When looking to buy or sell a business in Kenya, properly valuing the business is a critical step. Putting the right valuation on a business helps buyers and sellers agree on a fair price. Several methods can be used to value a Kenyan business for sale. This article will discuss some key factors to consider and the most common valuation methods used in the Kenyan market when determining the value of a business for sale.
Factors that Impact Business Valuation in Kenya
Many elements influence how a business in Kenya should be valued. Some major factors to take into account include:
- Financial Performance – The revenues, profits, margins, debt levels and other financial metrics of the business should be analyzed to understand historical performance and projected future performance. Financial records for at least the last 3 years are recommended.
- Size of the Business – Larger businesses typically attract higher valuations than smaller businesses, and size can be measured by revenues, profits, number of employees, physical facilities and other metrics.
- Growth Potential – If the business has opportunities to grow significantly in the future, all else being equal it will command a higher valuation. Growth potential depends on the industry, competition, regional expansion opportunities, online capabilities, and more.
- Management Team – An experienced and capable management team will likely add to the business value, while a subpar management staff may detract from the value or make the business harder to sell.
- Assets and Inventory – The quality and market value of assets like real estate, equipment, vehicles, inventory and other possessions influence business value.
- Intellectual Property – Businesses with valuable intellectual property, such as patents, proprietary processes, trademarks, and brand assets often achieve higher valuations.
- Customer Base – Strong, loyal customer bases that are likely to stick with the business through a transfer of ownership boost valuations.
- Supplier Relationships – Solid relationships with quality suppliers that provide favourable terms are intangible assets that can enhance business value.
- Business Age and Reputation – Older, established businesses with a strong track record and reputation often fetch higher valuations. But sometimes newer businesses have an advantage in terms of technology, processes, and connections.
Valuation Methods for Kenya Businesses For Sale
The most common valuation methods used for businesses for sale in Kenya include:
- Multiple Discretionary Earnings – This multiples-based approach values the business based on a factor of the discretionary earnings of the business. Discretionary earnings represent profits after the owner’s salary, taxes, and other expenses are deducted. Common multiples range from 1.5 to 5 times discretionary earnings.
- Multiple of Revenue – This is another multiples-based approach but it values the business based on a factor of the annual revenues of the business. Revenue multiples commonly range from 0.5 to 5 times annual revenue.
- Multiple of EBITDA – EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. The EBITDA multiple approaches value the business based on a factor of the EBITDA profit amount. Common EBITDA multiples range from 2 to 10 times or more.
- Asset Valuation – Totalling all assets of the business including property, equipment, inventory, accounts receivable, etc. and subtracting liabilities gives an asset-based value. This approach may set a floor value for the business.
- Discounted Cash Flows – Projecting future cash flows and discounts them back to the present using a discounted rate aligned with the riskiness of the business provides a value based on the future earnings potential.
- Entry Cost Valuation – Determining how much it would cost to start the business from scratch including costs for assets, property, hiring, etc. provides a valuation floor.
- Industry Rules of Thumb – Some industries have typical value ranges based on multiples of revenues or profits that provide quick shorthand valuations. While less rigorous, rules of thumb provide a starting point.
- Book Value – The company’s value on its own financial statements or balance sheet, representing assets minus liabilities, serves as a basic valuation. But book value has limitations for true fair market valuation.
There are pros and cons to each valuation approach and business sellers and buyers in Kenya often utilize a combination of methods to reach an agreed-upon price. The key is finding a fair balance between the past performance, current assets, and future earnings potential of the business.
Valuation Multiples Vary by Industry in Kenya
When applying multiples-based valuation methods, the specific multiples used will vary based on the industry of the business for sale. Here are average multiples for some major industries in Kenya:
- Manufacturing Businesses: 1.5 to 5 times discretionary earnings
- Distribution/Logistics Businesses: 3 to 6 times discretionary earnings
- Professional Services Businesses: 2 to 6 times discretionary earnings
- Healthcare Businesses: 4 to 8 times discretionary earnings
- Tech Businesses: Up to 10 times discretionary earnings or revenue
- Retail Businesses: 1 to 3 times revenue
- Restaurants: 2 to 6 times discretionary earnings
- Hotels: 0.5 to 2 times revenue
The specific multiple within the typical range for an industry will depend on the size, profitability, growth trends and local market dynamics of the business.
Adjusting the Valuation for Buyer Synergies
Strategic buyers who have synergies with the business for sale, such as companies looking to expand geographically, gain technologies/skills, or acquire suppliers or distributors, may assess a higher valuation for the target business based on synergies they can realize. Sellers can negotiate higher valuation multiples or sale prices with buyers who can achieve significant synergies through an acquisition.
Key Factors That May Reduce Valuations in Kenya
There are also important factors that can reduce the valuation multiples or price for a business for sale in Kenya. These include:
- Declining financials or future projections
- Overreliance on a single customer or supplier
- Operational challenges like high costs, inefficient processes, or high employee turnover
- Uncertainty around ownership rights or leased assets reverting
- The poor condition of assets and property
- Lack of financial records and proper documentation
Proper due diligence and adjustment of multiples or asset values should account for these risk factors that could lower valuations.
Valuing Professional Practices & Service Businesses
Valuing professional practices such as medical, dental, accounting, law and architecture as well as other service businesses in Kenya can be challenging. Some key factors that influence value for professional practices and service businesses include:
- Value of client accounts and retention rates
- Value of names and likenesses of key professionals
- Repeat customer business
- Referral networks
- Talent, skills and training processes
- Profits tied to owners versus institutionalized
- Documented systems and processes
- Transferability of company culture
- Real estate and equipment values
- Value of proprietary methods and intellectual property
Multiples of discretionary earnings, gross revenues, or EBITDA should be adjusted downwards for professional practices/service businesses if they are heavily reliant on individual talent and relationships versus having institutional practices, processes, and cultures that can thrive through an ownership transition.
Getting Valuation Advice for a Business Sale in Kenya
Selling or buying a business in Kenya is complex, with many variables impacting valuation. Working with trusted professionals can help both buyers and sellers determine fair valuation when brokering a deal. Here are some tips on getting advice:
- Hire a business broker familiar with your industry – they can provide valuation comps and smoothly negotiate deals.
- Consult a valuation expert – they can conduct analyses based on your financials and metrics specific to your industry.
- Seek guidance from an M&A advisor – they can pragmatically determine valuation ranges and navigate the sales process.
- Work with an experienced M&A or corporate lawyer – they can review deal terms and help finalize a transaction.
- Talk to other business owners – they may share insights on valuations used for recent sales of similar businesses.
With the right advice and context, buyers and sellers of Kenyan businesses can meet in the middle on appropriate valuations, resulting in deals that work for both parties.
Determining the value of a business for sale requires analysis of financials, assets, industry metrics, growth potential and risks. Various valuation methods can be used individually or in combination to reach an appropriate price. While valuing a business in Kenya can be complex, getting guidance from brokers, advisors and professionals can help both buyers and sellers agree on deal terms. With a balanced approach, Kenyan businesses can be valued and sold in a way that meets the needs of both parties in the transaction.