Its often said that the reason lots of deals are still happening in uncertain times is down to the liquidity in the system, and those companies being in good sectors. Conversely if asked many investors and advisors will tell you the retail and construction are "difficult". So it's heartening to report that there's always cream at the top of the milk bottle and that deals are still to be done in "difficult" sectors provided you're working with really good businesses.

Specifically I'm pleased to look back on two recent deals we've completed over the summer at PEM Corporate Finance, the sale of English Architectural Glazing and the sale of ATP Architects + Surveyors.

We acted as lead advisers to the shareholders of English Architectural Glazing.  Based in Mildenhall in Suffolk and Attleborough in Norfolk, this is one of the UK's leading contracting businesses providing envelope cladding packages for project such as Great Ormond Street Hospital, Wimbledon Centre Court, DLR Station City Airport and the BBC TV Centre conversion. Their clients include the great and the good of UK construction such as Kier, BAM and Skanska. The business was sold to Irish Private Equity Fund Elaghmore LLP. This deal closed in August.

A couple of months later we were pleased to announce the sale of ATP Architects + Surveyors to RSK. ATP, which is based in Ilford in Greater London,  is a multi-disciplinary professional consulting firm, and its purchase was RSK's 7th deal so far this year. ATK, which was established in 1966 provides the complementary services of landscape design, interior design, space planning, employers’ agent, and health and safety. It works with a broad range of clients such as Barratt London, Sanctuary Housing Association and Hollybrook Homes.

We've not done anything in retail recently - but are always keen to speak with good businesses and to help shape their exit plans.

More on our website  about the EAG and ATP transactions.

It’s a cliché that business valuation is both and art and a science.   Or as it’s been more aptly put it is a craft.   Either way it needs to be done thoughtfully.   You don’t need to look hard online to find sites that invite you to put your data in and I’ll value your company for a low fixed fee.  Trouble is that “under the bonnet” this is just some maths – this is a problem because you have no idea if the site is asking the right questions, and more importantly its only as good as the data input.   As they say garbage in garbage out.

But if you do treat valuation as a craft, to be conducted thoughtfully, making insightful and supportable judgements about the business at each step you need to guard against bias – and this can arise accidentally.

Anchoring is a well documented phenomenon.   There have been psychology experiments that have demonstrated this.   Business students are asked if they’d pay the last two digits of their national insurance number for each of several items.   Then they’re asked the maximum they’d be prepared to pay item by item.   Despite it being random students with higher NI numbers consistently indicated higher maximum bids.    The anchoring phenomenon can work to ones advantage – it’s a reason why it’s often helpful to go first in a negotiation – to try to anchor the debate at your end of the value range.    But it has no place in valuation as the valuer should form an independent judgement.     

So as a corporate finance adviser I’m keen to understand what my clients objectives are as input to negotiations. Conversely as a business valuer I need to be deaf to the client’s desired valuation.  This might be a business valuation for divorce purposes, or to do with shareholder exit, or tax.  But I need to avoid anchoring bias to make sure I arrive independently at my best judgement of valuation which is supported by the evidence and by my understanding of the business. 

For more information on our Business Valuations service have a look at our website - based in Cambridge we provide valuation services to business owners around East Anglia, in London, nationally and internationally. 

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Why revenue multiples aren't very helpful

With the Cambridge and the East of England economy continuing to perform strongly we're hosting a free educational morning seminar targeted at local small and medium size business owners (in the £1m-£100m turnover band).

Alongside our own corporate finance, and tax specialists we have speakers from our joint event hosts Barclays and Business Growth Fund who will give insights into raising debt and equity finance.   The whole event is designed to give business owners practical ideas on developing a strategy for growth.

Any acquisition should have a sound strategy underpinning it.   And it should look not only at the why and how, but also at the long term implications – when will you see benefits? Will it make your business more attractive to buyers?”

As well as giving advice on acquisition, we'll cover using strategic growth to maximise the value of a business.  The event is going to be comprehensive, guiding attendees from growth right through to succession or trade sale.

What Does Maximum “Value” actually mean when selling a business?

When the time comes for business owners to think about selling their business it is usually one or, if not the, most valuable assets they possess.   And so it’s important that they get something truly valuable in return.   Typically, that’s money.   But most transactions have lots of other valuable features – so in company sales it’s not just about the money.

When a company owner hires an M&A adviser like PEM Corporate Finance to work with him or her on the sale of his/her business we are typically charged with helping to maximize value.  But not all business sellers appreciate fully that “value” can mean much more than money.   “Value” can of course be extracted in many forms other than cash, such as:

• Loan Notes
• Earn-out agreements
• Releases of liabilities, such as guarantees.
• Waiver of contingent liabilities
• Ongoing benefits, such as insurance coverage or use of a vehicle or premises
• Consultancy agreement for the Vendor
• Employment agreements for employees
• Agreement to lease certain real estate or other assets

In the sale preparation process, we work with Vendors to determine what they would enjoy or find value in.  Of course there’s no telling what a strategic buyer might be prepared to pay until we can get them into a competitive process, but its useful to prioritize before going into an auction.

For example:

1. Cash at closing
2. Long-term “market” lease of property that the Vendor owns personally or in his/her pension fund
3. Firm obligations to pay cash post-closing – i.e. deferred consideration rather than earn out.
4. Employment agreements for top 3 executives
5. Earn-out agreements
6. Release of contingent liabilities

This priorities list can then inform the negotiation, and it’s a useful expectations setting exercise ahead of the sale process. 

So “maximising value” relates to anything that is of value to the seller.  It will probably should be much more than cash because the buyers have a limited amount of cash they can provide at closing, and yet they usually have other “things of value” they can deliver if the negotiation is skilfully handled.  This is one reason why its better to have skilled experienced M&A/corporate fiannce advisors on your side rather than working with a brokerage which simply puts buyers and seller together and then leaves them to it.

We think its more of an art than a science.    And this is borne out by legal precedent:

"in the field of valuation the experience of the valuer and his ability to form a sound commercial judgement is of overiding importance. The process of valuation cannot be reduced to the application of a set of abstract formulae..."

Justice Vinelott - High Court Case Re Cumana (1986)

I lead our business valuations activity, and as such I often get to see earlier attempts at valuing the company, or sometimes in a dispute the valuation prepared for the other side.  I'm always astonished at home little knowledge is shown of the business being valued.    Its like a surveyor valuing a house simply by driving past it at speed.   And companies are more complex to value.   I've also seen valuations where earnings multiples are simply plucked from the air, or derived from quite ludicrous comparatives.   And probably the worse offenders are the valuations that clearly suffer from "death by spreadsheet".  In other words lots of complicated, but meaningless, analysis.

We believe strongly that valuation reports should be useful, and if possible interesting to the company that commissions them.

If you're interested in learning a little about the factors that will influence the value of your business, why not come to one of our seminars where we cover the topic.  We're runing one in Norwich this week 14 March at Dunston Hall Hotel.   We're running them again in Cambridge at the Trinity Centre on 13 June, and in Borehamwood at the Holiday Inn on 20 June.  If you'd like to find out more about the program or to book visit our events page. 

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