Succession Buyouts as a route to succession in Family Companies

Planning for exit and succession can be difficult in any business, but in family businesses there are additional factors to consider.   One of the problems with family succession planning is that the two key objectives – liquidity and preservation of the business legacy appear to be in conflict – how can you get cash without selling up?   A sale to a trade buyer may be unattractive if the plan is to keep things in the family, and this is where the idea of a sale to family comes in.  Family Business Cubes

This is a form of management buyout – the family members buying the business are very often the team running the company.    Often it goes beyond that to key managers – hence the occasionally used abbreviation the FAMBO. This is meant to mean Family and Management Buyout, or Family Buyout, although just to confuse things I’ve recently seen it used in East Anglia to refer to a Franchisee and Management Buyout.   It can also be called a VIMBO or Vendor Initiated Management Buyout – because the its usually (though not always) the older generation which initiates the sale to the younger family members.  At PEM we prefer to refer to such deals as Succession Buyouts – because that neatly encapsulates the overarching strategic intent of the deal.

Because family relationships are involved things can go wrong so as to delay the transaction or even kill it completely.  So here are some key thoughts on how to preserve family harmony whilst successfully completing a buyout.

Plan ahead and don’t rush each other. It is really important that harmony and trust is maintained. Nothing breeds suspicion more than the idea that one family member wants to take advantage of another, either by being pushy or appearing to scheme behind the scenes. This is true whether a family member is a buying or selling. An aggressive buyer almost ensures that the seller will react negatively; an aggressive seller communicates desperation and may undermine his or her own negotiating position.   Actually this is also true of Succession Buyouts amongst long standing colleagues who are not related.

Take account of peoples personalities Families ought to know one another pretty well. They know about personality traits or past circumstances giving rise to unusual levels of loyalty, or even resentment, or jealousy.   This might all come out in the run up to a transaction, sometimes they are deep-seated psychological feelings, and can be almost childlike—“Dad always preferred you.”   Being alert to such attitudes and steering the transaction in a sensitive way that respects feelings will help ensure success. Often the most important thing is to make sure everyone is listened to.

Get the business professionally valued If your shareholder agreement doesn’t prescribe a valuation methodology, it will be helpful to everyone involved in negotiating a transaction that there should be an independent assessment of valuation. Fairness is the key to completing the transaction and maintaining positive family relationships, and possibly sanity.  Neither buyer nor seller wants to looking back on the transaction with regret or suspicion.

Find some trusted advisors. Truly independent advisors who have the best interests of the family in mind can be hugely helpful in communications and facilitating agreement amongst the family. Each family member can get some independent advice, but its much better to select an adviser with a track record of brokering/facilitating such deals amongst close knit family or business groups to work for the company/family as a whole with the objective of reaching an agreement that works for all.  A skilled adviser will listen to all the agenda’s and try to manage any emotional pressures that arise during negotiations.

Tax and estate planning My tax colleagues would point out that it’s really important to consider the tax and financial affairs of the whole family, up and down the generations. And a deal like this is an opportunity to consider these things holistically.   Has the family provided for everyone as they intend and have they done inheritance tax planning?  Again these are things that need to be done early. One of the consequences of some buyout structures is that IHT planning becomes more important – don’t leave it to the last.

Family businesses are important to us all – according to INSEAD they account for 57% of US GDP.   There’s a general perception that many don’t make it beyond one or two generations. I’m not sure that’s true, INSEAD reckon there are 5,500 bicentenary family businesses around the world, and we’ve certainly worked with some family businesses which are now at fourth or fifth generation stage.  Visit our website to read about some of the family buyouts we've worked on.

Business Valuation Bloopers - just a few of the ways it can go wrong

Bloopers are the mistakes made by cast or crew on a film that end on the DVD extras. Sometimes they can Clapperboard be better then the film.   Business Valuation bloopers on the other hand are no laughing matter.   You might need a business valuation for divorce purposes, a shareholder exit, or as part of some kind of tax planning. Whatever the reason, whether you’re valuing an early stage technology company in Cambridge, or a mature SME in London there are some common business valuation bloopers to avoid.

As valuation experts we are often get to look at and comment upon other advisers valuation reports.  Often basic flaws in valuation methods, logic, or lack of decent data lead to challengeable advice being given. 

Here are some valuation out-takes, make sure you avoid them.

"I believe you"

Believing everything you’re told isn’t a good idea.  But I see lots of report where advisers have based all of their calculations on profit figures supplied by directors without having challenged them, or having reviewed the business.   Sometimes its pretty clear that most of the text is templated and applied to any and every business.

Lies, d*mn lies and statistics

You can find statistics to prove anything – just ask any politician. When valuing a business there a range of indices available from which to source an earnings multiple.   The lazy adviser might just reach to for one of these without either questioning it, or corroborating it with other data.   This is a problem because these indices by their very nature are averages – and so they say nothing in particular about any one sector or company.  It doesn’t matter whether they use, the BDO Private Company Price Index, FT All Share PE ratio, the Leading Edge Alliance’s PERDA, the Argos Soditic Mid Market Index, or the UK200 Group SME Valuation Index, a generic multiple will rarely give you the right answer in a business valuation.

Out of code information

As in any field business valuers need to keep up to date, and to use current data.  I recently saw a valuation based solely on the Private Companies Price Index.  Just relying on that would be bad enough, but the valuer then applied it to the wrong profit figure in the companies accounts.  My guess is he has been using PCPI for years and has never noticed that it changed a few years ago from an EBIT multiple to an EBITDA multiple.  

Apples and Pears

ApplesandpearsDon't mix apples and pears or you'll get a curious byproduct.  Likewise there are a range of profit measures, EBITDA, EBIT, PBT, PAT, Operating Profit.  And a range of multiples  including EV:EBITDA and the price earnings ratio or  PE ratio.   If you apply a price earnings ratio to EBITDA you will significantly overstate the result.

Rules of Thumb

As a business valuer I wouldn’t disregard rules of thumb in a particular industry, so transactions involving shops, cleaning companies, and professional service firms are amongst those where one comes across them. But I’d only ever use them as corroboration of more rigorous methods.   So shops are often sold for a number of weeks turnover plus the value of the stock – ultimately this must also equate to an earnings multiple, but where data might be patchy it’s probably a useful ready reckoner of valuation. The trouble is one often see’s quite inappropriate, and unquestioning, extension of these rules to other sectors. So for example I recently saw a service firm valued by a valuer who I suspect must specialise in valuing corner shops for after arriving at a (not entirely supportable) earnings valuation he then added the balance sheet value.  

I could go on. There are lots of ways to go wrong, indeed a quick Google produces an academic paper entitled “110 Common Errors in Company Valuations”

The answer, and you’d expect me to say this, is to find a business valuation expert who knows what they’re doing, and produces a well reasoned valuation that would stand up in court if you ever found yourself there.

Have a look at our


Start up valuationValuations are quantitative and we rely heavily on financial and other numerical inputs.  Not only that valuations get better the more financial information is available.

This is why start-ups and early stage businesses can be difficult to value.  For a valuer there’s a death-zone somewhere between seed funding and the emergence of sustainable financial performance.   As anyone doing business in and around Cambridge will tell you most start-ups have a spell when there’s few reliable numbers to work with.  So how can we value businesses when they’re in the data death-zone?

Comparable Transactions: Of course no two companies are identical but acquisitions of “somewhat” comparable start-ups can provide useful reference points.  Without usable financials we can compare based other metrics – for example IP portfolios, number of subscribers or drug pipelines.  It may feel like horse trading and exact matches are rare, but a couple of close comparables can support a relatively accurate valuation.

Cost Approach:  While some entrepreneurs might not agree, until a company passes a meaningful proof-of-concept milestone, a start-up is valued on a time and materials basis, if that. A potential purchaser might add a premium for timing and the cost of trial-and-error, but will mostly view early stage technology as something they could recreate internally.

Transactions in Start-up’s Own Shares: This is a bit like calculating the market cap of public companies; start-up valuation can be derived from the value of its individual shares. To use this approach one has to assume that the transaction was fairly negotiated at arm’s length and by a professional investor. Not all equity shares are equal and simple multiplication, while widely used, won’t often work. But a well-negotiated funding round can provide a usable value indicator.

Rules of Thumb can sometimes be used, but this is best left for corroboration of other methods.  For example the Berkus Method (invented by US business Angel Dave Berkus) seeks to “price” different qualitative stages of a start up’s development such as having a sound idea, a prototype, or a decent team and ascribing a fixed $500k value to each step.    One could defend this slightly arbitrary approach because if enough business angels use.

Read about our business valuation services

Use the Private Companies Price Index (PCPI) with caution in Business Valuations

The Private Companies Price Index or PCPI is a widely reference index of private company exit multiples published by BDO.   It is useful for establishing trends in the market.   However from what I can see its often used in Business Valuations, call me a cynic but I suspect this may be partly because its widely available and free?  I’ve always said it should be used with caution.   

PCPI-Q2-15So I was interested to read of the recent case of Foulser and Foulser v HMRC, part of a long running serial litigation concerning a failed tax avoidance scheme, and the transfer of two food companies.  The valuation of the companies was in dispute, and two valuers presented different methodologies.  This roundly rejected one valuer’s use of the PCPI as the best indicator of price earnings multiple to be applied saying "There is no transparency of the PCPI. No information is available as to the number of private company acquisitions on which the average P/E ratio is based. Nor is anything known about the companies concerned, including their activity and size. It is thus impossible to take any view on comparability."

The problem in this case wasn’t that the PCPI is of no use, rather that it was a poor measure to focus exclusively on.   When I’m doing a business valuation I’d typically look to use it as additional data to corroborate more specific and transparent data on comparable companies and comparable transactions.

To illustrate why this went to law you only have to look at the taxpayers valuation of £243,750 versus the HMRC valuation of £2.1M.    The tribunal came out at £1.75M in the end.

Read about our business valuation services at PEM

Cambridge and East Anglia Businesses asked to think strategically about growth

Flyer_front_cover_Cambs_Oct15With 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.

The seminar will run from 8.30am to 12.30pm at The Trinity Centre in Cambridge on 22 October. Registration is free; for more details or to book, please visit

ICAS cruise down the Thames on the Waverley

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A big thank you to the Institute of Chartered Accountants of Scotland ('ICAS') courtesy of which Mrs F and I enjoyed a cruise down the Thames last night on the PS Waverley (the last seagoing passenger-carrying paddle steamer in the world).   Starting from Tower Pier and cruising down to the Thames Barrage, the opening of Tower Bridge make a spectacular start and finish to the trip.


Valuation neither art nor a science?

It’s often said that valuation is neither an art nor a science but a little of both.  I’m sure I’ve said something along those lines myself.  Clearly it’s based on some hard data, but then the art is in building a convincing defensible case often based upon a number of judgements.    So I was interested to read a recent blog post by valuation guru Aswath Damodaran (Professor of Finance at the Stern School of Business at New York University where he teaches corporate finance and equity valuation).  

He takes the line that valuation is neither an art nor a science but a craft.   As he puts in unlike, say, Mathematics valuation has principles but not at the level of precision to be a science.    It’s not an art he says because you can’t just let your creative juices flow and make things up.   He reckons it’s more like a craft, more akin to cooking or making things with wood.   It has rules, but requires adjusting and “crafting” for each set of circumstances.

His other key points, which bear repeating, are that a valuation must have a narrative.  I’ve blogged on this before – but as he puts it Valuation = Story + Numbers.   Also valuing an asset is different from pricing it – “much of what passes for valuation, in practice, is really pricing, sometimes disguised as valuation and sometimes not”.   I've certainly seen a few technology company valuations around Cambridge which are at the "pricing disguised as valuation" end of the spectrum.

Read about our Cambridge based business valuation team at PEM

Kissing Frogs : buying a business - how not to get it wrong

It’s stating the obvious to say “don’t pay too much for a business“.   No prizes for that advice then.   And the consequences of paying over the odds can range from underperformance to financial crisis.   The aim should be to do the right deal after a thorough analysis and review.   Even then it sometimes goes wrong, in the Cambridge tech market the most obvious local example has to be what happened to HP and Autonomy.  HP no doubt invested huge sums in due diligence and used high powered M&A advisers – and yet somehow feels it overpaid.

Kissing frogsIt’s too easy to get caught up with the thrill of the chase.  The desire to buy sometimes overpowers the ability conduct a sober review of the business target.   That’s where having an experienced adviser alongside to play devil’s advocate – even if that means not doing the deal – is hugely important.  They should also be able to help with the appraisal and pricing of the target.  I often find myself counselling against a deal, or at any rate against paying a price the seller will accept even if it means I lose out on what on the face of it could have been an interesting project.  It’s more important that my clients do a good deal that adds value to their business.

Again stating the obvious – the seller knows all about the business, but he is motivated to sell it for maximum value.  He might not be lying to you; the future of the business may indeed be good, but maybe not.  You need to challenge what you see and hear.  Also this is where vendor finance – for example building an earnout into the deal – can help to de-risk the deal and keep the seller “honest”.

Your goal as a buyer is NOT to make the seller happy, although it helps if they’re not unhappy!  Offer to pay a price that works for you – having first considered three things 1) what it’s worth to you, 2) what the fair valuation of the target might be and 3) what is the Vendor’s best realistic alternative.   For a small business sale the latter might be just to keep it – all very well if she is 35 years old, not so if she’s already 71 years old.   

Don’t be afraid to walk away from a deal.  At the very least it’s a real learning experience to go through the process of appraisal, offer, and working with an adviser – all of which will pay dividends when a better or more realistic target comes along.   Sometimes you have to kiss a lot of frogs.  And if the one your looking at now turns out to be the handsome prince you’ve been waiting for (to stretch the metaphor to breaking point) then you should be prepared to put resources into the deal to make it happen – not just money, make sure you have the time to really commit to it.

Get in touch if you're interested in making an acquisition - read more above how we can help here.

Six things you must know before selling your business

 There is lots of detailed material available on the internet on how to groom your company for sale.   But often its the basics of the negotiation that get forgotten. 

Here's a short video, less than 2 minutes long,  with six things I believe you should think about.

If you're selling your business, or beginning the process of grooming it for sale you might want to read more on our Company Sales page


Buyout at Molecular Dimensions



We advised on the management buyout of Molecular Dimensions in Newmarket a while back.  And recently its Managing Director Tony Savill was recently kind enough to record a video with us to share his MBO experience.

Molecular Dimensions is a world leading supplier of modern screens, reagents, other consumables and instrumentation for protein structure determination by X-ray crystallography. Headquartered in Newmarket it has offices in the USA and distribution in Asia.  Founded in 1998 to provide specialist products for crystallographers across the world, it has grown through alliances with leading scientists aimed at developing and commercializing innovative ideas.