Why revenue multiples aren't very helpful

In some industries people talk about multiples of revenue when working out what their business could be worth.  It has some relevance in some industries which use it as a metric (financial services/advisory for example) and in early stage businesses where profit is an alien concept.

However for the most part it needs to be used with care as a secondary measure - and here's why.

Revenue is generally a poor indicator of value.   Its rather like focussing on cost per square foot of an office building.   But assessing the price for accommodation as rental/square foot will be driven by other factors, including quality but above all by location.  Or location location location.   So office space in a fenland village, for example, is going to be less per square foot than in Station Road Cambridge.

When we're selling a business potential buyers look at a number of financial metrics of which revenue is one.  But of course its not the only one, and as you'd expect profit is usually most important.  Specifically EBITDA as it can be a good proxy for cash generation.   A buyer will also be looking at qualitative aspects of the business or value drivers, that will influence its price/valuation.  These might include perceived weaknesses such as customer concentration or over dependence on the vendor.  In contrast positive value drivers could include having a strong intellectual property portfolio or significant market share/quality customers.

Business typically don't sell for multiples of revenue but for fractions of revenue as the chart (of US data) below shows

What this does show clearly is that revenue multiples vary over time and by sector.  

So when a company sale is reported as being an impressive multiple of revenue its probably because it has some other factor driving the sale - technology and intellectual property for example.

If you need a business valuation for whatever reason visit PEM Business Valuations to read more.




Raising equity finance. First mitigate dilution through good housekeeping

Many entrepreneurs are wary of selling equity to outside investors.   Whether its at the early stage where the main source of funding is likely to be Angel investors or later when VCT and Private Equity investors may be the sources.   

The concern is of course about control, and how it will change the business.  Will the new investors meddle?   Of course get the right investor and what to some feels like meddling will in fact be a truly positive value added contribution to the business.  The right investor, or their appointed non-executive director, can bring additional experience, knowledge and contacts to the company.

But before you get to raising equity its worth challenging whether or not you really need it.    And sometimes you just need some good housekeeping to reduce your cash needs.  How about these simple thoughts:-

Supplier investment

Your supplier base may be able to part fund your growth.   Maybe not through direct investment, but they may be able to go for extended credit, or perhaps the will be prepared to support you through marketing costs.

Change your working capital profile

Could you do business in a different way?  How about charging for some or all of your work up front?  Could you introduce deposits or progress fees?  Better still could you get your customers to pay up front and move to a subscription basis? 

Narrow your aiming point

Sometimes the big cash requirement is because businesses aim to make a big step forward, or to tackle a lot of new things at once.  Could you scale that down to the true priorities, grow the business and then if you need to raise equity later it will be at a time when you’re profitable and so you’ll be able to raise capital at a higher valuation?



What a difference a dot makes

I'm delighted to be able to share our new PEM Corporate Finance branding.   You will see that it is closer in look to that of our parent company PEM.   PEM has adopted a visually strong logotype with a square blue dot.   Some of the feedback has been that it's like Deloitte, only theirs is a round dot, and is green while ours is a square dot and is blue.  These things are important!   Much more positive feedback from one client at our launch event was that it represented how he'd always thought of us.   The brand visual look is completed with the use of striking black and white images of Cambridge to reinforce our positioning as the largest accounting practice based in Cambridge.      We have worked with design agency MOBAS  (which also works with Taylor Vinters, Accor Hotels, Barratt Homes, Greene King, Cambridge Building  Socitey, University of Cambridge, and Toshiba amongst others.     


Management Buyout at Hospitality Software Business

I'm pleased to report that we helped the management team at Alacer Software to acquire the company from its parent company Lifecrown Investments.  

Alacer is a developer of hospitality software that allows all manner of businesses in that sector to run their businesses more efficiently.     Instead of having a patchwork of various different systems Alacer brings together all elements of their business (bar, conference, spa, front of house, reservations and so on) into one system.   This makes life much easier as it then involves one supplier, one system and is properly "joined up".

Alacer was the only software business in its parent group, which itself was focussed on a very different market sector - so the logic of the buyout was compelling.

We were able to help Rob Day, MD of Alacer, to negotiate and structure the deal.  I'm glad to say that we continue to help them with the business in an advisory role post transaction.


A big thanks to Rob for agreeing to appear in our first PEM Corporate Finance video, and to the spielbergian skills of Peggy McGregor of PEMCF and Connor Nudd of PEM for pulling the video together.   Alas too late for this years Oscars.

Have a look also at coverage of the deal in Business Weekly and on our website.






Why Entrepreneurs' Relief isn't quite as simple as you might think

The government is keen to encourage entrepreneurs to create wealth and employment, and it has repeatedly used the tax system to try to do so.  All the focus is now on Entrepreneurs’ Relief but before that it was on retirement relief, and business taper relief.   Entrepreneurs’ Relief began its life as a relatively minor effort – a maximum of £80,000 of tax saving for an individual over a lifetime – much much less attractive than it is now. 

__10-off1The relief is now much more attractive and it would seem that every entrepreneur believes that when you sell your business you will only pay Capital Gains Tax at 10%.   Which of course means that most people are assuming they’ll qualify for Entrepreneurs’ Relief.   Alas its not quite so simple.  The tax rules are complex, and if you get it wrong you’ll pay the full rate of 28%.

There are quite a few ways in which it can go wrong.  Entrepreneurs’ Relief only applies to trading companies but alas there is no definition of what constitutes a trade and court decisions over the past 160 years are not altogether helpful.

In many businesses its pretty clear that there is a trade.   So what doesn’t qualify for the relief?  Generally speaking property investment businesses or other business relying on passive investment income, would be exempt.   Less clear cut would be businesses such as caravan parks, which the tax man generally considers to be investment businesses, even where the owners carry out related activities, such as providing utilities or other facilities.  So before you go ahead and appoint an M&A advisor to help you to sell your business give thought to the trading status of your company.

If you’re a sole trader or partnership you should qualify for Entrepreneurs’ Relief, but its more complicated if you trade through a company.  Firstly you must own at least 5% of the company’s ordinary shares and hold at least 5% of the voting power in the company.  Secondly you must be an employee or officer of the company.  And you must satisfy these conditions for a full year immediately before a sale of the company.   I've often met people who had sufficient shares to qualify but hadn't met the officer or employee criteria for a full year.  That's fine if you have time to plan, but if a strategic buyer knocks on your door with a great offer you may not have the time for that.

Where it can also start to go wrong is situations where employees get non voting shares, or where husband and wife own the company but one spouse has never been a director or employee of the company.  

There can also be problems associated with the type of deal you do with the purchaser of your business.  If you were to provide some Vendor Finance for the deal, ie you accepted a loan document rather than an immediate cash payment from the purchaser of your business, such a “share exchange” can be problematical.  If you go down this route the upfront cash you get when you sell may qualify for the Entrepreneurs’ Relief but the later loan note redemptions will not – so you might end up paying tax at 28% every time you redeem a loan note.

The key, as ever with tax, is to plan ahead.   And of course if you do have some of the issues above such as husband and wife ownership, skewed voting rights, or issues around the trading status - there are always planning options.

Stats and stories: why valuations need both

Aswath-DamodaranIn a recent blog post, Dr Damodaran (Professor of Finance at New York University and something of a ‘valuation celebrity’) highlights the need for both numbers and narrative when valuing a business:

“If you do a good valuation, it’s like composing a tune,” He says. “So it forces you if you’re a storyteller to be disciplined. And it forces you if you’re a numbers person to think about the narrative.”

Many valuers suffer from the illusion that numbers ensure precision, objectivity and control, he explains. Yet figures can be just as biased as words, and worse are protected by the belief that ‘numbers don’t lie’. Damodaran underlines a few key dangers of a numbers-heavy approach:

-         the valuations become mere tools used for sales pitches or to confirm pre-conceived values

-         endless line items can lead to the creation of a business that only exists in ‘spreadsheet nirvana’, not to mention hair-splitting about inputs

On the other hand, Damodaran warns against narratives unrestrained by numbers, which can fast become fairy tales. Further, relying solely on narrative makes measuring progress difficult, as it provides no obvious benchmarks.

Read about PEM Corporate Finance's business valuation service based in Cambridge

Cereals 2014

To underscore our interest and committment to the food and agriculture sector - following on recent deals such as the sale of Elsinore Foods to Golden Acre Foods and the sale of Phaseolus to Place UK  - PEM recently took a stand at Cereals 2014 the leading event for the UK Arable Industry.    This was held at Chrishall Grange near Duxford.

Nice to see our friends Max and Ian of Redfox Recruitment at their very busy stand just along from us, and to catch up with Hannah Croft (formerly of PEMCF) on the Duncan & Topliss stand.

PEM Stand
Stand Construction
Stephen Peak, Partner at PEM, supervises Sanchia Norris one of our Private Clients Tax Partners, and Rebecca Porter Assitant Director VAT Services in the errection of the Peters Elworthy & Moore stand at Cereals 2014





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Car Park 1 at Cereals 2014 - if you have a grey, black or silver car then you will NOT stand out from the crowd!


Will you be prepared for your moment in the sun?

As a business owner, you too need to be prepared when opportunity strikes. The two most common reasons owners sell their business are getting approached with an unsolicited offer and having a health scare. Either way you’re not in control of the timing, but you can be in control of how prepared you’ll be when opportunity knocks or necessity strikes.  Here’s 7 things to do right now to get your business ready to sell

Seven1. Make sure your customer contracts include a “survivor clause,” stipulating that the obligations of the contract “survive” the change of ownership of your company. That way, your customers can’t use the sale of your company to wiggle out of their commitments to your business.

2. Cultivate a group of a dozen “reference-able” customers that an acquirer could interview. When you sell, the buyer will want to speak with your customers; so you need a group of people – customers who are also friends – that would be willing to say good things about your company. In particular, the acquirer will be looking for assurance that the customer will keep buying after you leave, so make sure your reference-able customers are loyal not just to you but also to your business.

3. Keep in mind your elevator pitch to a potential acquirer. Writing your elevator pitch now will crystallize the important attributes of your company and ensure you focus on the right metrics in the coming years. It should the Who, What, Where When and Why of your business:

  • Who: describe why your management team is a winner. 
  • What: describe what you sell and why customers choose you.
  • Where: where are you located and what is the potential to expand geographically? 
  • When: how long have you been in business? 
  • Why: What are the strategic reasons someone would want to buy your company? Do you have a niche? Is your product a world-beater? Make decisions for your business now through the lens of how the results of your decisions would be perceived by a potential acquirer down the road

4. Identify 10 companies with a strategic reason to buy your business. Once you have a short list of potential buyers, study their M&A activity. What do they buy? What do they list as the strategic reasons for their acquisition in their media releases? Who are their lead corporate development executives?

5. Do business with your short list. Once you have a short list of potential acquirers, try to do business with as many of them as you can. Companies buy companies they know; so if you can find a way to work with a potential acquirer (either as a partner, supplier or customer) it’s a chance for them to become familiar with your company.

6. Professionalise your financial management – there’s nothing that freaks a buyer out more quickly than disorganised accounts.

7. Stop doing the selling. If you’re the rainmaker, nobody will buy your business without a soul-crushing earn out. Keep in mind that sales people take time to train and to hit their stride. Depending on your industry, it may take them a year or even two to start cranking out deals, so now is the time to hire and train them – not six months before you want out.