Buying & Selling Private Company
Avondale Group Ltd
Lead Advisors
Transaction Advisors
Strategic Advisors
- Business sales
- Due diligence
- Increasing shareholder value
- Acquisitions
- Post deal integration
- Exit Planning
- Mid market deals
- Valuations
- Business coaching
- International
- Fund raising
- Strategy
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
Avondale
Group
• Proven Track Record
Lead Advisors
Transaction
Advisors
Strategic
Advisors
Clear Business
Sales
The market
Deal 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.
Motivations
reasons to sell
reasons to buy
•
Capitalise goodwill
• To increase shareholder value/profits
•
Retirement / health reasons
• Increase market share / product base
•
Lack of capital / underperformance
•
Challenge has faded- Executive
downsizing / lifestyle
• 1+1=3 (synergies, economies of scale)
•
Acquire growth potential
Intellectual Property
•
Family succession has receded
•
•
Lack of succession
• To buy a job (individuals)
• To buy, build and sell on
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?
Low risk- high margin
high recurring revenue
High Risk low
recurring revenue
price earnings/ROCE calculation
Operating profit (pre tax)
+
Adjustments/add on/backs (subjective)
Sustainable/maintaniable
x
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
Turnover
£3,250,000
Gross
£1,346,976
Operating Profit
Wives salaries
Directors remuneration
NI On Directors
Additional rental
Bank interest
Factoring
Hire purchase interest
Amortisation
Depreciation
Adjusted PBIT under
management
40.38%
£327,725
Adjustments to net profit
Directors pension
HIRE Business
Notes on adjustments
£3,600
£21,859.00 Not fulfilling ongoing operational roles
Only requires 1 replacement Director£78,005 Must be justifiable
£7,800
-£15,000 Under commercial rent
£639
£16,806 Is financing essential cost?
£3,542
£21,600 Depreciation of goodwill
Real cost as plant business
£466,576.00 SUSTAINABLE???
Profit in £000’s
50
250
500
750
1,000
1,500
2,000
10
9
Multiple pre tax
8
7
6
5
4
3
2
1
Most likely
Beware of news
multiple headlines
Least likely
Post tax if you want to make multiple sound bigger.
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
• Shares
Secure the risks
Reverse due diligence/Personal and bank Guarantees
High earn-out
deferred/higher multiple
Deal structure- effects
multiple
All cash lower
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
Value Builder
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
Enhancing Value - rule 5
Growing the Shareholder Fruit Tree- acquire
Economies/synergy 1 + 1 = 3
Bigger profits = Higher Multiple?
Merged Company
Shareholder Fruit
Company A
Synergy
(extra sales)
Company B
Economies of Scale
(cost savings)
Enhancing Value - rule 6
stand 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 7
Know 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 Builder
Helping you
create
sustainable
equity value
Enhance 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