GUIDE

My business is making a little less profit than last year – how much will that affect the valuation?

The valuation of a business achieved during a sale is the culmination of numerous factors, which assess both past performance and potential for the future. 

Of these, financial performance is just one.

Understanding what caused a dip in profits, be it internal, external or a combination of factors, as well as being able to demonstrate why it was a one off, will help a company achieve maximum value during a sale. 

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Understanding what caused a dip in profits as well as being able to demonstrate why it was a one off, will help a company achieve maximum value during a sale

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Equally, a slight dip in profit can, at times, be attributed to internal transformation or initiatives, with the short-term impact being an impact on profit versus the longer-term benefits. By explaining the strategic rationale and being able to evidence how this will benefit the business in the long-term, the impact on valuation can be minimal.

One way to mitigate the impact on valuations is to understand what impacts on profit are exceptional. By explaining what is exceptional and why, it is possible to normalise one-off, negative impacts to profit and any subsequent impact on valuation.

As advisers, it is important that we work with businesses to understand the financial profile, and manage and position the messaging around any dip in profit in the most effective light to minimise the impact on valuation.

What caused the dip?

In a perfect world, businesses would be sold on the back of a track record of year-on-year growth in profit and complemented by a credible and ambitious growth plan. However, if a business is making less profit than in the prior year, it is important to understand what caused the dip, as this will be a determining factor in how it impacts valuation.

Where a business has had an exceptional prior year, a slight dip in profits can demonstrate that the step up in profit is not a one off. Buyers will want to see that the new “normal level of profit” for the business is sustainable, so demonstrating that it will grow from its current point will be important to achieving an attractive valuation during a sale. 

Where a business is making less profit compared to the prior year due to external market factors, it is important to understand whether these are structural market changes or one-off, exceptional circumstances. The former will have a greater impact than the latter.

 

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Knowledge

We don't hide behind jargon and complexity. Instead, we aim to open up the black box of M&A, illuminating the path with clear insight, simplifying the process, and delivering valuable information.