The latest Argos Mid-Market Index which shows movements in private company prices has just been published. It shows data up to Q3 2017 and indicates a record high of 9.5x.  As you can see from the graph it has been steadily climbing since 2009.   So if you're a business owner it's a good time to think about exit.  Or at any rate to make sure you have a credible exit or succession plan in place.   Many owners of private companies have much of their wealth locked up in their shareholding and so even an equity release transaction - perhaps by selling shares to a third party like a private equity house can help balance their personal portfolio.

The other factor I now start to hear in conversation with business owners is concern about the tax regime that a new government might bring.    The capital taxes regime re the sale of company shares is particularly benign with Entrepreneurs' Relief effectively reducing the rate to 10% on the first £10M of lifetime gains.  Whilst Entrepreneurs' Relief was brought in by a Labour government there is an up swell of concern that a Corbyn led government might change things.

None of this may happen of course but it does underscore the need for every business owner to have a plan for exit and succession - even if it is explicitly not intended to happen for some time.

We're running our Business Exit Strategies Seminar in Stevenage on 23 November the day after the Chancellor Philip Hammond's budget speech.  So we should have clarity at least on his short term tax plans.

Our event, which is free, gives useful insights into a range of topics:-

• The current M&A market
• Strategic planning
• How to build value in your business
• Business valuation
• How to achieve succession through a management buyout
• Tax - how to mitigate and also how to use your tax affairs to build value in your company
• Company sales - how to sell your business, pitfalls, why some companies don't sell

There are a few places still available - and the venue (Novotel just off the A1M) is easy to get to from Hertfordshire, Bedfordshire, Northamptonshire, Cambridgeshire, Essex and North London.  So have a look at our website for the full program and booking.  http://www.pem.co.uk/corporate-finance/business-exit-strategies-stevenage

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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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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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