When is your business saleable and who is buying?
In previous articles, we have explored the multiple aspects of a professional service firm’s value. In this blog, I answer the fundamental questions ‘when is your business saleable?’ and ‘who is buying?’. It is an extract from Guide 02 (Fundamental Components of Value) of the ‘Five-Year Entrepreneur Series’.
When is your business saleable?
The topic of company value is, of course, only relevant if you are saleable in the first place – that is, you are at a stage where you can generate competitive bidding interest in your firm. I say competitive buyer interest as you are very unlikely to unlock your true value in the circumstance of a single buyer (perhaps one that has approached you unsolicited). Unless they have a critical strategic need, such a situation is unlikely to give you a full negotiating hand. Indeed, the old acquisition maxim ‘one buyer is no buyer’ is a really important one to acknowledge, early on, in your quest for optimal value.
To get the maximum value and the best terms, rather, you are far better off entering into a deliberate, well-orchestrated competitive situation (supported by the right professional advisers). The question, therefore, is … at what stage is such an exercise likely to be tenable?
As a guide, I would say the following. A competitive sale exercise is achievable (and affordable) when you have met the following outcomes:
- grown revenues to at least $8m (£5m) per annum;
- consistently (previous three years) delivered an EBITDA of 20% plus;
- consistently grown EBITDA, year-on-year, by at least 20%;
- a rounded portfolio of clients (cf. being a one-client success story);
- a demonstrably accurate sales forecasting capability (premium values go to those firms with a strong order book e.g. over 50% of business already booked for forward six months);
- a stable and committed leadership team.
Of course, there are exceptions, but this simple set of targets serves to illustrate an entry threshold that you should aim to head towards – and beyond.
Who is buying?
You may be surprised by the number of different classes of buyer. All I would say at this stage is – keep an open mind. As my case study will reveal I certainly did not pre-envisage, or indeed seek, the buyer type that Moorhouse attracted (albeit an excellent mutual arrangement was built). But more of that later.
For now, it is just worth a quick canter through the types of buyers out there and I will then return to this in more detail in Part 4 of my series (Guides 19 to 21).
(1) Your own management (‘management buy-out’ or MBO)
Your own colleagues – most likely a senior cohort – buy out the founder(s) and/or other senior shareholders. This most often requires bank debt funding.
(2) Trade Buyer
This will typically be a strategic acquisition by another professional services firm or, indeed, a firm seeking to supplement its existing product-based offering with a new professional services capability. Regardless, such a firm will clearly be seeking to bolster its own growth ambitions by using your company to do at least one of the following – extend its geographic, service or client reach or, simply, just to grow its capacity.
(3) Stock Market Flotation
For larger companies, a listing on one of the (small cap) stock exchanges (e.g. American Stock Exchange in the US or AIM in the UK) is a viable route. This is going to have more onerous listing conditions than the ones cited in the previous section – not least the level of historical revenues (albeit these vary by exchange).
(4) Investment House
This is primarily the domain of Private Equity (PE) houses albeit some Venture Capital (VC) houses have also been known, on rarer occasion, to invest in PS firms. Such deals are fairly clinical, financially motivated decisions with the Investment House looking to make a good future return for its own fund investors based on your historical trading results.
In the next blog, the final in this set, I will look at additional value considerations.