Building Business Value
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The document outlines the Business Growth Service led by Ian Fletcher, which supports businesses in overcoming growth barriers through tailored coaching, consultancy, and financial advice. It details strategies for enhancing business value, including maintainable profit increases, creating competitive advantages, and preparing for potential sales. Additional insights on valuation processes, factors affecting multiples, and recent business acquisition examples are also discussed.
Building Business Value
- 1. Building Business Value Ian Fletcher Business Growth Manager
- 2. GrowthAccelerator, Manufacturing Advisory Service (MAS), Intellectual Property Audits and Design Mentoring have integrated to become the Business Growth Service. We can help businesses to achieve their full potential by identifying barriers to growth and providing tailored support that fits your needs. This support includes coaching, consultancy, mentoring, training, access to finance and export advice What is the Business Growth Service? Business Growth Service
- 3. Building sustainable growth Aligned to Government’s growth agenda Our focus: – Turnover growth – Profit growth – Job creation and retention – Build capability – Improve efficiency
- 4. MC Vanguard & Mitchell Charlesworth
- 5. www.mcvanguard.co.uk Building Business Value The Crowne Plaza Liverpool, 25th February 2015
- 6. Brian McCann Partner,MCVanguard 0151 2552300 brian.mccann@mcvanguard.co.uk MC Vanguard & Mitchell Charlesworth Tim Adcock Partner,MitchellCharlesworth 0151 2552300 tim.adcock@mitchellcharlesworth.co.uk
- 7. Contents A Definition of Shareholder Value The Valuation Process How owners build value The Buyers viewpoint • What are they buying • Valuation • Strategic buyers Constructing a Value Building Plan
- 8. Shareholder Value The amount a willing seller and a willing buyer will come to agree on as the price for the business
- 9. The Valuation Process In most cases where a privately owned company is being sold, negotiations about value will start with a multiple of maintainable profits Where negotiations end will depend upon the bargaining positions of the two sides and how effectively they negotiate The majority of businesses are sold for between 2 and 6 times maintainable profits but a small proportion achieve much higher multiples – we will look at why this is
- 10. The Owners Perspective Not every business owner is looking to sell at the highest possible price: • Some family companies have no desire to sell • Other owners prioritise looking after their workforce above maximising sale value • For some owners the priority is timing of sale so they can do other things Even where maximising the sale price is not an absolute objective, a structured approach to growing business value will improve the position for all stakeholders
- 11. A Valuation Example Maintainable Earnings Calculation Calculation 2012 £000 2013 £000 2014 £000 Turnover 2,450 2,600 2,800 Cost of sales 1,300 1,400 1,550 Gross profit 1,150 1,200 1,250 Overheads (600) (720) (600) Other operating income 1 0 0 Bank interest receivable 10 22 24 Net profit per accounts 561 502 674 Addbacks Directors’ salaries 150 165 180 Directors’ pension costs 50 50 50 Depreciation 34 36 31 Other operating income (1) 0 0 Bank interest receivable (10) (22) (24) 223 229 237 Adjustments Salary for Operations Manager (50) (50) (50) Employer’s NI costs @ 13.7% (7) (7) (7) (57) (57) (57) Adjusted EBITDA 727 674 854
- 12. Maintainable Profits 2012 £000 2013 £000 2014 £000 Adjusted EBITDA 727 674 854 Weighting 1 2 3 Weighted Profits 727 1348 2562 Weighted Average Profits 773
- 13. Price Earnings Multiples are determined by… General Economic Conditions Trends in quoted company multiples Buyers expectations for profit growth Competition - the more buyers bidding - the more likely the multiple will rise Key characteristics of the business which effect the underlying qualities of earnings. Market perception of the business
- 14. What would a strategic buyer pay … and why? The Impact of Multiples Multiple 3 4 5 6 Indicative Value £2.3m £3.1m £3.8m £4.6m Valuation based on maintainable earnings of £773,000:
- 15. Realising Value at 10% Tax Share v Asset Sale Entrepreneurs Relief • Trading Company • Office Holder • 5% Danger areas • Investment property • Portfolio shareholdings • Loans to directors/shareholders • Holiday Homes • Excessive Cash Balances? 12 months prior to disposal 20%
- 16. Nature of the consideration & Entrepreneur’s Relief Cash Deferred Share for share Loan notes Earn out Employee ownership trust Election for ER?
- 17. Financing the company’s activities Enterprise Investment Scheme Seed Enterprise Investment Scheme • Income Tax Relief • Capital Gains Tax deferral (and exemption) • Tax free exit NB: qualifying conditions (tortuous legislation!)
- 18. How Do Owners Build Business Value? Build Maintainable Profits Improve Business Attraction and lift the Multiple Generate Competition between Buyers Attract a Strategic Buyer
- 19. Tips for Building Maintainable Profits Develop a financial business plan and use an outsider to challenge it Establish clearly which products/services are making or losing money Build on the winners and address the losers Identify which overhead costs are essential to profit delivery Question whether the essential costs can be purchased more efficiently Drop or reduce the other overhead costs Engage the management team with the profit improvement process Link their rewards to the improvement achieved Set gross and net margin budgets which are as close to the best in your industry as practical Search actively for technology improvements
- 20. Know WhereProfit is Made 0 100 200 300 400 500 600 1 2 3 4 5 6 7 8 9 10 Customers Profits
- 21. Employee/Director Incentivisation Employment related securities provisions Approved share option schemes: • EMI • CSOP Growth shares Partly paid shares Use of employee benefit trusts Unapproved share option schemes Employee shareholder regime
- 22. Doing the same thing - but getting a different result Source: Marketline Major Retailer Net Margins: J Sainsbury 3.0% Wm Morrison (1.3%) Tesco 1.5%
- 23. Chemicals Profit Margins Source: Bureau Van Dijk Company name Sales £’000s Profit Margin Chevron North Sea Limited 1,169,800 53.15 Ineos Enterprises Group Limited 269,800 6.86 Baerlocher UK Limited 13,481 2.14 Cogent SSC Limited 9,689 1.55 Chevon Marine Limited 483.833 0.20
- 24. Profit Improvement Frequent Areas of Lost Profit: • Ineffective sales process • Lack of attention to buying as a route to better margins • Accepting loss making products/customers/plants • Lazy budgeting • No attention to industry benchmarks • Failure to manage cash
- 25. Tips for Building the Multiple Make yourself dispensable Tie in key members of the management team Focus the business Build profits year on year Demonstrate delivery of the plan which extends beyond sale Diversify the customer base Sharpen (or develop) the sales process Build recurring income Maximise positive market profile Manage the website and social media Get the contracts signed Take the big steps early Don’t leave it too late
- 26. Moving the Multiple - Some Examples Bolt on acquisitions to add critical mass Building recurring income Key customer tie-in (& contract signed) Proactive PR Partner
- 27. Some Potential Value Builders Feature/Rating 1 2 3 4 5 6 7 8 9 10 Dependency on owner Owner Driven Business Non Exec Owner Management Gaps in team Full team with experience Systems Weak or informal Established & robust Customers Few & weak relationships Many strong relationships Suppliers High dependency Secure supplies Financial Information Volatile results Improving trend Marketplace Mature & “me too” Growth market Competition Many strong competitors Defendable niche Workforce High turnover Key staff tied in Growth Future growth limited Exciting growth options IP No defendable IP Established IP Regulation Regulatory threats Market driven by regulation
- 28. Which features matter most in your business?
- 29. Moving the Multiple - Example Criteria Dependency on Founder Management Systems Customers Suppliers Financial Information Marketplace Competition Workforce Growth IP Regulation Weighting 12 10 10 10 10 9 9 - 8 6 - - Rating 9 7 9 9 9 5 8 - 5 3 - - Commentary Founder already mostly retired. Two tiers of management already in place. Internal systems appear to be very good. Strong and loyal customer base with no particular dependency. Strong supplier base, again with no signs of dependency. Only had sight of last 3 years figures, slight dip in 2009. Growing marketplace with substantial global potential. Not enough information in the document to comment. Not enough data yet. Clearly a potential for growth but where the growth will be, and its funding requirements are yet to be determined. 84 64 Maximum Multiple 6 Score 76% Guide Multiple 4.6
- 30. Some recent deals On 16/01/15 it was announced that The Foschini Group has acquired Phase Eight from TowerBrook and other shareholders. The transaction values Phase Eight at £238 million. EBITDA in the year to Jan 14 £22.03m Multiple 10.8 On 03/02/15 it was announced that Sofa Brands International has been acquired in an MBO for an estimated £60m. Promethean Investments LLP and Santander UK plc provided equity and debt financing to the management of Sofa Brands to support the transaction. EBITDA in the year to June 13 £7.3m Multiple 8.3
- 32. Building Business Value: Overview Understand the value drivers and measure them Objective assessment of current position Develop a clear business vision of where you want to get the business to Develop clear plans for bridging the gap Evaluate the existing teams ability to deliver the vision Implement the plans – a change management program
- 33. The Value Building Process The purpose of the action plan and milestones is to concentrate attention on the steps which can make the maximum impact give the priorities and timescales of the shareholders Current valuation Building Business Value Workshop • Profit improvement potential • Current multiples • Scope to build the multiple • Potential strategic buyers Building Business Value Action Plan and Milestones
- 34. Contact: FOLLOW US… www.mcvanguard.co.uk Whilst the information is believed to be true, the communication may not be comprehensive and recipients should not act upon it without seeking professional advice. Building Business Value The Crowne Plaza Liverpool, 25th February 2015 Questions?
- 35. Brian McCann Partner,MCVanguard 0151 2552300 brian.mccann@mcvanguard.co.uk MC Vanguard & Mitchell Charlesworth Tim Adcock Partner,MitchellCharlesworth 0151 2552300 tim.adcock@mitchellcharlesworth.co.uk
- 36. Natwest
- 37. Jeff Cummins Lending Director Merseyside, Cheshire & North Wales 07753833085 jeff.cummins@natwest.com
- 38. Building Business Value February 2015 •Is Your Business on the Right Track? •Structured Finance / Complex Transaction Execution Team •What’s a Business Worth? •Recent Deals •Commercial Mortgages •Lombard Green Energy
- 39. Is Your Business on the right track? • Keeping Business Moving • Supporting Your Business • Ownership Strategy • Always consult the experts • The MBO • Heading for the Exit Free Guide : nw-businesssense.com
- 40. Structured Finance/Complex Transaction Team • Coverage based in Manchester to support local Managers. • Deal with HLT’s and large and complex cases. • Deal Numbers Trend: 2012: 14. 2013: 18. 2014: 24 • Debt Levels: 2012: £15.4m 2013: £39.3m 2014: £69.4m • 2014 saw increased number of MBO deals highlighting increasing emphasis around succession planning • Increasing number of secondary deals, with refinance of Loan notes as an example • 2014:3 significant opportunities won from 2 competitors who appeared to have less appetite for HLT’s & unsecured debt.
- 41. Whats a business worth?
- 42. Recent Deals • Privately owned Restaurant chain-50% MBO of retiring shareholder via £1m Loan. • Manufacturer of high quality precision parts and components for P&M. £2m facility to refinance Loan notes from a 2005 MBO. • Industrial & Retail Waste recycling business total re- finance package >£4m with Term Loan, I.D Line and Lombard. • Long established Waste recycling and Quarry business total re-finance >£6.5m through a Loan and additional working capital headroom.
- 43. Start-up business banking Appetite to purchase 4 10 12 5 29 44 51 42 38 36 30 43 25 9 6 9 5 1 1 1 0 20 40 60 80 100 In today's climate its better to rent than buy Its hard to get commerical loans to purchase property Commercial loans are too expensive Now is a good time to buy % strongly agree agree neither disagree strongly disagree Source: RBS Commercial Mortgage Survey: September 2013: Base – total sample 615 with an annual turnover between £250,000 and £10m 47% believe its a good time to buy 54% believe its hard to get a commercial mortgage
- 44. Why a good time to buy? Why SMEs don’t buy? Investing for the future Low interest rates Raising economic confidence Company doing well Increasing rental costs Need for flexible cashflow Fear of being locked in Lack of funding Lack of available property Lack of deposit Source: RBS Commercial Mortgage Survey: September 2013: Base – total sample 615 with an annual turnover between £250,000 and £10m
- 45. ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER DEBT SECURED ON IT. Please note that the FLS cannot be applied to overdrafts, or business credit cards. Usual lending conditions apply. Structured Finance and Real Estate Finance are excluded. The funding is available due to our participation in the Government’s Funding for Lending Scheme (FLS) . Security may be required for which a fee may apply. Over 18s only. A choice of loan - Borrow from £25,001 upwards. A choice of interest rate options - Fixed, capped and variable rates. Flexi Fee option – Via our participation in the Government’s Funding for Lending Scheme. Flexible repayments – Option to take a capital repayment holiday should you need to re-direct your finances. In this event, interest will still be charged and your future monthly payments may increase. Flexible repayment term – Repay the loan over a period of up to 25 years. Early repayment charges may apply depending on the product selected. Challenging these assumptions with choice and flexibility….
- 46. NatWest funding sees Forest Contract set for growth. Security may be required. Product fees may apply. Over 18s only. ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER DEBT SECURED ON IT.
- 49. The story so far … 22,000 businesses £1.5 billion GVA growth 36,572 job created Sources: Grant Thornton, ONS, BVD FAME for SME Growth
- 50. 4x faster
- 51. Building sustainable growth • Build a successful growth strategy • Unlock your capacity for further innovation • Discover new routes to funding and investment • Harness the power of your people • Unite and excite your leadership team
- 53. What can clients expect?
- 54. Is the service right for you? Ambition • You have got to want to grow – growth wish • You have got to commit to growth Opportunity • You have got to have or be able to develop opportunities Capacity • You have got to understand how you will deliver and scale
- 55. Who is it for? Easy entry • Registered in the UK • Based in England • Less than 250 employees • Turnover less than £40 million • Not part of a larger group • Any sector
- 56. What’s the investment? 1-4 employees £600 + £700 VAT* 5-49 employees £1,500 + £700 VAT* 50-249 employees £3,000 + £700 VAT* * VAT is based on 20% of nominal value of service, at £3,500 so all businesses pay the same amount of VAT * The VAT can be reclaimed at the end of the next VAT quarter if you pay standard rate VAT.
- 57. What do clients get • Dedicated Business Growth Manager • Tailored growth plan • GROWTHmapper assessment • Output focused coaching with a specialist growth coach • Up to £2,000 match funded Leadership & Management training per manager • Six business development workshops
- 58. Growth Impact Pilot 1. Led by Leadership & Management Training Funding • Up to £2,000 matched funding per senior manager 2. Eligibility same as core GA package except: • Turnover between £250,000 and £2 million 3. 50% of companies (600 nationally) will be randomly selected to receive coaching 4. Cost if selected for coaching is VAT element of GA contribution i.e. £700
- 59. Are you ready for Growth?
- 60. Ian Fletcher Business Growth Manager i.fletcher@winning-pitch.co.uk 07769 227 208
Editor's Notes
- #2: Housekeeping issues Fire Alarm Test Rest Rooms Round table introductions
- #3: The Government has brought schemes for businesses with growth potential together under on wider offer so that support can be access more easily from one place, giving an even better customer experience. The Business Growth Service integrates the existing GrowthAccelerator and Manufacturing Advisory Service (MAS) programmes, along with Intellectual Property (IP) Audits and the Design Mentoring Service. A simplified point of contact for businesses. Working closely together to provide integrated support and advice.
- #4: Government has tasked us to invest £200 million worth of support on companies that want to achieve their growth ambitions. Growth is not for everyone which means GrowthAccelerator will not fit with every business. We are paid by the Government on hitting targets associated with business growth – turnover, profit, job creation 20% year-on-year Growth - Its about potential rather than actual We recognise that we are coming out of recession and a lot of businesses we work with have been in survival mode, have consolidated, and are perhaps sitting on cash waiting for the right opportunities and confidence to return. GrowthAccelerator is acting a catalyst for these companies to build new growth strategies using external expertise from experienced coaches.
- #50: National Targets 26,000 businesses £2.8 billion GVA averaging £108k GVA per client 70,000 new jobs averaging 2.7 new jobs per client Source: Grant Thornton
- #52: Aim is to support rapid and sustainable growth. Support focuses on identifying and removing the barriers holding the business back. Putting a structure in place of critical steps a business needs to take to achieve its next phase of growth. Characteristic of a high growth business is that they not only embrace support but also take advantage of it in their formative years.
- #54: Growth manager’s role is to get under the skin of the business, identify the key barriers to growth, align the management team and agree a growth plan. Use Growthmapper tool to assess existing strengths and challenges in the business. Coaching – Working with a specialist and experienced business coach over a number of months to help companies overcome growth barriers and obstacles Leadership and management funding of up to £2000 per manager/director. 6 high growth workshops and masterclasses (refer to BD flyer): Strategy Sales & Marketing Leading a high performance team Managing changes Achieving more for less High growth teams ERDF funding for eligible (B2B) companies Same support again free of charge. Connectivity Linking to other Government or local support that GrowthAccelerator outside of our support reach Connecting to local providers professional advice, support and guidance. Choose most appropriate support route from 3 distinct strands of support: Business Development – 70% of clients go through this strand. Covers more areas: Commercial strategy, sales & marketing, operational efficiency, leadership, team building, change management Access to Finance – 15% of clients go through this strand Growth through Innovation – 15% of clients go through this strand
- #55: Growth Ambition Innate hunger to want to grow their own business Not our role to convince them to want to grow - they should already have this Opportunity Scalable business model, sector or opportunity that is going to allow them to fulfil their growth ambition Capacity Costs naturally increase as a business grows Need to consider finance as well as the ability to take on and deliver
- #56: Registered in England – Must by registered at Companies House and status as ‘Active’ Can support companies operating in ANY sector. No sector restrictions Can support any type of business (limited company, Limited Liability Partnership, partnership, charity, social enterprise/CIC, CO-OP/Mutual, PLC) apart from sole trader. For companies in England only. For companies based in Wales the Welsh Government has its own services to support business growth. Not part of a larger group – British Gas etc
- #57: Investment initial cash commitment dependent of size of business more importantly the time commitment of the senior management team Good value Commercial package of support in excess of £10k Small cash commitment to help unlock significant growth. Give you access to high quality support and expertise at a fraction of the cost on the open market.
- #58: TAKE PARTICIPANTS THROUGH FACE TO FACE AND SUBSEQUENT “VALUE ADDING” CLIENT ACQUISITION PROCESS INCLUDING: FACE TO FACE GROWTHMAPPER SCOPE OF SUPPORT DEFINITION (DELIVERABLES FOCUSED) INCLUDING COACHING, WORKSHOPS ETC. AND / OR L&M APPLICATION PROCESSING COACH MATCHING GM CONNECTIVITY /ACCOUNT MANAGEMENT SET EXPECATIONS: EXPLAIN THAT THAT WE WILL INVEST IN IN-DEPTH FACE TO FACE BUSINESS ANALSYSIS SESSION (F2F) BASED ON REQUEST TO DO SO INDICATED ON EVENT REVIEW SHEET; BUT WE WILL USUALLY ONLY PROGRESS BEYOND THAT POINT IF WE HAVE COMMITMENT FROM PARTICIPANT TO PROGRAMME; WHILST NOTING: No invoice will be issued until, we have received your signed acceptance of a Scope of Support.
- #60: So in summary: GrowthAccelerator is a vehicle to get you access to specialist support like that provided by …. Support is tailored to your specific requirements. Significant funding available for you to access to help develop your business and leadership team. Quick and easy access to the support. 12 months left on the service – Use it or Lose it! I’m happy to take questions now or if you’d rather speak to myself (or David) privately we’ll be around after the event.