Someone's offered to buy my company; how to value it?

[Scruff]

As a further thought here...

YourCompany (if you are a typical IT Service Company) will have as its largest asset, its Cash at Bank. If another company then comes along and offers to purchase YourCompany, if they are going to pay you in Cash in one lump sum, then subtract the Cash at Bank figure from the Purchase Price. If they are going to pay you by any other means (shares in TheirCompany, deferred cash, debentures or any non-cash related means), then they are effectively using YourCompany's cash and paying you with non-cash related "assets" of dubious (future) value. This is an old accountant's / financial manager's trick and which caught out Umpteen IT Start-ups in the early 2000's - "I have just sold my ITCompany for £5m (and have been paid in shares which I have used to wallpaper my loo)"...

[1865]

Thank you, most useful.

Something doesn't sound right here. Why would they want to purchase a company that isn't really a company? I take it they are aware there is only you that comes with it so you are the only asset?

What type of company is your client? Small to medium sized owned by a single entrepreneur type who has a habit of buying smaller companies? If so I would be very nervous about them having a card up their sleeve and turning you over at a later date.

I would be getting some very good legal advice on this if you are going to do it. Sounds like a lot of smoke and mirrors just to get you to work for them IMO.

As a further thought here...

YourCompany (if you are a typical IT Service Company) will have as its largest asset, its Cash at Bank. If another company then comes along and offers to purchase YourCompany, if they are going to pay you in Cash in one lump sum, then subtract the Cash at Bank figure from the Purchase Price. If they are going to pay you by any other means (shares in TheirCompany, deferred cash, debentures or any non-cash related means), then they are effectively using YourCompany's cash and paying you with non-cash related "assets" of dubious (future) value. This is an old accountant's / financial manager's trick and which caught out Umpteen IT Start-ups in the early 2000's - "I have just sold my ITCompany for £5m (and have been paid in shares which I have used to wallpaper my loo)"...

My company is now really a company; although it began as vehicle to bill for contracting work, Ive now got a good list of clients who come back on a regular basis who I do project work for. The buying company gets access to this. The company who are interested in buying employs around 20 or so, and as far as I know haven't bought any other companies. They did mention that some of the payment would be in shares, how much I've yet to find out. I presume any offer will come with minimum term of working for them followed by some sort of non-compete clause. I'll certainly check any contract with lawyers/accountants before I sign up!

Thanks once again.

[Dominic Connor]

Being shafted

A big issue here will be your work for the company afterwards.

It is far from unknown for the takeover to be for assets/goodwill/IP of the company and for the founders to be made redundant quickly after, perhaps with a clause in the contracts that stops them doing "competitive" work.

Conversely, they may want to lock you in, with financial penalties if you quit and again an non compete clause.

Lastly there is the earn out, they may be buying your company because they reckon it will make £X over the next few years and there may be clawbacks or deferred payment to cover this. That has the obvious risk that it may not perform and also that transfer pricing may mean that they can engineer it so that the profits go elsewhere, so they don't pay you.

[LisaContractorUmbrella]

If your company is starting to make real money and you have brand recognition at a point where another company wants to acquire that brand why would you want to sell?

[yasockie]

If your company is starting to make real money and you have brand recognition at a point where another company wants to acquire that brand why would you want to sell?

More money sooner, possibly less work?

[LisaContractorUmbrella]

More money sooner, possibly less work?

Yep but potentially the company could end up making a lot more money than was gained in the sale

[1865]

A big issue here will be your work for the company afterwards.

It is far from unknown for the takeover to be for assets/goodwill/IP of the company and for the founders to be made redundant quickly after, perhaps with a clause in the contracts that stops them doing "competitive" work.

Conversely, they may want to lock you in, with financial penalties if you quit and again an non compete clause.

Lastly there is the earn out, they may be buying your company because they reckon it will make £X over the next few years and there may be clawbacks or deferred payment to cover this. That has the obvious risk that it may not perform and also that transfer pricing may mean that they can engineer it so that the profits go elsewhere, so they don't pay you.

Thanks a lot Dominic, some excellent points to consider. If there's a possibility that that are may ant to make me redundant within a relatively short period and I have to put up with a non-compete clause, that puts more reason on me to to push for a higher sale figure to offset this.

I'll certainly check for lock-in clauses, and deferred payments. Not sure how I can ensure at the outset that I don't get caught out by them engineering it so the profits go elsewhere making the performance look worse than it actually is?

If your company is starting to make real money and you have brand recognition at a point where another company wants to acquire that brand why would you want to sell?

More money sooner, possibly less work?

True, Lisa but if both sides realise the company is doing pretty well that augers well for me pushing the price up they really want it. As Yasockie says this may be a good time to cash in; the opportunity to do so may not pass my way again.

[financial analyst]

A couple of thoughts from a newbie:

There are a lot of question-marks on this and I think you need to anticipate exactly what they want and decide exactly what you want before considering the sale of the company further.

Why do they want to buy?
- to use your balance sheet? (cash probably)
- to gain control over you or your/their Intellectual Property?
- to invest to build your company into something bigger?

Why would you want to sell?
- to retire?
- to change job/lifestyle?

Not much point in selling the company but continuing to do the same work under onerous non-compete clauses & multi-year payouts / clawbacks.

Also, check your tax position carefully - it can be advantageous to sell if structured correctly. Also, if you do sell, consider your pension position regarding current & future contributions and treatment of the sales proceeds.

If they just want you to work for them, it would be much more straightforward to simply offer you a job, or to change your existing service contract.

My guess is that in the absence of significant 'strategic value' they will offer much less than you will want for it as a going concern - probably two or three times NPBT, plus cash in the bank.

Remember that you don't have to sell the whole company. It may suit both you and them for them to buy a minority shareholding, but with a tighter agreement on your obligations to the company and indirectly to them.

Either way, run anything past your accountant & solicitor before signing.

[1865]

Hi 'financial analyst', many thanks for your excellent points.

I've no pressing desire to sell and be subsumed by the purchasing company; however £££ talks and it all depends how much they are prepared to pay. Good point about not needing to sell the whole company, instead selling them a minority shareholding with obligations on my side re the service I then provide them. I definitely need a good lawyer and accountant to go through matters first as you've said.

My next meeting with them is in just a over a week's time, along with their accountants. Let's see what they've got on the table.

Thank you again.

[financial analyst]

You're welcome. Hope it goes well.