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The Market Today & Business Valuations Kevin Uphill Avondale www.avondale.co.uk The Market Avondale SME/mid tier commercial focus. 35 transactions pa. Organic growth slow driving acquisitions (average 5 bids per project). Fast change driving interest in niche companies with products. www.avondale.co.uk Advanced economies no longer driving global GDP growth Global market percentage change on a year ago 10 Emerging and developing economies 8 6 • 2011 Global economy worth 69,659,626 million US dollars. • The United Kingdom is world’s 7th largest economy. • Over 300,000 companies in UK employ more than 6 people. 4 2 World 0 Advanced economies -2 -4 1980 1985 1990 1995 2000 2005 2010 2015 Source: IMF, 3 www.avondale.co.uk UK output- Recovery lagging last two recessions 9 8 7 The UK M&A market Spare capacity increases competitive factors and creates driver for consolidation and Mergers and Acquisitions (M&A) activity. Interest rates low to 2015? 1981 1992 6 5 4 2011 3 Weak credit arena/volatility creating drag. 2 1 0 1 2 3 4 5 6 7 8 9 10 11 Overall 2012 M&A activity (by value) increased on 2011 with Europe most active due to consolidation. Activity down 20% on 2007 but down only 10% in sub £250m arena. 1st qtr 2013 increased on 2012. Motivations Sellers Personal/strategic cross roads Growth in sector House in order Elevator deal Leap of faith Buyers House in order Organic growth slow Create shareholder value Strategic (New products/team/services) Strategic deals + Economies + Synergy + Value influence Sum 1 1 1 6 www.avondale.co.uk Valuation Methods Discounted cash flow forecast or price earnings multiple of profits Debt free/cash free Adjustments to profits Valuations are financial forecasts to exceed in the process www.avondale.co.uk www.avondale.co.uk Adjusted Balance Sheet Example hire business 31/12/2013 Equipment undervalued £ 50,000 Debt free/cash free £-75,000 Surplus cash negotiate extra to deal for tax savings but be warned buyers will try and include as goodwill, if its there. £-25,000 Consider tax instrument to remove surplus – EFURBS? Adjustment to final price Debt- Long term liabilities Less - Cash www.avondale.co.uk Adjusted Profit & Loss Example hire business 31/12/2012 Turnover £1,850,000 Gross £746,976 Operating Profit £177,725 Forecast Financial value x 4 est. 4 x £316k = £1.26 ml Adjustments to net profit Director’s pension £3,600 Spouse salary (non operational) £21,859 Directors remuneration (parttime/strategic role) £78,005 NI On Directors £7,800 Additional rental -£15,000 Bank interest £639 Factoring £16,806 Hire purchase interest £3,542 Amortisation (of goodwill) £21,600 Actual Marketed on Offers 4 bids Offer achieved £1.9 ml --------------------------------Dutch co seeking UK base Depreciation real cost hire co Adjusted PBIT under management £316,576 www.avondale.co.uk Deal Structure 1. On Completion £1,450,000 2. Deferred Payment £ 225,000 3. Earn out £ 225,000 4. Total £1,900,000 Protections Charges on shares for deferred Earn out on gross not profit- easier to define Earn out on current not growth Protections business to be run materially same Quality buyer/covenant Access to records Reverse non compete Deal structure is a multiple influencer www.avondale.co.uk Strategic Deals Case Studies Type Profit/t/0 Value ROI PE Notes Construction £316,000 Hire Tuition (London) £70,000 pbit £1,900,000 11% 7 £240,000 25% 4 Gateway Ltd £500,000 ebitda £3,500,000 14% 7 Renewable Energy Distribution Kiddicare £3,600,000 £20,000,000 17 % 6 £3,200,000 £78,000,000 4% 24.3 Dutch buyer needed UK presence Actually 8 multiple plus as no owner manager costwent to a charity £100 million buyer, looking at new products Rare right buyer again £100 million turnover Online positionMorrisons Supermarket Positioning - Modelling - Deal Structure 35% of projects international buyers 2013 www.avondale.co.uk Business Value by Design Business Angel yourself (think like an investor) How much time do you spend on strategy versus management? How do you design a better value business? What is your worst envelope? Management Strategy The Profit Engine RECURRING REVENUE | NICHE PRODUCTS | REDUCE RISK BARRIERS TO ENTRY | TEAM- NOT OWNER DRIVEN Company Foundation REAL TIME DASHBOARD | PROSPECTS www.avondale.co.uk