Case Study: Ready for Sale? 2012

Case Study: Ready for Sale?

 

The table below highlights the differing deal structures achieved for two businesses we sold recently, both were highly profitable in different but attractive sectors with very good forward order visibility.

Company A Company B
EBITDA £3m £2.2m
The buyer Trade buyer MBI
Deal structure 100% on completion 50% on completion25% deferred over three years25% on earnout over three years
Vendor finance None Reinvested 50% of initial payment to finance deal
Vendor involvement after completion None Ongoing until earnout completed
Time to do deal Six months Four years and three aborted deals
EBITDA ratio achieved 8 x 4 x
Sector average at time 7 x 8 x

 

The most significant difference between the two was that Company A had a well established management team who ran the company on a day to day basis whilst Company B was run by its owners who were in their sixties with no second tier management team to speak of.  As can be seen from the table this made selling Company B very difficult as potential purchasers perceived there was a significant risk that the business would lose a lot of its know how, corporate history and sales contacts if the owners left the business.

 

Early on in the process we recommended that Company B introduce two senior managers and over a period of 12 months let them take over the management of the business.  It is reasonable to estimate that the cost of two suitably qualified senior managers would have been circa £250,000 per annum.  Let’s further assume that these managers were successful in taking over the reins of the business but did not in the short term bring in any new business.

 

If such action had been taken, the likely outcome would have been a limited deferred consideration, no vendor finance and no requirement for the vendors to remain with the business after the transaction and a valuation multiple in line with sector norms at the time. i.e. the shareholders could have received double the value actually achieved, even with the additional management costs! Sadly the vendors chose not to recruit a senior management team and consequently could not achieve a clean exit.

 

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