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Buying & Selling Private Company

Buying & Selling Private Company. Avondale established 20 years, UK wide team.

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Buying & Selling Private Company

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  1. Buying & Selling Private Company

  2. 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.

  3. Part of the Avondale Group • Commercial SME £100k-£750k value • Experienced & Dedicated Experts • Best Advice • Exceptional Service • Proven Track Record

  4. The market 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. 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)

  5. Motivations • 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 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

  6. 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)

  7. valuation contributing elements Low risk- high margin high recurring revenue High Risk low recurring revenue • 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?

  8. 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.

  9. 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

  10. Profit in £000’s Beware of news Post tax if you want to make multiple sound bigger. multiple headlines Announced multiples typically of non adjusted profit

  11. deal structure High earn-out deferred/higher multiple Deal structure- effects multiple All cash lower multiple 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

  12. 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?

  13. Enhancing ValueValue Builder

  14. 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

  15. 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?

  16. 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

  17. 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

  18. 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

  19. Enhancing Value - rule 5 Growing the Shareholder Fruit Tree- acquire Economies/synergy 1 + 1 = 3 Bigger profits = Higher Multiple? Shareholder Fruit Merged Company Company A Company B Synergy (extra sales) Economies of Scale (cost savings)

  20. 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

  21. 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.

  22. Create road map to value Play to multiplier Influencers Prepare and present Value Builder Helping you create sustainable equity value Enhance profits/business model

  23. 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

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