Most deal valuations are set out as a multiple of earnings, plus surplus assets. Nick Hulme’s article, Valuing Companies, is a great read for more detail on this.
As he mentions in the article, surplus assets come in many forms, and can include lump sums of cash sitting on the balance sheet, the company’s premises/real estate (if the sellers are going to keep these personally post-close) and even the yacht or Bentley in some cases.
Below are some simple rules for sellers to keep in mind when considering Free Cash, the most common surplus asset we encounter on our deals.
Rule #1 – Have Realistic Expectations
A buyer will only allow you to extract cash at completion that is truly surplus to the requirements of the business going forward.
Think, perhaps, in terms of how much cash you could extract yourself without affecting the ongoing operations of the business, and how much you’d ordinarily want to leave in the business to guard against mid-month and month-to-month fluctuations in cash requirements.
In some cases, this cash can be extracted in a tax efficient manner (for example, in the UK where Capital Gains Tax is presently significantly lower than Income Tax, subject to certain conditions being met).READ MORE >>