Post on 16-Dec-2015
Avondale established 20 years, UK wide team. Avondale offer a fully integrated service combining sales, acquisition, finance and transaction support as well as strategic advice. We have an exceptional track record in assisting clients on a wide range of SME and mid market transactions.
• Part of the Avondale Group
• Commercial SME £100k-£750k value
• Experienced & Dedicated Experts
• Best Advice
• Exceptional Service
• Proven Track Record
The marketDeal types/market
• 300,000 commercial companies employ more than 5 people.
• Trade
• MBO / MBI / BIMBO purchase
• Investor / Private equity purchase
• AIMS / OFEX Float (requires ambitious management willing to stay after float)
Today
• Competitive markets drive consolidation
• Organic growth decline/halted driving acquisitions
• Contraction forces economies of scale as essential driver
• Cash-flows settling improving finance lender opportunities
• Interests rates affordable
• Tax regime still favourable to sellers
• Valuations increasing after dip
High activity/fragile financial arena.
reasons to sell• Capitalise goodwill
• Retirement / health reasons
• Lack of capital /
underperformance
• Challenge has faded-
Executive downsizing / lifestyle
• Family succession has receded
• Lack of succession
reasons to buy• To increase shareholder value/profits
• Increase market share / product base
• 1+1=3 (synergies, economies of scale)
• Acquire growth potential • Intellectual Property
• To buy a job (individuals)
• To buy, build and sell on
Motivations
valuation techniques
The value is what a purchaser will pay and a vendor sell for - the market decides
• Discounted cash flow• Net asset value• ROCE (Return On Capital Employed)• P/E ratio (Price/Earnings ratio)• Comparison yields (ROCE)
valuation contributing elements
• Profit yield (reflection of goodwill/trust)• Property• Fixed assets (vehicles, plant etc)• Net current assets (stock, cash etc)• Intellectual Property• Profitability/volatility/sustainability
WHAT MULTIPLE? High Risk low recurring revenue
Low risk- high margin
high recurring revenue
price earnings/ROCE calculation
Operating profit (pre tax)+ Adjustments/add on/backs (subjective)
Sustainable/maintaniablex multiple (subjective/comparative/deal structure)+ Net asset value (enterprise value less surplus
cash/freeholds etc)****+ freeholds_________________________________= Subjective forecast > Market decides
*** Use higher multiple if assets included. Lower if plus. No rule.
adjusting the sustainable net profit
• Cost in replacements for vendors • Add back salaries/benefits of vendors• Adjust appropriate costs for premises?• Remove costs personal to the seller• Is depreciation real? PBIT - Profit before interest tax EBITDA - Earnings before interest tax
depreciation and amortisation
Example adjustment 31/12/2010 HIRE Business
Turnover £3,250,000
Gross £1,346,976 40.38%
Operating Profit £327,725
Adjustments to net profit Notes on adjustments
Directors pension £3,600
Wives salaries £21,859.00 Not fulfilling ongoing operational roles
Directors remuneration £78,005Only requires 1 replacement Director- Must be justifiable
NI On Directors £7,800
Additional rental -£15,000 Under commercial rent
Bank interest £639
Factoring £16,806 Is financing essential cost?
Hire purchase interest £3,542
Amortisation £21,600 Depreciation of goodwill
Depreciation Real cost as plant business
Adjusted PBIT under management £466,576.00 SUSTAINABLE???
Profit in £000’s
Mu
ltiple
pre
tax
50 250 500 750 1,000 1,500 2,000
10
9
8
7
6
5
4
3
2
1
Most likely
Least likely
Beware of news Post tax if you want to make multiple sound bigger. multiple headlines Announced multiples typically of non adjusted profit
deal structure
Valuations also depend on deal structure as buyers hedge risks. • Cash• Earn out/Performance related payments (PRP) • Deferred payments/loan notes• SharesSecure the risksReverse due diligence/Personal and bank Guarantees
High earn-out deferred/higher
multiple
All cash lower multiple
Deal structure- effects multiple
Valuations are an art not a science
Comparison/double check• Other investments• Organic reinvestment in buyers own business• Likelihood of buyer achieving organic growth• Other deals done• Would you pay it? Risk to return reflected? • Vendors net income versus net capital sum• What assets are included?
Enhancing Value - rule 1
create a game plan well in advance
• Know where you want to be. Plan the journey
• Many ‘planning’ aspects are good business
practice
• Frustration makes your game worse
• Shareholder value is more tax effective than profit
Enhancing Value - rule 2
work on your business, not in it
• Reduce dependency on owners / key personnel
• Housekeep – legal / financial / presentation
• Build a machine- systems / training / procedures
• Reduce risk- What’s the worst envelope that could land
on your desk?
Enhancing Value - rule 3
look after the pennies
• Reduce expenditure – non core, review
overheads
• Increase margins / pricing policy
• Seek tax advice
• A £ of profit multiplied
Enhancing Value - rule 4
financially engineer
• Repay Directors loans / remove personal
guarantees
• Create stand alone venture / balance sheet
• Consider removing surplus cash
• Take out non-core assets such as freehold
• Check value of assets
Enhancing Value - rule 5
acquire
• Buy a company achieve economies and
synergies fruits shareholder value
• Shareholder value is tax effective (exit tax
cheaper by far than income/corporation tax)
• Route to real capital wealth
Synergy (extra sales)
Economies of Scale (cost savings)
Company A Company B
Merged Company
Enhancing Value - rule 5Growing the Shareholder Fruit Tree- acquire
Economies/synergy 1 + 1 = 3
Bigger profits = Higher Multiple?
Shareholder Fruit
Enhancing Value - rule 6stand out
• Market leader (or threat to) is the most valuable in a sector
• Invent a niche. What is your unique business proposition?
• What barriers to entry do you have on the competition?
• Recurring revenue/value multipliers
• Create a culture and brand
Your best BUYER has ‘we need, we want’ motivation
Enhancing Value - rule 7Know thyself - What changes do you need to make?
The most important and influential person in a business is you – the leader. Due to this, it is likely that whatever is working well in the business is because:
a.) You are good or enjoy that aspect b.)You put your time and energy into it
Similarly, whatever is not working so well is probably because:
a) That aspect is not one of your strengths or you don’t enjoy it. b) You do not put as much time and energy into it
The most effective way to improve the business is for you to understand your own strengths and preferences.
Create road map to value
Play to multiplier Influencers
Prepare and present
Value BuilderHelping
you create sustainable equity
valueEnhance profits/business model
change• Take time out, prepare
• Little changes make the difference
• Most preparation changes are good business sense
• Value Builder – Avondale’s strategic growth planning service. Strategically enhancing multiplier influencers and profit
It’s not the strongest that survive, or the most intelligent, but the
one most responsive to change Charles Darwin