Where to Start?
Looking to Sell Your Business? Where to Start
In this video, Nick Davies and Justin Levine discuss the process of selling a company and provide guidance on who to approach and what to expect. They explain that the first step is to educate oneself on the sales process, as most business owners have not sold a company before. They also emphasise the importance of understanding the size of the business, as this will determine the type of support needed.
For smaller businesses with profits below £1 million, business brokers are typically the route to market. For larger businesses, M&A firms, corporate finance firms, and investment banks are more suitable options. The video also touches on the importance of valuation and how it is determined through a range of factors, including profit and market data.
The process of selling a company can take around 12 months, with due diligence and negotiation being key stages. The video concludes by highlighting the value of having a skilled M&A firm to guide the process and increase the chances of a successful sale.
Take a look at this in-depth discussion in the video below.
Quick find timeline:
00:00 – Introduction: Where to Start (Looking to Sell Your Business?)
00:43 – Get educated, YouTube, google
00:59 – Understand company size, this dictates available support
01:17 – Best fit by accountants, business brokers, corporate finance firms, M&A professionals or investment banks depends on profit
01:47 – £1M EBITDA threshold explained
02:37 – Business broker – typical support
03:14 – Specialist support for EBITDA £1M+
03:56 – More selective, targeted approach for companies with good profit
06:07 – M&A boutique / investment bank support vs business broker
07:18 – Examples of boutique support: Preparation, Research 150 man days, Global search
10:02 – Information memorandum (IM) overview & why it’s important
11:52 – Presenting the opportunity & model performance under new ownership
12:03 – Contrasting with current strategy
12:34 – What is adjusted EBITDA?
14:40 – Expressions of interest / offers and beyond
16:49 – Offers are not all the same
18:35 – Value of Justin Levine negotiating the right deal structure and optimising the price
19:40 – Offer letter and heads of terms
19:45 – Additional support, legal, tax, accounting
21:01 – Due Diligence is scrutinising & will inform content of SPA
21:34 – Timeframes for research, offers, heads of terms, due diligence milestones
24:07 – Legal team can add value from heads of terms
24:57 – Overseas buyers have different legal jurisdictions that can impact on timeframes
25:46 – Summary where to start (selling a business)
27:25 – Valuation ranges and how they are typically calculated
30:42 – Competition increases values
31:38 – Tax valuations vs market valuation
Series 3 – Topics
Pre-Sale Due Diligence in M&A transactions
Property in M&A transactions
Trends for M&A Warranties and Indemnities
Looking to Sell Your Business – Where to Start
In case you missed our first two series you can watch the videos on catch up below:
M&A Deconstructed Series 1 Topics:
Discussions to learn M&A basics in our first introductory series of videos, include:
- Introduction to the M&A Deconstructed series of videos
- What is EBITDA?
- What are Heads of Terms?
- Equity Share vs Asset Sale
- Completion Accounts vs Locked Box
- What is Due Diligence (DD)?
M&A Deconstructed Series 2 Topics:
The conversations in the second more technical series of videos include:
- What is a Sales & Purchase Agreement (SPA)?
- M&A Warranties, Representations & Indemnities
- Getting Paid: Earn-Outs, Deferred Payments & Vendor Loans
- What could Derail a Company Sale?
- How much does it Cost to Sell a Company?
- 5 Insider Tips: A Successful Company Sale
Meet your M&A experts
Nick Davies, Partner | M&A Solicitor, Steele Raymond LLP Solicitors
Nick acts for a wide range of business clients across various sectors, advising on complex corporate transactions including company sales, purchases and mergers. Nick also advises on on mergers, de-mergers and re-organisation.
Justin Levine – Managing Director, TheNonExec M&A Boutique
Justin leads a boutique exit advisory firm specialising in manufacturing, technology, IT, digital, healthcare, wholesale and distribution markets. With the support of a 20+ strong virtual team of analysts and researchers, he helps private business owners with growth and exit strategies.
CONTACTS:
TheNonExec Limited
Contact us here to chat about your business exit.
Steele Raymond LLP
Richmond Point, 43 Richmond Hill, Bournemouth, BH2 6LR
steeleraymond.co.uk
Transcript for video:
Looking to Sell Your Business? Where to Start
Introducing Looking to Sell Your Business? Where to Start
Nick Davies:
Justin. Hi, welcome. Video number four in our most recent series of M&A videos. And the idea of this particular video is to give people some ideas, some guidance about what they should do if they’ve decided they want to sell their company, their business. Where should they go? Who should they ask? Who should they speak to? Is it their accountant? Is it their lawyer? What’s the process? And what would your advice or guidance be? For me, the person who’s been running their business for a few years, decided I want to exit. Who do I pick up the phone to?
Justin Levine:
So good question. I think the starting point really is to get sort of educated on the sales process itself, because most people having a company won’t have sold a company. So go on YouTube, go on Google and start Googling around.
Understand company size, this dictates available support
I think the second point really is to understand the size of the business that the owner has because the size of the business dictates the kind of support or the kind of people that you are looking to use. So by size, typically we’re talking about profit. The more profit a business makes, then the more likelihood is you can employ a crack professional team of people to sell your business. The smaller the business is, it might change the options.
Best fit depends on profit levels
So typically there are probably around about a thousand companies in the market in the UK that sell companies. So you have accountants, you have business brokers, you’ve got corporate finance firms, you’ve got mergers and acquisitions professionals, you’ve got investment banks.
£1M EBITDA threshold explained
So it’s a real plethora of companies that you might choose. So if you’ve got a small business with profits of let’s say of 1 million pounds, that’s a real threshold in the market that we see. So at a million pounds profit or beneath buyers, the number of buyers for that particular company drop away a little bit. The reason being quite straightforward, because it’s expensive to buy a business. So a large company buying a company only really wants to invest and spend that money when the target, the selling company is a sufficient size, if that makes sense. So a million pounds is a threshold that we typically see in the market saying, well, beneath a million pounds, then the roots to market to sell you company are typically business brokers. Okay?
Business broker – typical support
A business broker is the business equivalent of an estate agent. So it’s a fairly transactional approach. And there’s plenty of business brokers, there’s some national ones, there’s some regional ones, there’s some local ones, and the process is quite straightforward. You sign up, you pay a little bit of money, they’ll produce a teaser, they’ll produce a small information memorandum, and typically they’ll screen their database for people that they think might be interested and they’ll contact them. And often that’s an email blast for 5-10,000 people saying, we’ve got a company for sale. Or they might put it on a website saying business for sale. But the point being is that at the smaller end of the market, it’s a very transactional approach. So business brokers would be typically the route to market. Okay.
Specialist support for EBITDA £1M+
Once a business is at a million pounds profit and north of that, the options open up significantly. So the options open up to typically use M&A firms, corporate finance firms, larger specialists that specialise in selling medium-sized companies and above. And that gives you a different playing field altogether. So if we talk about the small end of the market, it’s what I call a mass approach. The business brokers go out to lots and lots of different people saying, do you want to buy this business?
More selective, targeted approach for companies with good profit
But when you’ve got a business that has more profitability, typically you are approaching the market in a much more select way,
Nick Davies:
More tailored,
M&A boutique / investment bank support vs business broker
Justin Levine:
Correct. Yeah. And it’s the difference that I like to compare against, let’s say the recruitment industry. You have a recruitment industry where you’re recruiting lots of different jobs, or you have a headhunter. A headhunter is somebody that selects individuals and targets individuals in companies to go and hire them and place them on behalf of their clients. And it’s the same with selling a company that has good profits. Usually the right way to sell that business is to be very, very selective and to target very specific buyers that have an appetite to buy in that sector. But to do that, you’re going to need that M&A firm or the corporate finance firm or a large accountancy firm, et cetera. So this is where, of course, it’s more expensive to transact at that level because of course somebody selling a company has to spend more money on the advice, on the specialism, if you like.
But I think the summarise is, one, get educated on the process, what’s involved, b, know the type of business that you’ve got in terms of where your profits sit and who’s likely to be the right kind of fit. Knowing that stops a lot of what I call dead end conversations. So having a business, let’s put some metrics around it. You have a business turning over 3 million profits of 200,000 nice business. So making the telephone calls to some investment bank to sell your business is going to result in a lot of wasted effort because they’re going to say, listen, it’s going to be half a million to sell you a business. Plus, because we’ve got a big team, we’re very select and we put a lot of work into this. So knowing the size of business automatically decides to a degree who you’re going to try to use, if that makes sense. So that’s the starting point.
Nick Davies:
Absolutely. So when we’re looking at the kind of SME level, which is where you and I operate quite a bit, and you are looking at businesses with an EBITDA profit level of a million pounds and above, what is the best suited route for those businesses? Investment bank’s not going to work, business brokers not going to work. You’re into the corporate finance M&A kind of boutiquey firms. Would that be right?
Justin Levine:
I think that’s a fair way of putting it. I mean, obviously I’m slightly biased because we run a boutique, we’re a micro boutique, if you like, but it is, our service is much more tailored towards being an investment bank type of service and explaining that in plain language. Plain language is, if I use the term business broker, a business broker is not there to help a company get ready for an exit. The business broker doesn’t usually sit with the business, ironing out all of the housekeeping issues and understanding the business at a very detailed level. They don’t do that piece, it’s transactional. Think of a house sale within estate agent. They turn up, they do the brochure out she goes.
Examples of boutique support:
Preparation, Research 150 man days, Global search
So once you get to this smallest segment of M&A firms, good corporate finance firms, that’s where the value that they add, they do the preparatory work at the beginning, helping the company get ready for sale, understanding the business in some considerable detail and doing very, very, very detailed market research to find potential buyers.
So the answer is, I am biased, because of course we see that that’s the type of work we do. So we’re investing a hundred to 150 man days in research. For example, when we take on a project to find buyers, it’s a big investment. It’s a lot of work. Three months worth of full-time, work for a team of two or three people, just find potential buyers. So the advantage of this, of course, is if you’re selling a business with an enterprise value of 20 million, the final deal value that you’re likely to achieve really sits on the quality of the preparation, the quality of the research that’s done, the quality of the presentation, having the right buyers in the room. And some of those buyers might come from overseas countries, they often do. So often we’re searching globally 15, 20, 25 countries to find that buyer list.
So to simplify it, in a sense, even with bigger companies, there’s a big choice of who potentially could sell a business. But actually once you start narrowing it down and saying, okay, now just give me a subset of the very, very good quality companies that can do that. Now we start to reduce that a thousand companies, if you like, all the national accountants and the business broker and so on. We start to funnel it down to a much smaller number. Now, it’s not a handful of people, but it’s certainly, it’s dozens of credible companies across the UK that are really, really very, very good actually at the quality of the work they do, and it makes a huge difference in my opinion. I’ve bought companies and also sold companies professionally for 15 years. It makes a huge difference on the outcome. So the answer is there is a big choice, but actually when it comes down to it, when we’re talking about the place where we work, we have enterprise values, 5, 10, 20, 30, 40, 50 million pounds, and north of that, you’ve done 300 million pounds. Then the quality of the advisors that are doing that work pays demonstrably when it comes to the deal at the end. Is that your experience?
Nick Davies:
Yeah, definitely. I think as you say, there are certain deals that certainly as in our firm, we’re just not involved in; listed deals, deals beyond typically a hundred million in terms of enterprise value. We are not really operating that regularly above that level. We are typically in the owner managed SME space. So yeah, enterprise values one to a hundred million is probably our sweet spot, and that’s where we do most of our work, and we’re familiar and experienced with those sort of transactions. Just moving the conversation on a little bit, you talked about the two to three months investment of time in terms of research, finding a buyer.
Information memorandum (IM) overview & why it’s important
I know what an information memorandum is, just for the benefit of those who may not know, just tell me a little bit about what that is, what purpose it serves, and how it can be used and why it’s useful in the process.
Justin Levine:
Yeah, that’s a great question. Well, the information memorandum actually is a technical document, so it’s a little bit different to let’s say selling a house and having your brochure, your two page open out brochure. Typically, the information memorandum is 10, 20, 30, 40 or more pages, and it’s a technical document mainly. It’s mainly there to present the business and to describe what it does for whom, how it adds value. And it’s typically breaking that down in quite detailed levels. And the reason it’s a technical document, generally speaking, is if you’re presenting it to buyers, so particularly international buyers who might not actually visit the company that they’re looking to buy, the only thing that they’re going to receive once they’ve signed a non-disclosure agreement is the information memorandum. So that’s there. It’s almost the bible to the business. Sure. So it’s got to describe it at a sufficient level of detail that a buyer could say, yeah, I’ve got it.
Presenting the opportunity & model performance under new ownership
I understand exactly what the business is about. And it’s almost answering a lot of the due diligence questions that somebody might have. What are the margins in the business? What are the margins of the product lines? What markets are you serving? What products are you producing? And, and, and, so the IM is a very comprehensive document that literally presents the business. Now I say it’s a technical document, so of course overlaid on top of that is putting on the presentational aspects of the company you’re selling. So from our point of view, we want to make it so that nobody receives it and says anything other than it’s a world-class document. So it’s got to look good, it’s got to look and present. Well, and of course, the idea that you are presenting the opportunity of the business and showing how it can perform under new ownership, it’s a really key point.
Nick Davies:
What’s the opportunity? Absolutely.
Justin Levine:
What’s the opportunity? Because a business, SMEs typically, this is the space we’re operating in right? So a private business owner might have run a business with certain criteria in mind
Contrasting with current strategy
Nick Davies:
In a certain way. For so long, I want this much out of the business. So long as it’s doing that, I’m quite happy with it. That’s not going to be enough for a buyer. A buyer’s buying a business typically because they want to grow it, they see an opportunity, they want to generate more profit. The IM presumably has to help take the buyer on that journey and provide a bit of persuasion as to, well, this is what the opportunity is.
What is adjusted EBITDA?
Justin Levine:
And very often it is the case. We use a phrase in corporate finances adjusted ebitda. It’s a wonderful phrase. It’s got, I’ve actually got a mug with it written on it. But what does it mean? It means that a business will be run by a private owner with a certain level of profitability and a certain amount of cost going into a business. You sell that business to another buyer, a professional, let’s say strategic buyer, a large company, the profit will change. It could go either way. It could go less or it could go more. So the idea is saying, well, what does it look like under new ownership? And if you can model out for, let’s say a very specific company, let’s say a company that makes widgets and turning over 20 million, and you’re saying, well, actually your ideal buyer is going to be somebody making widgets turning over a billion, then we can get clever and start to model out financially to saying, well, if you have their buying power, if you can buy at the same rate they can, what difference is it going to make to your bottom line?
Sure. It’s an example, but we’ve seen this actually play out in deals we’ve done where large strategic buyers have brought in enormous purchasing power advantage. And in one case, locally, we had one where doubled the bottom line literally from day one.
Nick Davies:
Amazing.
Justin Levine:
So this is the type of thing that we’ll go into an IM, and so it’s quite a technical document, it’s detailed. It has to model out what it looks like under new ownership, and of course it has to sell. One of the key things in my view, and this is the difference between hiring seasoned M&A professionals, is this notion of selling something, not just a technical document in terms of the overall sale is what you really need is somebody that’s going to sell the opportunity. So it really gets the decision making people at the top of these very large organisations, and we deal with some that turn over billions. We need them to really see the full picture of how buying that company is going to make this famous thing called synergy and it can work. So that’s the job. I mean, that’s basically the job of the IM and of course, the people that support it in selling it.
Expressions of interest / offers and beyond
Nick Davies:
Brilliant. Yeah, that’s really, really interesting. So moving us one step forward, the IM’s out there, you’ve had expressions of interest. You reach the stage where a couple of offer letters have arrived from prospective buyers. What’s the process from that point? What do you do in that process that assists the seller?
Justin Levine:
Yeah, so once we have those, ideally multiple offers on the table, the goal is to optimise the offers. And I know that people watching the video, including buyers will think there’s some sort of mystical art that goes on here, but it’s not, I mean, typically we never present a company with a guideline price. It’s a rookie error to do that. That happens in the small business segment. Nothing when you come to really good size deals. So the idea being is you let the market decide. But of course, when those initial offers come in, typically they’ll have a range of values. They’ll have a range of different deal structures. And by the time, if you like, we have those letters of intent on the table we’ve already put in a lot of work with those buyers, that senior management team, the chief executives, the presidents and so on. They’ve got emotional skin in the game because by the time those offers have come in, those large companies have taken it through their board approval process, they’ve examined it really carefully, they’ve asked their management teams inside their companies how this is going to fit this acquisition. So in other words, they’re already some way on the journey by the time that letter appears on our desk with the offer. So of course, if you’re saying where does the value we add the value is in the negotiation
Nick Davies:
And the value is in producing the offer, right? Because the buyer, it’s not legally committed at that stage, but there is a commercial commitment they will have incurred cost to get to the stage of being able to issue an offer. And actually it’s at that point that the seller can evaluate, what do we do from here? Because the seller may say, well, actually, yes, those value ranges that you describe are, they meet my expectation, therefore I’d like to move forward. Or unfortunately, in some cases I suspect the value ranges don’t meet the sales expectation. And it’s kind of you draw stumps at that stage.
Offers are not all the same
Justin Levine:
I guess you raised a really good point. I mean, if you, certainly at the low end of the market, it’s not difficult, Nick to get offers for a business. There are lots of financial buyers out there that most, let’s say M&A investment firms will know who they are. It’s easy to get offers. The question is how easy is it to get a good offer? So you’re absolutely right. The job in hand that we do as a business, we do, we probably aren’t alone, but we screen out right from the off, the chaff. We just actually screen it off largely, we just don’t deal with it.
Nick Davies:
The opportunistic buyer who’s just looking for a deal.
Justin Levine:
Yes, correct. We just don’t deal with those types of buyers. So we’re only going, typically 90% of it is strategic buyers, 10% is private equity I would say with the type of work we do, mostly because the owners are looking for a full 100% exit. They don’t want to be on the journey downstream, which is what private equity is interested in.
Value of negotiating the right deal structure and optimising the price
So yeah, in a sense, by the time we get to those letters of intent, we’ve not dealt with any of the low end stuff that some other companies deal with and we’ve already talked about the deal structures in advance with the buyers to optimise those. So we again, weed out those that we think just simply won’t work. And of course, deal structures can come in all sorts of different flavors. Of course. Yeah. My personal favorite and preference is simple cash is always king, but I know it’s a bit of a simple way of approaching things. But a lot of the deals we do are genuinely 100% cash completions. Sometimes a little bit of money left over for covering warranties, indemnities and so on.
Nick Davies:
Yeah, a bit of retention,
Justin Levine:
Bit of retention. But basically I would say that the key value add, if you like, is negotiating the right deal structure and optimising the price. And sometimes we’ve had, I can only speak for our business, we’ve had transactions where we’ve achieved multiples. I’m thinking of one where we both dealt with it, where the exit multiple was 10, 10 times EBITDA. The average national standard for that was about four and a half. So it was outstanding. Now, I certainly not going to go on record and saying that happens every day of the week. It doesn’t. And so one has to be very mindful about overpromising if you like, but with a well-designed process, time spent upfront with a good M&A firm, actually there is the chance that one achieves really, really high multiples purely because of that time and expertise put up front.
Nick Davies:
Absolutely. Yeah. Okay, great. So let’s take it another step forward. We’ve had the offers. We’ve had the negotiation with the buyer. The seller is happy, the offer letter is signed. Where do we go from there.
Offer letter and heads of terms
Justin Levine:
Once the offer letter is signed? So we call it heads of terms.
Additional support, legal, tax, accounting
So normally at that stage, the seller has to then engage some legal, tax and accounting support. So most people that are selling companies don’t actually, they support the due diligence in coordination, but they don’t support it in answering questions. So the seller will need a professional team of people behind, and I think I always advocate, and you know this, is get the best possible expertise. There is tremendous value, even if it costs money in having excellent corporate firms such as Steele Raymond supporting you in that process, get good tax advisors and so on. So from that process, you sign heads of terms, then you go to due diligence, the buyer will send in their teams, they’ll do legal, financial, and tax due diligence typically takes two to three months. And in parallel of that process, the sale and purchase agreement (SPA) or the business or if it’s an asset deal, will also be produced. So in other words, the sale document. And then at the end of that process ideally is the seller signs that sale and purchase agreement and the deal is done, the deal is consummated. But of course, in that three month period, typically can be longer. There’s a lot of work, as you well know.
Due Diligence is scrutinising & will inform content of SPA
Nick Davies:
Yeah. And the potential, I suppose, for challenges to arise, the due diligence process we’ve talked about in other videos, it is scrutinising, it is forensic. A prudent buyer will be lifting up every stone and having a look underneath. They’ll be looking for skeletons in the closet, particularly for businesses which have been running for several decades. We’ve talked about the importance of having a look at that stuff before you get into the process. But yeah, the due diligence will take a bit of time and will inform the content of the SPA, which you’ve mentioned will also take a bit of time to negotiate.
Timeframes for research, offers, heads of terms, due diligence milestones
I’m just trying to get a feel for timeframes here for people who might be watching. So if we go back to the very beginning where the buyer, where the seller initially instructs, let’s say they’ve got a business that’s 1 million pound plus EBITDA, they’re going to instruct a firm like yours. That’s the very first step. We’ve then got probably three months of research. We then hopefully get to the offer letter heads of terms, there’s another three months worth of due diligence. Maybe allow a little bit of slippage, say another month. We’re talking there, start to finish about seven months. Would that be,
Justin Levine:
I always guide clients 12 months, allow 12 months for it. I mean, we’ve done deals in six months and some have taken longer, things come up. On average, generally 12 months is the kind of timing. And the reason being is because ideally if one runs at a certain pace, there’s lots of things that need to happen at certain times to keep pace behind the deal. And sometimes those don’t happen for the best will in the world, and it might not be nothing to do with us. It could be to do with all sorts of reasons. Holidays as a typical example of that, August in the uk, people just go away these days. We’re very continental in our approach. So I always say Allow 12 months, allow 12 months. And I think just to add just something to the point you raised about the due diligence process, it’s a point where at certainly the lower end of the market, the goal of, I’m going to use business brokers if you like. The goal is to get heads of terms agreed and then hand it over.
Nick Davies:
Yeah, it’s milestones, right? In a deal.
Justin Levine:
It’s a milestone and hand it over. And so basically they’ll hand it over to the seller and go write this over to you and the due diligence will happen and give us a call when the deal’s finished, if you like, as some sort of framework. And so what you’re going to find with really good quality M&A firms, good corporate finance firms is that they stick with you from the heads of terms all the way through to completion. And not only coordinating what’s going on, but adding commercial value because a lot of the due diligence that comes in can be screened and can be, let’s say, managed in a way that is going to help the deal complete better than before. But yeah, I mean basically I always say 12 months might take a little bit shorter.
Legal team can add value from heads of terms
Nick Davies:
Yeah, it’s interesting because from our perspective on the legal side, we are not involved with the very early stage process that you are involved in. We are not involved in the market research, the finding the buyer, the preparing the IM. An awful lot of work has gone into a deal by the time it typically lands on a legal desk, essentially, probably from heads of terms, which we like to be involved in, we like to help draft those. We think we can add value, but we’re not always involved. Sometimes clients may deal with it themselves for whatever reason, but we would say from that point, we would typically see a three month timeline. That would be typical. We have seen some deals lately where at the higher level where there’s been significant debt raise by a buyer, that’s had a really negative impact on timing. This was going back to the period pre-Christmas where there’s quite a lot of froth around interest rates and all that sort of stuff. The debt market at the higher level was very difficult, and that sort of slowed things down.
Overseas buyers have different legal jurisdictions that can impact on timeframes
Other factors can include who the buyer is. If you’ve got a buyer who’s in a jurisdiction outside of the uk, sometimes that has a timing implication. We’ve done transactions before with Chinese buyers. Chinese buyers beyond a certain level have to get a government approval for certain amounts of money to leave the country. So you sometimes see a delay there for that. There’s lots of factors which can play into timeframes. Sellers are very keen to have a feeling for timeframes. I think that an open-ended timeframe is unhelpful because people can’t see the destination. People want that certainty, which we understand and we try to give those guidelines, but sometimes there are factors which are outside of anybody’s control.
Summary where to start (selling a business)
Justin Levine:
I agree. I agree with you Nick, and I think this is part of the getting educated piece at the beginning because the more that a seller understands what the sales process looks like, it it’s rare that a seller is going to have had the experience of having sold a company, right? Sure. So probably the nearest thing is selling a house, that’s probably the nearest high value transaction that somebody could anchor their thoughts in. And of course, selling a company is actually infinitely more complicated. It’s just what it is. There’s a lot more complexity to it. It’s a lot more
Nick Davies:
Moving parts. There’s
Justin Levine:
A lot more moving parts. So basically the more they can get educated about it, the more they can have some sense of awareness of what’s going to happen at each particular stage of the process. But I think to broadly summarise it, there’s plentiful choices to who can sell a business in the UK and overseas if you like, but once you start narrowing down, the two key factors are profit. But once you get above that 1 million profit threshold, then basically my personal view is be very selective. We are not the only firm. We do a good job. I’d be arrogant to saying that we’re the only firm that can do that. Clearly not. But there are a much smaller number of firms that really are exceptional at getting deals over the line. And to give you some statistics, there’s some, I’ve seen this twice, and it looks to stand up that roughly about 80% of companies that come to market in the UK do not sell. It’s a horrifying statistic. It says, well, okay, only 20% that come to market do. Now. Why don’t 80% sell? Well, there’s a plethora of factors, loads of reasons that can go into that. But undeniably the quality of the people that are working on the project to get it sold
Nick Davies:
Big factor
Justin Levine:
makes a massive factor. Just has to.
Valuation ranges and how they are typically calculated
Nick Davies:
So Justin, let’s hypothetically, scenario is I want to sell my company, I want to sell my business. I’ve engaged you or somebody else. The first thing that I really want to know if I haven’t sold a business before is how do I value my business? And what is my business valued at? Because I might think I want to sell, but if a valuation comes back that it’s worth 50p, I might change my mind. I might be pleasantly surprised. Somebody comes back and says, well, actually it’s worth 5 million quid. Great, let’s crack on with the process. But how does that sort of standalone valuation work, is that something your firm would do? Is it an accountancy firm point? And when and how does somebody go about arranging that? Just give us a bit of insight on that.
Justin Levine:
Yeah, so great question. So there’s two different types of valuation in my experience. The first valuation is an accountant’s valuation. And these are typically done for tax purposes. So an accountant will value a business in, we’re talking in English and money at pounds, shillings and pence. So they’ll say, your business Nick is worth 255,413 pounds and 10 pence, wasn’t it? But the reality is, it’s not a market valuation. So an accountant will look at it, take a range of variables, and honestly, it’s a finger in the air, but it’s good for tax purposes. Often it’s not HMRC if it’s done by a chartered accountant would say it’s good for that purpose, but it’s not a realistic market valuation. So the answer is, any competent company we would undertake that work would provide a range, because that’s the reality. What a business is worth is only known at the point that Sale and purchase agreement is signed, done, and dusted.
And so how do we estimate that? Well, we take a number of different metrics. So one, we fix the methodology of how we’re valuing a business. Usually it’s a multiple of profit, a multiple of EBITDA. That’s the conventional way of doing things. So we draw on a lot of market data, previous transactions for example in a particular segment, we can look at the market and say, on average, if we draw a standard distribution curve where an average sits for an industry where the peaks sit, where the minimums sit, and we have to understand that nobody can guarantee where it would sit, the actual final multiple, if you like, until the business is taken to market.
Nick Davies:
And that’s down to the buyer, right? Or the buyers, because there is market data that shows us historically what buyers have deemed appropriate to apply to a certain business. A certain buyer may turn around and say, well, actually to me, the multiples X or another buyer may say, well, it’s Y, and then it’s a case I assume, if the seller is saying, well, that’s acceptable to me, or no, it isn’t. There’s no defined prescribed mechanism that both seller and buyer have to adhere to. You’ve got ranges and parameters. Ultimately it becomes a negotiation I guess
Justin Levine:
It’s a negotiation, but where the skill is, if you like, I shall be arrogant enough to call it skill, is in presenting the selling company in a way that gives the buyer the rationale to up the multiple.
Nick Davies:
The justification.
Justin Levine:
The justification, yeah. So this is all the constituent bits of what an M&A firm do. It’s in the IM showing how that business would fit in the buyer’s organisation and where the value would add. The more that we can present this strategic benefit, the higher on this standard distribution curve, we shift it to the right on your side. Sorry, we shift the multiples up.
Competition increases values
The other way to shift the multiples up is through competition, there’s no doubt about it. I mentioned a little earlier is by the time we get to letter of intent, there’s quite a lot of emotional and time and skin in the game by these companies that are bidding for the business. And it may well be that a business starts off with a bid of five times EBITDA, but actually is prepared to pay seven times, but hasn’t disclosed that. So they’re starting off at a position they think is acceptable, but through the competitive tension, if you like, with a skilled negotiator between, it pushes again the multiples up.
Tax valuations vs market valuation
So there’s a number of different ways. So to come back to this valuation piece, accountants will produce, generally speaking, a static number mainly for tax purposes, but it’s not a real number, it’s not a real market number. Valuation comes down to a range. And to get to that range, you have to understand the EBITDA, adjusted ebitda, what the business looks like under new ownership. And you have to understand the range of multiples that are existing in the marketplace, the average, the minimum, and the upside as well, the maximum. And basically then we’re playing with probabilities and producing a range of guidance range for a seller. And frankly speaking, Nick, some sellers have numbers in mind that often exceed what really the upper end of the market is likely to pay. Those things do happen.
Nick Davies:
A bit optimistic,
Justin Levine:
A bit optimistic, and those times they have to take a view on saying, are they prepared to take a chance? Or actually, no, don’t market the business. But the only thing that really is useful in this situation is a valuation guide range. You can’t pinpoint an exact number.
Nick Davies:
Got it. And is that a service that your firm offers? Do you offer standalone valuation, or would you only complete a valuation in the context of a full mandate to find a buyer and to sell a business?
Justin Levine:
Yeah, thank you. The latter. The latter. So we wouldn’t do a standalone valuation, frankly, it’s not worth the effort because
Nick Davies:
It’s a lot of work and the cost of it would seem, unless somebody’s committed to a process, it seems a bit, yeah,
Justin Levine:
If I could give you a little bit of nuance to it, you can take somebody’s financial accounts and produce a profit and loss cashflow balance sheet. It’s easy to do that. What’s far more time consuming is understanding what’s necessary to come up an adjusted EBITDA number under new ownership. Now, that requires a lot of to and fro and a lot of interface with the seller to get underneath where costs might change. It’s not a five minute exercise. You might spend a few working days, it might be a week or two, just on that piece alone with the client face-to-face, looking at individual items on the balance sheet, looking at the profit and loss statement going, well, how would that shift? You have to model out, sometimes you have to lean on the seller. Sometimes we’re selling a company where we know that let’s say the dominant influence on profit is purchases.
Maybe it’s a high volume business and we’re going to sell it to a strategic buyer. We know there’s going to have better buying power. We might have some insight into what that buying power advantage might be, but the seller might have some expertise in that area and saying, well, if that company bought us, we know that they can buy at 15% less than we can. So this is part of the example of how doing that kind of valuation range is time consuming. So as a standalone piece, it just wouldn’t be economical for us to charge it out the rates we would need to do, and it’s just not worth it without an exit. So it is all just part of one package.
Nick Davies:
Package. Yeah.
Justin Levine:
Right. Okay, Nick, so that brings the valuation piece to a close. So I think if there’s one final piece that I’d like to just leave, and that’s to summarise that valuation ultimately really comes down to that final price that’s known at the end of a deal. In other words, a seller, despite their real interest to know the exact value of their business, is never going to know until that deal is done. In other words, the business is taken to market
Nick Davies:
Only the market knows, right? That’s the only test,
Justin Levine:
Only the market knows. So whatever value they’ve been given by whoever, then it should be held as being well possibly
Nick Davies:
Indicative,
Justin Levine:
Indicative. Go to a good corporate finance M&A firm, you’re going to get a range. And that’s actually likely to be a lot more accurate, a lot more representative of what it’s likely to be. But ultimately it comes down to that final deal. When the business is taken to market, then the price is known. But anyway, hopefully that’s added a little bit of insight for people. So thanks for your time, Nick.
Nick Davies:
Really useful. Thanks Justin. Cheers.
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