How to Value Your Business Before Selling in the UAE
The UAE is home to thousands of businesses, from fledgling startups to multinational enterprises. While some remain in the same hands for their entire lifecycle, many others are the subject of mergers and takeovers. In fact, many companies in the UAE start out with an ambition to one day sell up to a larger business.
If this is part of your exit plan, you’ll need to know how to value your business before looking for a potential buyer. Overvalue, and you risk looking unserious and putting off potential investors. Undervalue, and you could miss out on a significant financial windfall.
In this article, we’ll explore the key considerations to consider when promoting your business to investors, from the factors behind business value to the impact of market conditions.
Key factors that impact business value
When we hear of multimillion- or even multibillion-dollar companies, it can feel like some valuations are plucked out of thin air. But, however big or small a business, its value results from numerous factors within and outside its control.
Unsurprisingly, one of the most critical factors is revenue. This is perhaps the clearest indicator of a company’s success. To put it another way, if you are convincing people to part with money for your offering, you have the makings of a successful business. If your revenue stream is consistent and growing, you can expect this to be reflected in your business valuation, too.
But of course, this is not the whole picture. As the saying goes, revenue is vanity, profit is sanity. Enormous revenues are not so impressive unless accompanied by equally impressive profits. Once again, if you can demonstrate consistent and increasing profitability, this will be reflected positively in the total valuation of your business.
Cash flow is important here, too. A business that is profitable and generates impressive recurring revenues is likely to look more attractive than one that generates revenue sporadically.
The market position of your business is another vital factor. Your value will differ depending on whether you are a market leader or a smaller player in a big industry. The size of that market has a part to play, too. If it is saturated with little room for growth, investors may see less chance of making a good return on their outlay. Similarly, market trends can significantly impact the perceived value of your business. Are you pioneering a new industry or at the tail end of an outdated market?
Then there are factors such as the size and quality of your workforce, the relationships or contracts with suppliers and customers, and any assets you own. This could mean physical assets such as office space or equipment or intellectual property, patents, trademarks and the like.
Different methods to value a business
With so many different factors at play, business valuation can seem confusing. However, there are several tried and tested methods to help you settle on a tangible value. These include:
Market capitalisation
This is the simplest method of valuing your business. To do so, you multiply your share price by the total number of shares outstanding. However, while this is a generally accepted practice for larger companies, it is of little use to smaller businesses without publicly traded shares. This method also does not account for any debt held by your business.
Times EBITDA method
This method takes the value of your EBITDA over a set period and applies it to a multiplier. Multipliers vary depending on industry trends. For example, a tech company may be valued at seven times its EBITDA, whereas a services company may only apply a 5x multiplier.
Earnings multiplier
This is similar to the times EBITDA method. However, it is calculated by adjusting future profits against cash flow that could be invested at current interest rates. As the earnings multiplier uses the price-to-earnings ratio, it generally gives a more accurate business valuation.
Discounted cash flow (DCF) method
Once again, this is similar to the earnings multiplier. However, this method uses projections of future cash flows, adjusted to estimate the company’s current value. Essentially, the key difference is that the DCF method considers inflation when calculating value, whereas the earnings multiplier does not.
Book value
This is perhaps the most tangible of any valuation method. The figure here is simply the value of any shareholder equity as shown on the balance sheet. In other words, it is the total assets of your business minus its liabilities.
Liquidation value
Similar to the above, this method values a business based on the net cash remaining should all assets be liquidated and all liabilities be settled on the day of sale.
Market valuation
An increasingly popular method of valuation, this is based on recent business sales. So, the value of your business depends on the sale or acquisition of other similar-sized businesses in your industry with similar revenues, profits, liabilities and so on.
Understanding financial statements for valuation
The importance of clear and accurate financial statements cannot be overstated when valuing your business. Any inaccuracies, inconsistencies or incomplete records could set alarm bells ringing for potential buyers.
Up-to-date and accurate records not only help to build trust throughout the consolation process, but they also offer peace of mind that any valuation is likely to be precise. Potential investors can also be confident that your business has and is continuing to meet its auditing and regulatory requirements.
How market conditions in the UAE affect business valuation
Market conditions are likely to have just as much bearing on your valuation as the health of your business.
Here in the UAE, there are several large and consistently thriving markets, including technology, tourism and hospitality. However, this does not necessarily mean any business in these industries is more attractive to investors.
If your business is offering something new in traditionally high-growth sectors, then you can expect a high valuation. If it is offering something similar to the major players in the market, your business will likely be valued less favourably.
Any pending legislation or regulation will also impact your valuation. If your industry has until now been unregulated but is soon to face additional bureaucracy, investors may be concerned about how this may impact your profitability.
Hiring a professional to assist in business valuation
Hiring professional help is one of the best ways to arrive at an accurate and fair valuation of your business. Not only are such experts highly experienced in setting valuations, but as outsiders, they can be much more objective than any company owner or shareholder.
A professional valuation will also be based on a thorough financial analysis of your business, providing extra peace of mind for investors that all is as it seems. Working with a professional to value and sell your business also adds credibility to the process and affords you some distance from the negotiation. Finally, all parties involved can be confident that the valuation and sale adhere to all relevant legal and regulatory standards.
About Royal CFO
Royal CFO began its journey in 2023 as a boutique firm with a clear focus: to offer unparalleled CFO and tax advisory services to SMEs across the UAE and beyond.
We’re committed to setting new standards of excellence and ensuring that every solution we deliver is synonymous with quality and tailored to your unique needs.
Our team of tax and finance experts can help with everything from bookkeeping, cash flow management and reporting to tax assessment and advice, process automation, and full-time CFO services.
Every decision we make is guided by our core values of honesty, integrity, and fairness. More than consultants, we are strategic partners invested in your growth and continued success.
That’s why you can trust us to guide you through every stage of your business lifecycle, drive your company strategy and make your vision a reality.
Ready to get started? Call +971 502 592 311 or email info@royalcfo.com to find out more.