Maximising the value of your business

Marc Fecher

8th May 2014

Agenda

• Sector overview

• Multiples

• The strategic review

• The valuation methodologies and myths

• Tax

• Who are the buyers and what do they want

• Timing

• Top Tips

Corporate Strategic

Advice Fundraising Acquisitions

Long-term Strategy

• Corporate Strategists

• Alternative Solutions

• Articulate in plain language

• Action - Hands on director team

• FCA Regulated firm

Our Services:

Long term

Shareholder

Value

Our

Focus

Deal volumes best since 2007

Sector deals

WhatsApp

$19 billion

$3 billion

Facebook

Acquisition

Google’s acquisition

Nest labs

$2.91 billion

£7.2 billion

Lenovo acquires

Motorola Mobility

from Google

Microsoft buys

Nokia

$2 billion

£7 billion

Facebook

acquisition of

Oculus

King Digital

Entertainment Plc

IPO

$16 billion

IPO

£7.2 billion

Alibaba Group

Holdings

Microsoft acquires

Nokia

Who is buying ?

M&A volume

Global technology M&A in 2014 highest since 2000

US 588 deals $64.5bn

Software $39.85bn

Services $23.6bn

Semiconductors $6.1bn

$0.00

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

$3,000.00

$3,500.00

$4,000.00

$4,500.00

$5,000.00

0

200

400

600

800

1000

1200

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Deal

valu

e (

$M

)

Nu

mb

er

of

deals

Europe: Annual Total Deals (2003-2013)

deals finance

Venture funding in Europe

Technology IPOs in Europe A weak market, with few noteworthy IPOs, for size or success

0

20

40

60

80

100

120

140

160

2005 2006 2007 2008 2009 2010 2011 2012 2013

Number of IPOs - Europe - Technology

Multiples Are increasing across the sector

0

5

10

15

20

25

30

35

40

2006 2007 2008 2009 2010 2011 2012 2013 2014

Technology

Media

Telecoms

Price Earnings (P/E) Ratios – year end

Stick or Twist

Sell

Retain

Raise funds

Debt funding

Crowd funding

Partial exit

IPO

Development capital

Private Equity

Buy

Liquidate

Strategic plan

Written exit plan

Unformulated exit plan

Identification of potential

buyer

None

Don’t know

• Despite such high awareness

of the meaning of “exit

strategy”, only (30%) have

any form of formal

succession planning or

written exit plan in place.

• However, one in four (24%)

have an unformulated exit

planned a further 6% have

identified a potential buyer.

• The survey showed that 40%

of those surveyed have not

considered their exit route

grooming or their exit strategy

despite being aware of the

term exit strategy.

7%

33%

6%

24%

9%

21%

What are my options?

Activity Specific

Hardware and distribution

Software sales/development

Consultancy Social apps

(social media)

Communication Services SaaS/enterprise

(software, mobile)

Marketplaces/analytics (advertising, education)

Fintech (FS FT,F) E-commerce

(marketplaces)

Digital media/marketing

Mobile apps (location based services)

Single most important transaction

in business life

“Failing to plan” is “Planning to Fail”

Strategic Plan

The

Pre-sale planning process

Proper Preparation

and planning

No second

chance

Get it right

first time

What is a good Exit Strategy?

A plan, that matches owners aspirations with a range of purchasers and their needs

Unique to each business

A full strategic review of all business and non business assets and objectives

The Pre sale Planning Process

• Enhance Strengths

• Remove Weaknesses

• Exploit Opportunities

• Manage Threats

To Improve the multiple and the quality of earnings and cash generation

Valuation Summary

£4.3m

£7.0m

£11.6m

£16.8m

£21.2m

FY10 FY11 FY12 FY13 FY14

Valuation Split £000 %

Contracts 7,629 36%

Products 3,799 18%

Government 1,950 9%

Analytics 806 4%

Projects 3,765 18%

Fieldworkks 2,266 11%

Other 1,046 4%

21,262 100%

67%

33%

ne

wC

urre

nt

Timeline and Action Plan Short term Medium Term Long Term

Immediate Phase 1 Phase 2 Phase 3 Phase 4

Implement timesheet system Performance management remuneration system

Budget for all jobs on detailed proforma by employee

Prepare cashflow forecast for all large jobs and negotiate terms accordingly

Control job costs and profitability

Improve working capital

Performance improved, complete XYZ ‘platform‘

2nd tier management team empowered and setup EMI Scheme

Interim debt raising / capital injection to support growth if necessary

Corporate reorganisation and structure

Focussed Growth Strategy • Long term contracts • Government sector • Product development

Deliver exit strategy

Key Milesone: • Projects Developed • 2nd tier management

fully empowered

Key Milesone: • £500k of products sold • 5 main contracts won

Key Milestone: • Delivery Exit Strategy

Key Milesone: • New system goes live

Key Milesone: • Group Reorganisation • Performance improved

and implemented. Ongoing trading/KPI‘s enshrined:

– Time targets – Write off targets

Increasing Partnership Value

The Process

Maintainable Earnings (Post-Tax)

Price Earnings

Ratio

The Business

Value

• Objective = maximise value, meet owners emotional expectations

and maintain confidentiality

• To improve both the multiple and the quality of the earnings

• To attract a premium buyer

What valuation should I expect?

NAV minimum

EBITDA multiple less Debt

P/E multiple of maintainable earnings

Discounted Cashflow

Strategic acquisition valuation

Which multiple is used ?

Multiples: 2008 2009 2010

Pre tax 70.0 23.0 18.0

Adjusted pre Tax 50.0 17.5 9.8

EBITDA 15.9 9.3 6.7

Valuation of business £7m

2008 2009 2010

£ '000 £ '000 £ '000

Turnover 7,000 8,000 9,000

Gross Profit 2,100 2,400 2,700

Overheads 2,000 2,100 2,300

Pre tax profit 100 300 400

Adjustments

Excess Directors Rem 40 65 200

One off Recruitment costs 35

Redundancy payment 70

Repairs and maintenance 45

40 100 315

Adjusted Pre Tax profits 140 400 715

Depreciation 250 300 300

Interest 50 55 35

Entrepreneurs relief

First £10 million 10%

Thereafter 28%

One-off lifetime amount

5% of the business

12 month test of ownership

and employment

Who are the buyers

Strategic Buyer

Financial

Trade

Management Team

The Company

International

World Wide Association

Ksi – Member Firms

Total number

of offices

Total number of

firms

Total number of

countries

183 83 68

Case study

S Limited Digital agency

No pressure on sale – realised opportunity

Expected commitment post sale

EBIT on an upward curve

Characteristics:

– Geography

– Expertise

– New market entrant

– Growth

Negotiated valuation of up to £10m [30x historic 10.5x current run rate]

Why would they buy

Competitor removal

Gain market share

Geographic expansion

Enter complementary market

Broaden product / service offering

Buying power cost benefits

Marginal costs to run

Diversification

As Preparation for their exit

Flexible property

arrangements

Other key issues both good or bad

Good market dynamics and secure market

position

Quality of management

team

Quality of earnings and

sustainability in the future

Relatively rapid Payback

Low price and a low risk

Future growth

Hidden asset values

Quality of operations

Protected IP Maintainable

earnings

Hidden asset values

Minimal working capital requirements

Simple transaction structure

What buyers want

Exit Puzzle

Cash Buyers

Market

Esteem USP

Employees Results

Timing

Warranties

The Best Time to Sell

-20

-10

0

10

20

30

40

50

0 1 2 3 4 5 6 7 8 9 10

Pro

fits

aft

er ta

x

Time

Do I need to stay on?

Motivation

Deal structure

Deferred consideration

Earnout

Corporate Clean Up

1. Excess directors / family

salaries, pensions

2. Benefits in kind

3. Family property

4. Cash drawings

5. Private Assets

1. The Management Team

2. Option scheme

3. Maintainable Earnings

4. Subsidiaries & Branches

5. Share buy backs

6. Ownership of intangible

assets

7. Property

8. Cost base and Margins

Top 10 Mistakes

1. Process Triggered by adversity

2. No strategic plan

3. No idea of real worth

4. Too much own involvement

5. No DD on other side

6. “CASH” only

7. Weak secondary management team

8. Wrong partner/strategy

9. Wrong time

10. “Eye off the ball”

C Limited

Page impressions 1.5m

Income £100k

PBT £8k

NO forecasts

Developed revenue model

Proved concept

Sold for £

Objectives

Vendors

Objectives

Buyers

Objectives

• Secure future for business

• Income stream or retire

• De-risk

• Cash

• Up-front

• Goodwill recognition

• New challenges

Platform for growth Broadens products and services

Enter new market / Geography

Critical mass

Non-cash

Deferred

Overhead savings

If necessary tie in vendor

H Ltd – Sale

Profitable - Turnover £65m

Excellent business trade buyers were interested

3 offers from international buyers

Offers were based upon valuation of £15m

Offers were based on 65/35

completion/performance

Owners felt loyalty to staff and wanted a

continued investment but also wanted to retire

from the business.

Plan B

Current management wanted to acquire the business

Deal structure

Total business valued at £12m

– Vendors kept 20% of the equity

– MBO team funded £12m of acquisition finance

(Once in a life time opportunity)

– Assist with raising the debt funding to buy the

business

– Business currently valued at £40m

Plan B realized over double the best offer from a trade

buyer for the vendors!

Top Tips

1. It’s never too early for strategic pre-sale planning

2. Get earn outs clearly documented

3. Strategic buyers pay premiums

4. Auction situations maximise value

5. Keep your eye on the ball

6. Experienced advisors pay for themselves

7. Timing, Timing,Timing – Window of opportunity

Conclusion and next steps

No second chances

Get it right first time

The best outcome arises when there is:-

– A well planned grooming and sales

process

And Plan B