Reaching new heights: Business valuations and how to get them right

11 February 2020

Valuing a business requires expert advice, rigorous preparation and in-depth knowledge of the market sector. Any business adviser will need all these skills and more if they are to ensure a successful transaction for an owner.

Creating and growing businesses often takes many years, sometimes decades, to arrive at something of value. Owners need to get the best advice to maximise the potential for significant growth or sale.

There are many reasons for the need for an effective valuation, besides getting the maximum selling price for the enterprise. For example, issuing new shares if the company is unlisted or stimulating management with stock are very good reasons to get a realistic valuation.

Owners who have decided to sell their business need ‘best practice’ and advice to get the maximum reward for their efforts. A clear and well-constructed valuation will instil confidence in any qualified buyer, while a poorly planned appraisal might well have the opposite effect.

There are many variables to consider in getting the right valuation to catalyse an equitable transaction for both buyer and seller. The fundamental factors include, but are not restricted to:

1) The circumstances surrounding a sale i.e. is it voluntary or forced
2) The viability of the business model and its ability to withstand changing market forces
3) The tangibility of the assets
4) The maturity of the business and robustness of its business model
5) The nature and geography of its customer base

 

As experts of over twenty years standing in the TMT sector, Evolution Capital’s in-depth valuation process has enabled owners to exit their business at a price that best reflects their investment.

The company has evolved robust valuation formulae to take into account all the vagaries of changing sector landscapes. Throughout 2020, Evolution Capital will be sharing some of its expertise in a series of workshops with business owners looking to find hidden value within their enterprise.

This bespoke approach highlights all the internal and external adjustments that affect business value such as competition, brand reputation, business modelling and wider economic factors. An essential part of an effective valuation plan is recommending where fundamental change is necessary.

Mike McEwen co-owner of ACS whose company was acquired in 2019 said: “The team at Evolution Capital took us out of our comfort zone and questioned our existing processes and methodologies. It highlighted what we needed to do to exit the business at the right price.”

A business can be valued in several different ways. The most established and popular method in the TMT sector is on a price to earnings ratio for many public companies or a multiple of profits for the majority of private, mid-market businesses.

The latter technique occurs where readjusted profit needs to include extraordinary one-off costs to produce a solid forecast. A final, normalised profit figure can be then be achieved by adding further post-sale costs and an industry-standard multiple can be applied. It is not uncommon for service businesses to attract a multiple of one while new ‘challenger’ banks and hot start-ups can attract multiples of twenty-five times earnings.

Businesses may be valued differently if they hold large, tangible assets (land, buildings, inventory, equipment) but this is unlikely in the TMT sector where the recognised measurement of valuation is generally through profitability.

Alternately, businesses can be valued through the process of discounted cash flow (DCF), reportedly Warren Buffet’s preferred measure of valuation. This methodology is generally applied to mature, heavily invested businesses that can forecast stable cash flow for many years ahead.

An energy or utility company is a good example of where the principle might be applied. The DCF estimates what the cash flow will be and what that is worth today. Valuing companies using this method is probably the most complex valuation technique and relies on accurate long-term assumptions.

Every industry sector has its valuation formula for businesses acting within it and advisers must have all the necessary expertise to establish a fair and representative figure.

However, this is not the end of the story for being able to articulate and demonstrate fair value is only constructive if the exercise results in the desired transaction e.g. MBO, acquisition or investment. For example, a business looking to be acquired needs their advisors to present them with qualified buyers who are looking to transact.

The complete process represents a consistent workflow in which the business is reviewed, valued and ultimately sold with careful management and guidance from the adviser. Within that process, an owner needs to feel in control of the situation and that his or her aspirations are fully met.

John Donoghue, founder of ICOM System, said of the partial buy-out of his company:

“From the outset, Evolution Capital was the one (adviser) I felt most comfortable with. The team understood our marketplace well and took a great deal of time and effort considering our requirements in finding the best partner for us. Although realising capital was important, so was finding a partner who shared our values – specifically in the area of customer and staff care.”

Ultimately, a realistic valuation is the critical building block upon which successful transactions are made and to achieve this a great deal of preparation and detailed planning is necessary.

There are numerous stages in the development of the plan, each of which requires enormous care, attention and expertise. The initial business review needs to highlight areas that require attention e.g. increased recurring revenues or longer contracts.

When the valuation is completed, the transaction can progress and appropriate partners found, such as acquirers or investors. The transaction process itself needs careful supervision, which will require tenacity, management and above all momentum to keep it on track. A dedicated and expert adviser will ideally provide all these functions.

Tom Carroll, founder of Our IT, said of the sale of his business: “I was delighted with the outcome of the deal, which was done according to a strictly adhered-to time-scale. Evolution Capital was highly supportive throughout the complete process, helping to smooth away any bumps in the road. They proved to be a very competitive business adviser showing some high touch ‘seller’ skills at all the right moments.”

On the 12th and 13th February 2020 Evolution Capital will be holding one-to-one, confidential meetings designed to help business owners plan and execute their exit or growth strategy. We are experts at unlocking hidden value for TMT firms. We have decades of transactional experience and have helped hundreds of ambitious technology and telecoms entrepreneurs take their businesses to the next level. Understanding the true value of your business is key to ensuring a deal gets done and involves a huge amount of careful preparation, which is why we are offering you an insight into our bespoke valuation methodologies. To find out more, click here:

 

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