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 Group

• Commercial SME £100k-£750k value

• Experienced & Dedicated Experts

• Best Advice

• Exceptional Service

• Proven Track Record

The marketDeal 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.

reasons to sell• Capitalise goodwill

• Retirement / health reasons

• Lack of capital /

underperformance

• Challenge has faded-

Executive downsizing / lifestyle

• Family succession has receded

• Lack 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 on

Motivations

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? High Risk low recurring revenue

Low risk- high margin

high recurring revenue

price earnings/ROCE calculation

Operating profit (pre tax)+ Adjustments/add on/backs (subjective)

Sustainable/maintaniablex 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 HIRE Business

Turnover £3,250,000

Gross £1,346,976 40.38%

Operating Profit £327,725  

Adjustments to net profit Notes on adjustments

Directors pension £3,600

Wives salaries £21,859.00 Not fulfilling ongoing operational roles

Directors remuneration £78,005Only requires 1 replacement Director- Must be justifiable

NI On Directors £7,800

Additional rental -£15,000 Under commercial rent

Bank interest £639

Factoring £16,806 Is financing essential cost?

Hire purchase interest £3,542

Amortisation £21,600 Depreciation of goodwill

Depreciation Real cost as plant business

Adjusted PBIT under management £466,576.00 SUSTAINABLE??? 

Profit in £000’s

Mu

ltiple

pre

tax

50 250 500 750 1,000 1,500 2,000

10

9

8

7

6

5

4

3

2

1

Most likely

Least likely

Beware of news Post tax if you want to make multiple sound bigger. multiple headlines 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• SharesSecure the risksReverse due diligence/Personal and bank Guarantees

High earn-out deferred/higher

multiple

All cash lower multiple

Deal structure- effects 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 ValueEnhancing ValueValue BuilderValue 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

Synergy (extra sales)

Economies of Scale (cost savings)

Company A Company B

Merged Company

Enhancing Value - rule 5Growing the Shareholder Fruit Tree- acquire

Economies/synergy 1 + 1 = 3

Bigger profits = Higher Multiple?

Shareholder Fruit

Enhancing Value - rule 6stand 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 7Know 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 BuilderHelping

you create sustainable equity

valueEnhance 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