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Lies damn lies and statistics.......

I attended a competitor's seminar the other week on selling businesses - more of a pile them high broker than a bespoke M&A boutique or seller of quality business as we like (modestly!) to think of ourselves.   However competitive intelligence is good for the soul! 

A lot of what they had to say was quite sensible.   In particular they rightly pointed out that while the normal distribution of outcomes for company sales suggests that a earnings multiple of 7 is the likely outcome one should aim to be at the end of the graph where strategic premiums are paid.

I take issue with two things.  The first is the suggestion that accountants just use the average and "value" businesses on a 7 times multiple.   No doubt some do - but we are at pains to understand what will really drive value in a business and make it strategic to  a buyer.  We also work hard to find - from some serious research and thinking - a good range of potential strategic purchasers, internationally if necessary.   I tell anyone who will listen that "valuation" is only of interest to tax accountants, lawyers and the divorce courts.  I do accept however its relevance to share options and Venture Capital pricing .

Asteroid_strike Incidentally beware of anyone who quotes the law of averages at you.  This suggests that because on average the earth suffers a catastrophic asteroid strike once every 65 million years that we are OK for another 35 million years.  Of course one could strike tomorrow and not disturb the long term average if the following strike was over 100 million years out!

The second thing I disagree with is the implication that there is a strategic buyer out there for every business if you just research hard enough, make enough calls, and scatter the businesses details wide enough!  This is washing your linen very very publicly - and the reality is that some businesses whilst no doubt making a good living for the owner are just the wrong size, shape, colour, location or whatever to capture a strategic buyer. 

Of course if  you take the broker approach and take a big enough fee for your up front work that you make good money regardless of whether the strategic sale materialises then you don't care.    I'd rather put my money where my mouth is and take on assignments where I really feel that we could make a difference, and I think honesty at the outset about the prospects for the sale is a far better way to do business. 

Management speak v Plain Speaking

I've been enjoying the Lucy Kellaway podcasts from the FT - and in one of them she bemoans not getting mentioned in the blogosphere - so here's a mention.   I particularly enjoyed her devastating critique of the Deloitte Blue Book,  a book of strategy recently issued to its employees which she describes as "drivel of a richly contemporary kind".   I mention this as I'm sure this kind of thing is familiar to anyone who, like me, has worked for one of the larger practices - and is in no way unique to Deloitte. 

One of the great boons of working in a smaller practice is the chance to be more plain speaking.  We did some market research recently on what our clients,  referrers,  and prospects thought of us - and this was one of the things they valued.   I'm sure "management speak" has its place - somewhere.  But business owners and directors want clear advice and feedback to help them achieve their goals and that's what we try to deliver.   

The benefit of gearing

Interesting article in the press this week about Private Equity.   And there have been plenty recently that haven't been.    Basically it suggested that debt is not all bad.  Yes private equity investees don't pay much corporation tax as all the taxable profit is mopped up by the interest,  but the shareholders - and this is often our pension funds - sweat more value.   Now don't get me wront this isn't all good - it can lead to disfunctional behaviour in the business which is being run for very short term cash,  and if interest rates rise too far it could all fall out of bed. 

However an interesting contrast can be made with the quoted sector.  The FTSE 100 has net debt less that one times operating profit.  Private equity deals go up to eight times!  Different ownership shouldn't imply a completly different funding structure.    The suggestion was made that quoted company directors are now so focussed on corproate governance as to be risk averse.  When a cash bid is made they take it, bask in glory and move on to another nice job in the city.    What puzzles me is that the pension funds invest in both sectors.  At the private company end the same principal applies, a bit of debt is a relatively cheap was to fund expansion to grow the value of the shareholders equity.    But I've seen plenty of very successful private companies that have never borrowed.  I guess its all down to attitude to risk.