There are various ways of assessing your business, but perhaps the most important criteria are in terms of value and the ‘perception’ of worth, according to Knight Corporate Finance founder Adam Zoldan.
There is little doubt that the M&A fraternity have collectively brought a sharply honed interest and vitality to the idea of multiples. But a seller’s focus should be far more broad, says Zoldan, who pointed to six recent deals completed by Knight ranging from six to nine x EBITDA. “As advisors we reinterpret EBITDA and look at revenue, non-recurring and extraordinary costs,” he added. “We look at run rate, how the performance is today versus how it was over the last year. We consider work in progress, what’s coming down the pipe and how that will add to a business. Multiples are important, but don’t always believe what you read – they can be misleading.
“From an investor and buyer perspective, among the key attributes that will have an impact on the value of a business are of course customers. The profile of a customer base will in large part determine the interest from certain buyers. There is no right or wrong. Also key is the product portfolio and the expertise within a business.”
He noted that owners must know their elevator pitch and be able to articulate clearly the types of products and services they offer, which is reflected in the financial performance of the company. Another key question to ask is – how do the products and customers affect performance and vice versa? The key to making this all work is the people and the management team, especially if you are looking for inward investment.
If a business owner gets all this right the perception of the business will be positive. That perception can be subjective, but importantly it can have an impact on the multiple. “If you can generate a great perception of your business you will also generate much competition in the process, whether an exit, investment or fund raising – that is worth money,” stated Zoldan.
Multiples are important, but don’t always believe what you read – they can be misleading
“Other factors that will move a reseller’s multiple include size. Typically, for a reseller falling between £0.5 million and £1 million EBITDA we’re seeing a multiple of circa six times. Once you get beyond £2 million PE as a platform investment gets interesting. There is much competition among PE investors for companies of a reasonable size. That’s when we start to see double digit valuations.”
Multiples are too often the talk of the town, but this preoccupation reflects another important reality that is often overlooked – that of perception. Selling a business is a serious matter, and the role of perception in achieving success cannot be over stated, noted Zoldan. He argues that the perception of growth that a business owner could generate in the future may positively differ from growth already achieved, which is a pivotal and valuable distinction to emphasise.
To emphatically prove the point he cited certain value dynamics at work in the car market. Tesla is small compared to Toyota, for example, but worth almost double. “There has been a change of perception about Tesla’s ability to deliver on its growth plans, which are aggressive and reflected in its share price,” said Zoldan. “It’s also reflected in different types of multiple.
“Instead of EBITDA, look at the value per car multiple. Each car General Motors put on the road over the last year was worth circa $6,000 in terms of adding to its share price or market cap. This increases to $20,000 for Toyota. But buying a Tesla for $50,000 increases its share price potentially by £1 million, based on perceptions of its ability to deliver growth in the future.”
Returning to deal activity in the communications sector, it’s business as usual for Knight. Significantly, the ICT sector is not focused on proprietory technologies, it is all about open and easily accessible technology. And software is IPR – all big attractions for investors. Against this backdrop there are two reasons for acquisitions, scale and expanding product sets and expertise.
“But the real story of the sector is PE which accounts for approximately 90 per cent of deals,” commented Zoldan. “We are aware of six currently underway and another six that are likely to drop over the next six months. Most range between 10 and 15 x EBITDA. When you are planning your own route ahead, don’t look over your shoulder or concern yourself with the activities of others. Take time to consider your aspirations. Whatever they are there will be options that enable you to mould your strategy.”