Guide:

Valuations and selling a Business at Maximum Value

Contents

The successful sale of a business requires careful planning, good timing and an effective approach. It involves presenting the business in the right light, intelligent research and carefully approaching the right buyers, avoiding technical pitfalls and creating and managing a competitive process. The steps are: 1. Selecting an advisory team 2. Business valuation 3. Value enhancement strategy 4. Timing and personal financial review 5. Positioning your business in its best light 6. Research and create competitive environment 7. Negotiate and structure the right deal 8. Project manage to completion

This guide provides an insight into each step.

1. Selecting an advisory team

Undertaking a business sale is one of the most important financial decisions you will ever make. The approach an advisory team take can make a real difference in maximising value and minimising distraction. There are many legal, tax, accounting and regulatory issues to address. In addition, there is the matter of finding the most profitable buyer for your business and then negotiating and structuring the most advantageous deal, ideally in a competitive environment. Start by meeting several intermediaries. Appoint based on track record, ability to create highly strategic transaction at maximum value, experience, personality, research resources, international approach and technical deal structure knowledge. Make sure fees are linked to success deliverables; avoid high non-performance based time fees. Finally make sure they take the time to understand your aspirations, approach and business. A good intermediary will also help you understand the timing and value influencers.

2. Valuation

Values are often significantly exceeded by creating competition with the right strategic buyer. A forecast valuation is helpful however as a review of prospects for increase in value both quick-win and long-term and also to understand and seek to realise aspiration value (beyond the numbers). A valuation will seek to measure the trust the market has in a business and in its ability to create wealth (the goodwill). Goodwill is intangible, although the accounting definition is the difference between the purchase price and the companys balance sheet assets (net assets). There are many different techniques for calculating the value of a business, such as industry specific formulas, asset based valuations, discount cash flow forecasts and dividend formulas. However, typically in unquoted smaller businesses, the most usual method is to use a multiple of one years adjusted and maintainable profits. The chosen multiple is the number of years it is considered acceptable to generate a payback on the investment. This can be expressed as: Multiple x Adjusted Maintainable Profit per annum pre tax = Likely Valuation Profit Adjustments A sustainable profit figure will be assumed, often using last years net profit as a base. It is then normal to make specific adjustments to this figure to obtain the net profit to a buyer, rather than the one the previous

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Guide: Valuations and selling a business at maximum value

owner may have enjoyed. This is called calculating the adjusted net profit. An adjusted EBIT or EBITDA may be used depending on sector. This is calculating the earnings before interest and tax (EBIT) or depreciation and amortisation (DA). This can include items such as salary or extraordinary or personal costs. Adjustments to the net profit might include add ons such as costs for placing the business under management, additional premises cost if requiring relocation and investment required replacing old equipment. Multiple influencers Low multiple High multiple Volatile Sustainable Less desirable SME business Highly expandable Poor expansion Growth sector Declining sector (poorly perceived) Bigger profits Lower profits Strong team Poor infrastructure Recognised Brand Low economies Growth record Intellectual Property

Multiple Range: Below is a typical guide to the assumed multiple range x the adjusted profit. The profit is usually expressed either PBIT for service companies or EBITDA for capital intensive businesses such as manufacturing. The table assumes a debt free/cash free balance sheet included in a deal, excluding Freeholds. Aspiration value should always be sought to secure transactions beyond the multiple.

3. Value enhancement strategy

Prior to sale owners should be looking at strategic ways to increase the value, not only through the level of profits, however also through addressing elements that will directly impact the final valuation. These can include: Ensuring steady, recurring and forecastable income. Eliminating dependency on key members of staff, clients and suppliers. Ensuring solid systems are in place. Clean accounts and balance sheet with good Management Information Systems Creating strategic long-term growth plans. Not only will this increase value but, being clear on your alternative strategy creates a powerful walk away position to leverage negotiations and optimise price. Ensure your website represents your company in its best light. Consider geographical and sector diversification. Businesses should aim to own a niche marketplace. Ensure all legal, tax and accounting paperwork is in order

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Guide: Valuations and selling a business at maximum value

4. Timing and personal financial review

The timing of the deal should be when the business is in good shape but ideally still growing and at a time when the shareholders have reached a personal cross road. It is vital to be objective as many a deal is lost when the shareholders needs drive the timing rather than what is right for the business. It is also important to analyse the forecast net proceeds versus the net sale income you will receive, versus the time wealth achieved from a sale. If fast growth is envisaged seek an elevator/earn out deal which working with the buyer will maximise the proceeds over time. Costs: Tax on any capital gain you make will probably be your biggest cost. Currently Entrepreneurs Relief, an Inland Revenue allowance, allows the first 10m to be at 10% per executive shareholder owning more than 5% for more than a year in a qualifying company. The relief is given after all other reliefs and allowances. The amount of the reduction depends on how long you held the asset (the qualifying holding period), and whether the asset was a business asset or a non-business asset. Entrepreneurs Relief creates a significant argument for entrepreneurs to make money through capital gain rather than through ongoing profits. Sellers also need to allow for professional costs including a merger & acquisitions advisor, a tax advisor, accountant and a lawyer. For smaller companies professional costs are usually between 5-10% of the proceeds. Some of the costs will be prior to the sale. Income Vs Capital: The diagram below further assists in making the right decision as to when to sell. It highlights income vs capital considerations. The scenario depicted is a company valued at 1m based on a multiple of 4. The end result that the owner(s) would have to run the company for 5.859 years on the same profit levels to achieve the same income as they would by selling the company. You should also consider the fact that Capital is certain whereas future income is uncertain. A certain (capital) 0.90 today is worth more than an uncertain (income) 1.00 tomorrow. Income (uncertain) Assumes all profit stripped - Corp tax @20% - Dividend after corp tax@ 25% Total net No of years earnings

250,000 -50,000 -50,000 150,000 5.859

Capital ( certain) 1,000,000 Assumes multiple of 4 -70,000 - Estimate legal & brokers costs -93,000 - Assuming Entrepreneurs Relief at 10% +41,850 Interest at 5% for 1 year 878,850 Total Net Assumes full profit strip each year

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This guide is not definitive. Accuracy is not guaranteed and it does not replace professional advice.

Guide: Valuations and selling a business at maximum value

5. Position business in best light

A carefully crafted information pack will drive value by highlighting opportunities and potential synergies. It ensures that your advisor fully understands your business and is thereby able to position unique benefits to each interested party. A good data pack will not only contain current and historic company information but also forecasts and financial modelling around potential synergies. An effective data pack will not only ensure optimum positioning of the business but, as all information is prepared in advanced, will also accelerate the entire process.

6. Research and create competitive environment

In order to value a business and to then seek to exceed this it is essential to secure the right buyers in order to create competitive bids. In depth research should be conducted to identify these potential purchasers using a combination of global intelligence tools and a database of active financial and trade buyers. A business in an auction can sell for more than 200% of financial forecasts. Through synergies and economies of scale available, the business will be worth differing amounts to buyers. The optimal purchaser is one who has a we want, we need motivation who drives their own shareholder value via an acquisition. A good advisor will carefully position synergies to multiple, interested parties utilising financial modelling and future visioning to demonstrate the benefits of the acquisition on an international basis.

7. Negotiate and structure the right Deal

Agreeing an aspiration value deal requires brinkmanship. This takes understanding of the other sides motivators, and the ability to walk in their shoes. A good lead advisor will ideally create an auction to drive value but also be able to analyse which big points to win and which smaller ones can be lost to secure optimum terms. This is best achieved in a non adversarial environment, where listening creates understanding, but with very clear presentation of the alternatives and key selling points. Your advisor, ideally who will have been involved from the very start of the project, will lead the strategy and map out how best to leverage best advantage in negotiations, offsetting weaknesses and playing to strengths. Timing and effective delivery are critical to create a win/win. At the same time there are increasingly complex deal structures with earn outs and deferred payments. Considering how best to protect these positions is also critical. Your lead advisor will also consider the tax position and create a detailed heads of terms that creates clarity between the parties increasingly the likelihood and speed of a completion once agreed.

8. Project manage to completion

A good advisor will orchestrate all the parties, create a timetable and manage the project to completion. They will also anticipate and circumnavigate issues. Deal fatigue or worse failure, can result if a poor dialogue occurs once terms are agreed. The parties need to continue to listen and aim at a win/win transaction. Your advisor will facilitate this, liaising with all other advisors (legal, tax, financial) through to successful deal completion.

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This guide is not definitive. Accuracy is not guaranteed and it does not replace professional advice.