You might know someone who wants to invest in your business – but, barring this eventuality, we are talking about maximising the objective chances of meeting a higher valuation when the marketing/networking moment arises.
Professional advisers (Solicitors, Corporate Finance Accountants) – and Lenders – will also rely on metrics/objective assessments to validate the value that’s being discussed. So, how do we make ourselves look as good as possible?
Getting the Metrics Right
Maximising embedded value is about:
Reducing (controlling) costs;
These steps are more likely to lead to ‘sustainable’ profit which acquirers will pay more for – on the basic “P/E multiple” principle. Which says, that the price an acquirer pays will be a multiple of the average annualised earnings they anticipate.
Mathematically, this “p/e” ratio will give the number of ‘years’ it will take for the deal to pay for itself.
Some acquirers (like those who buy Premier League football clubs) may buy for kudos, or other emotive reasons – but for most people acquiring a business, it’s the return that is important.
So the price someone is willing to pay for a business is linked to the belief in the return that the acquirer is likely to get over the journey of the investment.
When someone is conducting their review or ‘due diligence’ into a vendor’s business, they will look for both the ‘detractors’ and ‘enhancers’ to the valuation. These will conveniently spin off from the same tripod of Cost, Revenue and Risk that we just examined.
Enhancers and Detractors
So it’s important to take a long, cool, unsentimental look at your business before you begin the process. Here, for instance, are some of the key things a buyer will be looking for:
Positive Value Enhancers – for an Advisory Business (Valuation/Due Diligence/Industry Comparables)
And here are a few of the weaknesses that might count against you:
Not to mention, of course, anything that increases Cost and Risk – or limits Revenue.
How Do We Market Ourselves For a Sale?
Good question. Acquirers will value based on the likelihood of a return – but, as with a house
purchase, acquirers will be more likely to ‘take notice’ of the positive traits of a business if they are well packaged and well presented.
So – Management Information (MI) which is the right blend of concise summary and supporting info is essential. A ‘Vendor’s pack’ – much in the way you would put your house on the market.
How Do We Make Ourselves Stand Out?
We live in an intangible financial services industry – however, if you can tell the personal story – and include what makes your business different – this will attract more attention. Testimonials or citations from clients will help. So will a strong articulation of your brand.
WHAT SORT OF DEALS CAN BE DONE?
Some deals are done to buy “the client bank” – or the assets of the business – and in old language, this was commonly done on “X times renewal”. Say, two to three times renewal.
Remember, no one “owns” clients! – only the right/opportunity to market clients. So this is about how loyal/attached the clients are to the vendor’s business – and, how likely this is to transfer forward with the transition to the new acquirer.
Since the language of RDR came in (meaning ‘adviser charging’), we widen ‘renewal’ to cover predictable, repeatable annual revenue which can be expected to come in each year.
(As long as any acquirer would expect to collect the same fees when they roll forwards the transaction – these could be included – such as with the old concept of “renewal”).
Other deals are done on a figure of “X times EBITDA” – (Earnings Before Interest, Tax Depreciation and Amortisation) – or the annualised earnings.
This seeks to find an annual figure for the ‘cash generation’ within the business – the purpose of EBITDA is to find a figure that can be more easily (fairly) compared and takes out any unusual / variable spending so the raw cash generation is shown.
A figure of 5-7 x EBITDA is common in our Industry.
In my next article, I’ll focus on how the deal can be completed….