Market Multiples

Remember that “market multiples” are only indicators of value – the do not explain value.    Also detailed information on small and mid-sized deals is patchily available.  Starts up businesses have no historic perfo rmance for the comparison.

Intrinsic Value

In other words what is your business truly worth based on its strategy and vision, and the financial forecasts   - for this your business plan needs to be convincing, it is the vehicle to communicate your business to buyers, investors or valuers.

Its often the non financial assets that will persuade people of its lasting value - strongth of customer base, intellectual property, product pipeline, asset base and so on.

Realistic Forecast

To make your plan believable your forecasts must be believable.  If you have an existing business its well worth developing a credible track record of forecasting its performance.  Then when you ask someone to value it based on a forecast they can take comfort from your ability to predict the performance of the company.

Terminal Value and Cost of Capital.

If you’re at all considering using DCF in the valuation you must give serious consideration to the terminal value.  How will it be arrived at – are you assuming continuing business and a going concern sale, or a liquidation?  What are the tax consequences, and execution costs of your planned approach?  The valuation needs to reflect the net cash flows.     The DCF calculation will be critically dependent on the chosen cost of capital – can you work out a realistic cost of capital to represent your opportunity cost for a similar investment?

Get it done properly

If the valuation of your business is going to be important – your raising finance or planning your exit for example – then its really worthwhile getting a professional valuation.  A decent professional valuer will take the time to get to know you and your business, will assess the factors above, and give you a reasoned and nuanced view on what your business could be worth.  Beware the cheap online valuation – you pop some numbers in a form, give them your credit card number and it spews out a pro-forma valuation report.  This is of course entirely mechanistic, and while it may be right, its more likely not to be.  After all a stopped clock shows the correct time twice a day!

The benefits of doing this properly

You get to understand what drives the value of your business, and so can influence your strategy and tactics accordingly, you can use this information for finance raising, and sometimes for negotiations with the tax man too.

I'm pleased to be able to report on a recent management buyout that we advised on.   Lee Green, Matt Higgs, Phil Dascombe and Dan Todd have acquired Kloeber, a manufacturer and supplier of glazing products. 

Based in Somersham in Cambridgeshire, Kloeber is a manufacturer and supplier of glazing products - including bi-folding, sliding and entrance doors, windows, roof lights and bespoke glazed screens.

It has had a lot of attention in the media, with its products featuring on TV programs such as Grand Designs and DIY SOS. In 2012 the company’s signature ‘FunkyFront’ door – a contemporary take on entrance door design – received Build It magazine’s Best Joinery Product Award.

Very often management buyouts take place at long standing mature businesses.   In fact Kloeber has not been around that long, and its rapid growth is a real success story.  Launched in 2006, the company capitalised on the high demand for quality glazing products from the home improvement and self-build sectors.

Despite a general decline in the UK window and door market, the bi-folding door market grew by 17% (to £43 million) in 2011, an expansion that greatly benefited Kloeber. Within the first year of trading the company had designed a full range of timber glazed products. It later added uPVC, composite and aluminium products to its range.

The management team having run the company on a daily basis for the past three yearsacquired the company from its founder Director, Gavin Morris who now wants to focus on his other business activities while retaining a reduced involvement and shareholding in Kloeber.

What is also noteworthy about the deal is the raising of raise finance from RBS in a still tight debt market - particularly for this type of buyout funding.

Legal advisers to the deal were Rob Matthews at Keystone Law for the vendor and Jason Williams at Hewitsons for the buyout team. Finance for the transaction was arranged by Steve Noon of RBS in Cambridge. 

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I'm next on stage in High Society - which features the song Who wants to be a Millionaire, along with True Love and You're Sensational, Now You has Jazz and Well, Did you Evah? If you like Cole Porter's musical style this might appeal.

The plot centres on wealthy, elegant and priggish socialite Tracy Lord, who is about to embark on her second marriage, to an equally priggish but rich businessman, when her ex-husband C. K. Dexter Haven turns up to disrupt the proceedings and try and win her back.  Additional comic complications arise when tabloid reporter Mike Connor appears on the scene and immediately falls for the bride to be –and she for him! As the day of the wedding approaches we're left guessing which of the three men Tracy will choose!

Based on the hit film starring Bing Crosby, Frank Sinatra, Grace Kelly and Celest Holm which itself was based on an earlier play - SIMADS is doing the London version of this show - so a slightly different jukebox of that from the broadway version.   The London version was in fact rather more successful than the first run broadway outing.  The West End production opened at the Victoria Palace Theatre on February 25, 1987 and ran for 420 performances. It starred Trevor Eve (Dexter), Stephen Rea (Mike), Angela Richards (Liz), Natasha Richardson (Tracy) and Ronald Fraser (Uncle Willie); the director was Richard Eyre

I'm playing Dexter Haven - which is the role Bing Crosby took in the film. 

High Society will be at The Burgess Hall, One Leisure, St Ives, from April 10 –12, 2014. Evening performances are at 7.30 pm, with a Saturday matinee at 2.30 pm.

Tickets for High Society are £12 (£10 concessions) and will be on sale from  20 January, 2014, online via Ticketsource or through the SIMADS box office .

EXIT STRATEGIES FOR FAMILY FIRMS

We’re often asked how to achieve succession within family businesses.  For this type of business Business Exit Strategies mean how to pass it on and not how to achieve a trade sale of the company.  Very often this will be done in the form of a Vendor Initiated management buyout, particularly if those who are to succeed are not just family members.   The VIMBO or succession buyout structure can also work well in a family deal, if Mum and Dad want full value rather than gifting the business, and if they need some sort of carried interest or ongoing income.

SIMPLEST CAN BE BEST

That said simple is often best.   And particularly in small deals variations on the share buyback theme can be useful. 

SHARE BUYBACK

We recently helped a family business in Suffolk achieve succession using this type of structure.   It wasn’t a huge business, but was sustainedly profitable, and had grown to have branches in Essex, Norfolk and Cambridgeshire.   Mum and Dad had been running their business as a company for many years, but had involved their two sons in the business as full time directors.  As the sons took more responsibility in the business they felt that it was time for them to take control.  The aim was to achieve the transfer and for the parents to have the profits which had accumulated in the company to be paid out to them tax efficiently.    If the arithmetic stacks up this can be done using a buyback of shares.  

The tax legislation which gives favourable tax treatment to an individual when a company purchases some of its own shares provided certain hoops are jumped through.   In outline the steps are:

• The sons get given some shares (a 32% minority holding) in the company a few years before Mum and Dad were ready to fully hand over the reins.  Result = no tax charge for parents or children due to the availability of tax reliefs - it qualified as a trading company.
• More recently, when Mum and Dad decided to retire, the company bought back their shares.  This was done     correctly and so the proceeds will be taxed as capital receipts for the sale of their shares (and not subject to income tax).  Entrepreneurs’ Relief should be available as both the individuals and the company meet the conditions and so the tax charge is only 10%.
• The company then cancelled the shares so that the shares held by the next generation are the only shares in issue and they all of the company.

THE GROUND RULES

In all deals there are some company law rules to be observed, or the danger is that the purchase of shares is an invalid purchase with unfortunate consequences.  As ever there are also tax rules to follow – and they’re often not quite so clear cut.   In this case the two keys matters that had to be established were that the company was a trading company for the purposes of Entrepreneurs’ Relief and that the purchase of shares is for ‘bona fide commercial reasons’.  The ability to “clear” this with the revenue in advance is helpful.   Of course there is usually a financing issue too.  In this case the company had the cash to payout. But what if the company doesn’t have enough cash?    There are ways round this – and indeed this might be a cue to consider a Newco buyout structure.

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