Maximising value – what you can do in the run up to a transaction… pt 1
We hosted our second Road to Exit seminar last week with a great attendance. Either the subject of Maximising value was more interesting than our last seminar on Private Equity (probably!) or as we move into the summer holiday season, a traditional time for reflection, business owners in the North East are thinking about what’s next.
It was fantastic to see so many business owners from all over the region, it’s not easy to get to the centre of Newcastle for an 8am start particularly if your home postcode is in North Yorkshire!!
So, what did we cover? How can business owners maximise value either in a sale or a major equity investment? It’s normally the biggest transaction a business owner will be involved in so preparation is essential.
In summary, we covered three key areas:
- How is value calculated?
- How to bridge from headline value to the equity value in the business
- What can be done to maximise the value?
Calculating headline value
- In the majority of cases value is expressed as a multiple of earnings – this is typically a multiple of underlying profitability and is used as a proxy for cash generation. Here a buyer is really saying “how long it will take me to get my investment back”
- The stronger the growth prospects of the business the higher a multiple the buyer will be willing to pay as they’ll expect to recoup this over a shorter time period
- You may have heard of some businesses being bought on a revenue multiple – this is typically high growth tech business that are pre-profit as they are still in the investment phase.
Ultimately, value is determined by making a business available for sale and running a planned and structured process to find out what a buyer is willing to pay but there are a few different ways of establishing an expectation of achievable value at the outset, these include:
Comparable companies: Publicly listed businesses in similar space to the business that being valued. Typically these business will list at slightly higher multiples than private companies as their shares are easily tradeable and they are more often than not larger businesses.
Comparable transactions: This should give a more accurate indication of value expectations if you can find similar businesses to yours. It can be difficult to get information particularly on private businesses as deal values and earnings are not always disclosed. There’s also a subjective element here, for example we don’t know the growth trajectory of the businesses, whether there was competition in a sale process or the strategic reasons for the acquisition, a large synergy opportunity? Or a market share play?
And then there’s the Private Equity approach…using the expected returns based on the forecasts of the target company to determine the acquisition value… (That was a whole seminar on its own!!)
Looking at multiples in this way doesn’t always tell the whole story. The last three deals we have competed in Newcastle have all had a premium over and above what the research was telling us. A mixture of sector intelligence from our M&A colleagues around the UK, a highly competitive sales process or working with buyers on an individual basis to explore synergies have all led to excellent results in the past 18 months.
I’ll pick up the bridge to equity value in the next article.
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Road to Exit in Newcastle is taking a break for the summer but will be back in October:
“Making It Happen: Avoiding Common Pitfalls”
If you would like to register now you can do so at the link below: https://www.kpmgenterprise.co.uk/events/north/road-to-exit-seminar-making-it-happen-avoiding-common-pitfalls-newcastle/