buying & selling private company

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Buying & Selling Private Company. Avondale established 20 years, UK wide team. - PowerPoint PPT Presentation

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  • Buying & Selling Private Company

  • 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 GroupCommercial SME 100k-750k valueExperienced & Dedicated ExpertsBest AdviceExceptional ServiceProven Track Record

  • The marketDeal types/market300,000 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 sellCapitalise goodwillRetirement / health reasonsLack of capital / underperformanceChallenge has faded- Executive downsizing / lifestyleFamily succession has recededLack 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 onMotivations

  • valuation techniquesThe value is what a purchaser will pay and a vendor sell for - the market decides

    Discounted cash flowNet asset valueROCE (Return On Capital Employed)P/E ratio (Price/Earnings ratio)Comparison yields (ROCE)

  • valuation contributing elements

    Profit yield (reflection of goodwill/trust)PropertyFixed assets (vehicles, plant etc)Net current assets (stock, cash etc)Intellectual PropertyProfitability/volatility/sustainability

    WHAT MULTIPLE?

    High Risk low recurring revenueLow risk- high margin high recurring revenue

  • price earnings/ROCE calculationOperating profit (pre tax)+ Adjustments/add on/backs (subjective)Sustainable/maintaniablexmultiple (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 profitCost in replacements for vendors Add back salaries/benefits of vendorsAdjust appropriate costs for premises?Remove costs personal to the sellerIs depreciation real? PBIT- Profit before interest tax EBITDA- Earnings before interest tax depreciation and amortisation

  • Example adjustment31/12/2010HIRE BusinessTurnover3,250,000Gross1,346,97640.38%Operating Profit327,725Adjustments to net profitNotes on adjustmentsDirectors pension 3,600Wives salaries21,859.00Not fulfilling ongoing operational rolesDirectors remuneration78,005Only requires 1 replacement Director- Must be justifiableNI On Directors7,800Additional rental-15,000Under commercial rentBank interest639Factoring16,806Is financing essential cost?Hire purchase interest3,542Amortisation21,600Depreciation of goodwillDepreciationReal cost as plant businessAdjusted PBIT under management466,576.00SUSTAINABLE???

  • Profit in 000sBeware of newsPost tax if you want to make multiple sound bigger. multiple headlinesAnnounced multiples typically of non adjusted profit

    Multiple pre tax502505007501,0001,5002,00010987654321

    Most likelyLeast likely

  • deal structureValuations also depend on deal structure as buyers hedge risks. CashEarn out/Performance related payments (PRP) Deferred payments/loan notesSharesSecure the risksReverse due diligence/Personal and bank Guarantees

    High earn-out deferred/higher multipleAll cash lower multipleDeal structure- effects multiple

  • Valuations are an art not a science

    Comparison/double checkOther investmentsOrganic reinvestment in buyers own businessLikelihood of buyer achieving organic growthOther deals doneWould you pay it? Risk to return reflected? Vendors net income versus net capital sumWhat assets are included?

  • Enhancing ValueValue Builder

  • Enhancing Value - rule 1

    create a game plan well in advanceKnow where you want to be. Plan the journeyMany planning aspects are good business practiceFrustration makes your game worseShareholder value is more tax effective than profit

  • Enhancing Value - rule 2

    work on your business, not in itReduce dependency on owners / key personnel Housekeep legal / financial / presentationBuild a machine- systems / training / proceduresReduce risk- Whats the worst envelope that could land on your desk?

  • Enhancing Value - rule 3

    look after the pennies Reduce expenditure non core, review overheadsIncrease margins / pricing policySeek tax adviceA of profit multiplied

  • Enhancing Value - rule 4

    financially engineerRepay Directors loans / remove personal guaranteesCreate stand alone venture / balance sheetConsider removing surplus cashTake out non-core assets such as freeholdCheck value of assets

  • Enhancing Value - rule 5

    acquireBuy a company achieve economies and synergies fruits shareholder valueShareholder 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

  • Enhancing Value - rule 6

    stand outMarket leader (or threat to) is the most valuable in a sectorInvent a niche. What is your unique business proposition?What barriers to entry do you have on the competition?Recurring revenue/value multipliersCreate 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 dont 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 valuePlay to multiplier Influencers

    Prepare and presentValue BuilderHelping you create sustainable equity valueEnhance profits/business model

  • change

    Take time out, prepare Little changes make the differenceMost preparation changes are good business senseValue Builder Avondales strategic growth planning service. Strategically enhancing multiplier influencers and profit

    Its not the strongest that survive, or the most intelligent, but the one most responsive to change Charles Darwin

    *Its a game- The stakes are high. The rewards are highIts stressful ( I had hair when I started)But there are RULES you need to understand to winYou only have one chance to win!They are called Rules because in my opinion break them and you lose the game.

    This slide enables you to position Avondale to the client.

    **Only 5000 corporate entities (200 plus employees) 1.1 million biz employ more than 4 people (majority retail)Nearly 200,000 commercial companies, turnover greater than 400k. Large population of SMEs = large market of people buying and sellingworlds 4th largest economy now we have beaten France!

    *I guess you all have your reasons for being here today so you have some ideas!Capitalizing and changing life focus, biggest reason for sale.They have outworn business.. Or business outgrown.They say after 5 years it feels like 20. RED TAPE/COMPETITIONA job is not for life why should a business be?Any of you got kids??? Would you let them near your business. Could they you/afford it?Kids just not interested. Dont want the risk. Too much hassle. Not enough need to

    *Its a game- The stakes are high. The rewards are highIts stressful ( I had hair when I started)But there are RULES you need to understand to winYou only have one chance to win!They are called Rules because in my opinion break them and you lose the game.

    *Well done by being here today, you have followed the first winning rule: planning and stepping back.If you know where you want to be its easier to get thereTo win any game requires a good strategyJohn McEnroe would not Win. Frustration makes the game worse.

    *Did you get where you are by being good at a job?Do you like control?Can nobody do it as well as you?Here is the rut: we run our own businesses because we want control but it must be through others.Systems. Training. Clear delegation

    *Retaining customers is 5 times cheaper than getting new ones e.g. Reduce advert speed, add loyalty schemeOwner extravagances? Do you need a Jag or boat?Cash is king. Profit on the bottom line can be multiplied 3, 4, 5 times on sale.*For companiesCan you leave in profit to repay loans?Reduce o/d, remove chargesCan you sell out non core assets? E.g. Freehold to residential (garage)Create a stand alone venture.Ensure all elements are trading visibly.Sell out non core assets - if you are a family run business does not mean your relatives.

    *For companiesCan you leave in profit to repay loans?Reduce o/d, remove chargesCan you sell ou