantly to calculate the cost of capital rate at which they are discounted, and ultimately in determining the Terminal Value, which is often the largest part of any DCF valuation.
The second set of reasons has to do with the interpretation that is made of the valuation numbers. This interpretation is key, as it will form the basis for strategy and decision-making. Two elements need to be analyzed and a view needs to be formed on them: One is the actual profitability of the company, based on which the valuation is done, and the other is the market inputs (basically where other companies are being valued) used to multiply (or discount) the company’s cash flows.
In summary, a partial exit of your family business is a very strategic decision to take or not to take. A number of key factors may sway family business owners one way or the other, but, at the end of the day, like in any business transaction, price is key, so getting the right corporate business valuation analysis in place should be the first step to guide decision making.
This is the third and final blog in my series about family business valuation and exit strategy. In case you missed it, here’s a link to the first blog, Why Business Valuation is Essential for Strategic Decision Making. Here is a link to my second blog, Should Your Family Business Have an Exit Strategy.
As always, I welcome your comments and questions below. I also invite you to request instant access to my download, 17 Essential Questions for Family Business Owners.