What’s the value of your business
It’s not easy knowing when’s the best time is to sell a business or its value.
The value of most trading businesses is typically calculated as a multiple of maintainable cash flow generated from the operating profits of the business. The accounting term for this is EBITDA, Earnings before Interest, Tax, Depreciation and Amortisation. The reported EBITDA is adjusted for one off, non-recurring income/costs with adjustments made to ‘normalise’ the profits, typically by adjusting shareholder related costs to market rates. It’s then this adjusted EBITDA figure to which a multiple is typically applied.
In the print and promotions sector, machinery can cost hundreds of thousands to replace. Those acquiring a business in the sector will need to consider how old the machinery and equipment is, whether it uses the latest technology and the cost of replacing it. Future capital expenditure could be a significant cost to the business and needs to be taken into consideration. Capital intensive businesses are often valued on a multiple of EBITA, dropping the D for depreciation, so that the cost of machinery replacement is factored into the business valuation.
Having assessed the adjusted normalised and maintainable profitability (EBITDA or EBITA), a multiple is then applied to this number to reach what’s called an Enterprise Value. The multiple used will vary dependent on a multitude of factors such as the trading history and forecast growth of the business, the industry in which it operates and the macro-economic environment. The multiple may be reduced where there are elements of risk. This could include high customer or supplier concentration, or if the exiting shareholder is looking to step away but remains intrinsically linked to the day-to-day operations or running of the business.
Whilst risk may reduce the multiple and price being paid, sometimes the risk may just be reflected in the terms of the transaction. The deal may be structured so that less of the consideration is paid on completion and more is deferred and paid once future profits have been achieved. Effectively, a buyer just wants to ensure that the business delivers the expected profits on which they’ve based the valuation.
There are numerous factors that can influence a business valuation. Those businesses that operate in markets where there are high barriers to market entry, such as high capital expenditure costs, or where there are restrictive / regulatory controls may command higher valuations than businesses operating in markets with low barriers to entry. Businesses that can demonstrate a future cash flow stream, such as having maintenance contacts or subscription models in place, are often considered more valuable to buyers who have more visibility over future trading performance and sustainability of profits. Businesses that are scalable but may be held back due to the lack of cash resources or the inability to recruit sufficient personnel in the right areas are often considered as being more attractive to buyers.
Finding a suitable buyer (or buyers) where the acquisition opportunity is of strategic benefit and driving a competitive bidding process between such buyers is a very effective way to drive the business valuation higher and is a situation a competent corporate finance advisor should always seek to develop in a full sale process.
Despite all the various aspects that can influence the value of a business, timing and market conditions are paramount and could have a huge influence on valuation. Recent changes to National Insurance and the minimum wage have impacted profits for many businesses, whilst there remains a lot of uncertainty as to how profits may be affected when the changes to US tariffs come into effect. Whilst not necessarily effecting all businesses directly, given the future uncertainties, deal structures may reflect a leaning towards more of the total consideration being deferred until the economic picture and the effect on business profitability becomes clearer.
There are many different options when it comes to selling the business which might include a trade sale to a competitor, to another company in the vertical supply chain sale, to a private equity firm, to an overseas investor/company looking to expand into the UK or even to the senior management team (management buy-out).
If a management buyout is an option, there is currently a war chest of money in the debt funding and private equity market that is ready to back management teams and finance a management buyout. These are very controllable transactions for business owners / exiting shareholders and should always be considered as part of the exit planning strategy.
Finally, never leave an exit until you must sell. Selling a business from a position of strength and not needing to sell, is a far better position to be in when negotiating with a potential buyer. You may have a target exit date in mind but prepare the business so that if the right opportunity/offer presented itself, in the right market conditions, at the right time, you’re ready to step away even if it’s a bit earlier than expected. No one knows what the future may bring and timing is everything.
Kevin Paget is Director, Head of Deal Advisory at Mercer & Hole www.mercerhole.co.uk
