Working capital management - can you ever have too much cash?

I was interested to read an article on East Anglian business website bizeast with the headline "Firms at risk from 'locking up too much cash' ".    What is too much cash?

The article was based on a Lloyds Bank report - Lloyds are pushing a working capital management product.   However if you read the Lloyds page it's clear that its not about having too much cash, but about having too much cash locked up in working capital.  As firms grow, unless you manage things tightly or have a very positive working capital cycle there's usually a suck in of cash as the debtor book and stockholding grow unless fully covered by creditor growth.   So a very misleading headline in bizeast.

Here's the Lloyds link

Art_moneywheelbarrowSo let's assume you manage your working capital tightly - can you still have too much cash?  Well yes sometimes.  Businesses often don't distribute all of their profits, and we see many firms with large cash balances.    This is partly for the "sleep at night" reason of having a cash buffer, and also often because of the high tax rates on dividends.

When you come to sell the company - typically subject to an arguement with the buyer about how much of the cash is surplus (this is where your M&A adviser can really earn their fee) you should expect to be paid £ for £ above the Enterprise Value of the company for any surplus cash.   That's all good.  The only circumstance where surplus cash can be too much cash, is in some circumstances where it's a disproportionaly large component of the price or the balance sheet you might run into trouble claiming Entrepreneurs' Releif.   So yes, in a few circumstances you can have too much cash - and this is where your tax adviser needs to help.

So just to string together a few cliches to finish - cash IS king, the cheapest way to fund your business is good housekeeping (ie working capital maangement) and don't beleive everything you read in the newspapers or on the internet!


Two experts can arrive at valuations of a business.  Experts aren’t in the business of advocacy, and shouldn’t two trained and experienced professionals come up with the same answer?  Here’s some good reasons they might differ.



Legal guidance                                     

Experts can be reacting to different legal guidance.

Differences in availability of information

Access to data may be unequal.  Valuers can only conclude based on the available evidence.

Access to Management

Sometimes the valuer for one “side” in the case is denied the level of access to management granted to the other expert. 

Using different valuation methods

Valuers make judgements as to which of the three main valuation methods to use.  The asset approach focuses on assets values, the income approach deals with income capitalisation or discounted cash flow and the market approach uses comparisons with public companies and with analogue transactions.   Valuers need to be aware of their merits and disadvantages. 

The asset approach is usually of limited use for profitable operating companies. 

The market approach is powerful but comparable companies and transaction need to be selected carefully, and for some businesses it can be difficult to find suitably close comparators.

In the income approach there is much subjectivity around future cash flows (especially the terminal value) and appropriate levels of discount.   

Judgements around these choices hugely influence the valuation opinion.

Different judgements, different assumptions

Experts providing business valuations must make assumptions and judgements on a wide range of issues:-

  • Asset methods – what basis to value the assets
  • Earnings methods – how to adjust and analyse the cash flows. Some element of judging the future from the past is required.  Adjustments need to be made to normalise profits and to reflect working capital changes.
  • Forecast assumptions for DCF – each difference of judgement shifts result. The terminal value in a DCF calculation can account for more than 50% of the value – so is it reasonably arrived at, what multiple is used?  What sensitivity analysis has been applied?
  • Public company comparables – is this method appropriate? Are the selected companies sufficiently comparable to reach a meaningful conclusion? Have differing growth rates and risk between the comparable companies and the company being valued been accounted for?
  • Analogue transactions –are the selected comparable transactions actually comparable to the subject company.
  • Premia and discounts – for example for control - or minority holdings - are they defensible?
  • Weightings assigned to the different methods – are they reasonable?


One would hope they’ll be discovered and corrected before anyone ends up before a Judge.


The court may also be swayed by the relative credibility of the reports and the testimonies of the experts.   Also, how compelling the conclusion is in comparison with other evidence?  Does it make sense?  

PEM Valuations also providing M&A advice to business owners, so we have the advantage of being able to apply the “gut test” to any valuation opinion.  In short do we believe that someone would pay that amount for the business being valued?

Valuation lessons from the High Court

This 2012 High Court case is interesting for the comments made by Justice Eder about Expert valuations.

High-Court-building-620-485x302Stabilus was a leading German manufacturer of gas springs and hydraulic vibration dampers used in the automotive industry which was the subject of a number of transactions. In 2008 it was bought by Paine & Partners LLC for €519M. Shortly afterwards got into financial difficulty and underwent a major restructuring in 2009 which carved up all the value to the Senior Lenders leaving nothing for the Mezzanine lenders.

Unsurprisingly – with €83M at stake in the Mezz layer – the Mezzanine lenders challenged the validity of the restructuring. Three different valuation firms gave opinions and three of the “big four” accounting firms were involved one way or another.

The judgement 100 pages long judgement had some key lessons for business valuation.

Use of previous valuations

If they’ve been prepared for internal reporting purposes rather than “fair market value” then they’re not suitable support

Business plans

Adjusting forecasts without considering the reasons for variations is not acceptable, and past variations from plan are not an automatic indication that there will be future variations.

Other Experts Reports

The Expert must request to see other Witness reports to check assumptions and any deviations from their viewpoint. Any deviations must be fully supported.

Judges-485x302Discount to EBITDA multiples relative to guideline companies

The judge was happy that EBITDA multiples should be discounted. He commented that applying a discount is qualitative rather than quantitative.

The Expert needs to compare the risk, size, growth pattern of the business being valued to the guideline company when estimating a suitable discount. Stabilius had a lower growth rate than the rest of the industry which justified a lower multiple.


The valuer must focus on the facts and business outlook as at the valuation date. Hindsight is not a sense check for assumptions at the valuation date.

Ultimately the Judge agreed for the most part with the American Appraisal valuation – that the mezzanine debt had no economic value at the date of valuation.




Tactics without strategy is the noise before defeat - or why you need a exit or succession plan

"Tactics without strategy is the noise before defeat" is a quote from the Art of War by Sun Tzu a 6th Century BC Chinese general and military strategist.  The Art of War, his book on military strategy, has become fashionable as a source of business wisdom, or at any rate quotes.

A recent US Survey found that 78 percent of small-business-owner clients plan to sell their businesses to fund their retirement. The proceeds are needed to fund 60 percent to 100 percent of their retirement needs. Yet, less than 30 percent of clients actually have a written succession plan.

We recently worked with a large and successful business which had become so by being very very good at what they did.   Clients recommended them, bigger and better projects came along and the business grew.   But there was no overall plan for the end game.   The board found it difficult to agree where they wanted to take the business, as a result of which they looked down at their feet to see what the next step or two might be for the business rather than lifting their heads to the horizon and developing a plan for growth and ultimately exit or succession.

It’s an oft repeated tale simply because day to day business is absorbing enough without planning for ones mid or long term future.  Yet without a plan, or an aiming point to paraphrase the Art of War quote each individual small step for the business might not be taking you where you want to go longer term.

If this resonates for you and your business, or clients of yours, you could benefit from attending our upcoming Business Exit Strategies Seminars in Cambridge (8 June 2017 - yes I know that's general election day, Teresa didn't consult with us!) and Norwich (22 June 2017).  Places are limited so I’d encourage you to book now at our events page

Good news in the last budget if you want to sell a subsidiary or trade from within a group of companies – changes to the Substantial Shareholders Exemption rules

Mr Hammond, in his recent budget, has made some rather helpful tax changes for those seeking to sell trading subsidiaries or part of a business by simplifying the Substantial Shareholders Exemption.

HammondSubstantial Shareholders Exemption (‘SSE’)

SSE allows companies to dispose of subsidiaries without paying corporation tax on any capital gain arising from the sale. As ever there are some key tests to be met to qualify for SSE. They have been: i) that the disposing company held more than 10% of the ordinary share capital; ii) that the disposing company is a sole trading company or member of a trading group, and; iii) the company being sold is also a trading company.

Before the changes, you also had to have held the shares for a continuous period of 12 months beginning not more than 2 years before the date of sale.

Issues with the “trading” test

SSE is not available if the disposing company fails to meet the test as a “trading” company or group. This used to mean then if any more than 20% of its activities (on various tests) were non-trading investment activity then you wouldn’t get the exemption.

Take advice

The above is a fair summary of the key aspects of SSE. But it’s an oversimplification and there are quite a few more detailed conditions to SSE. Do talk to a tax expert before trying this yourself!


The key simplifications to SSE which greatly facilitate deal structuring are that the “trading” test only has to be met in the subsidiary with effect from 1 April. This latter point would mean, for example, that in a group with only 30% “trading” versus 70% “investment” activity the trade one could hive down the trade to a subsidiary, dispose of it, and qualify for SSE.

Post-2002 Goodwill

There’s always a catch. And in this case, it applies to the disposal of a subsidiary where some or all of the valuation is “goodwill”. If that goodwill was created post-2002, it’s not impossible, but more difficult to do this without incurring a tax charge. If you’re in this position please get a business tax expert to walk you through the requirements.

Valuation Knows no Boundaries

That's the title of a recent PEMCF article in Acquisition International.  We covered the need for valuations, saleability, valuing early stage technology companies, and the need to get beneath the numbers.  Have a read here.  For more information have a look at the valuation section of our website here.

AI Valuation Article

Should I go ahead with selling my company during post Brexit uncertainty??

I was asked this question by a business owner very recently.   We had been discussing his exit options for some months, and not unreasonably he is trying now to work out the effects of a post Brexit world on his decision making, in particular how it should affect timing.

BrexitTiming is the key given that successful company sales are often significantly about getting the timing right; timing re your business, your sector, and of course one cannot ignore the overall economic outlook.

My considered opinion is that I think it is too early to tell.

But there are, as yet anecdotally, some positive signs. We have 3 sales on the go at the moment at Heads of Terms or legal stages, all with foreign buyers, all are unaffected.  Also we have another just begun where the directions asked themselves the same question – and decided to proceed, on the basis that if buyers are all running scared we’ll find out quite early on and they can pause the process.  

At a more general level if the purchase is strategic I think folk will push on, however there must be some buyers out there who will wait to see what happens. 

What about foreign buyers wanting an EU base – how will they behave? For some businesses that will clearly have an effect.   Again it will depend on the precise business being sold and the buyers specific motivation.  

Of course there is potentially a plus from exchange rates depending on how that pans out. We have clients which will do well from that, and those that are already hurting.

In short nobody knows – only way to be sure is to try it.

Finally, just as with the political campaign, we're seeing some daft statements associated with the post Brexit world.   I received a marketing flyer re a company sale today from another adviser which cheerfully concluded that the business was "Wholly UK focused, so not affected by Brexit".   Presumably any downturn in the UK economy due to Brexit would not affect this business despite being wholly UK focussed?!  Dubious logic that even Boris would have been proud of. 

Don’t drop the anchor. Avoiding bias in business valuations

AnchorsaweighIt’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. 

Valuing the Star Wars Franchise

Asman Damodaran of the New York University Business School had a go at valuing the Star Wars franchise.  Disney paid $4Bn for it – so did that turn out to be a good deal?

Business Valuation Star Wars Logo Style
Damodaran reviews the franchise to see where the revenues have come from.  Interestingly the original film is still the biggest grosser to date at nearly $4Bn.  But the other revenue streams are even more important; VHS/DVD/Rentals, Toys, Gaming, Books, and TV series.  These other revenues dilute Movie income to 20% of the whole alongside 23% for rentals, 15% for gaming and books, and a whopping 36% for toys and merchandise. Disney star wars

So how do you value it?  Like any other business, one needs to take a stab at future earnings potential.  In the absence of Disney’s,  no doubt closely guarded, forecasts Damodaran makes educated guesses.  Starting with Disney’s intent to make another two films he then assumes they’ll each gross something similar to “the Force Awakens”.  I’d have assumed some slight decline each time around (as the history suggests) but you have to start somewhere.  He judges that add-on revenues will continue be more important - streaming replaces rentals and he assumes $1.20/dollar v $1.14/dollar thus far, Toys continue to generate $1.80 for every dollar of movie income, Books drop 25% to $0.20/dollar, Gaming stays at $0.5/dollar, and he assumes that with the distribution power of Disney and Netflix (rumoured to be planning 3 live action series) TV rights will increase to $0.5/dollar. 

One needs to keep making assumptions, when the films will be released, inflation, and of course the margin levels on the income streams – he uses sector averages here, for example toys/merchandise at 15%.  Put it all together and you get an overall net income projection which he discounts at 7.61% being the average cost of capital for the entertainment sector.   Net result a valuation of $10M.   So Disney did a good deal.   If you want the full calculation Google “Galactic Finance: Valuing the Star Wars Franchise” which will take you to his blog.

It shows you can build up a cogent case to value almost anything, although I’d  have factored in some kind of discount just because of the existence of Jar Jar Binks. 

May the force be with you.