A set of frequently asked questions about PEM Corporate Finance services and expertise which we hope prove useful to you.
1. What does “Corporate Finance” mean? Corporate finance is the funding and capital structure of companies, and how to make them valuable to shareholders. But it’s not all City of London stock market stuff. In practice it’s usually about mergers & acquisitions, management buyouts, growth finance and company sales. Corporate Finance advisers help with all of these.
2. Why do I need an external adviser? A good adviser gets you a better outcome. You’ll only do the really important things like selling your company or doing a management buyout once. So it’s important to get it right. Also running a business is a full time job so you need an adviser to leave you free to concentrate on the success of your business.
3. How do I choose an adviser? When you buy professional services you’re buying the invisible. So how do you decide who to hire? Trust your instincts. Work with people you like who have good experience. Check that the people you’ve met will actually do the work and they’re not just there to sell to you. Make sure your company and your deal is important to them and they’re genuinely interested in you.
4. What are the costs of engaging PEMCF to handle a transaction? The fee basis varies with the type of transaction because this is the established pattern in our market. There’s often a significant component only payable on success and sometimes we can agree a fixed fee. You’ll always know what it’s going to cost agreed in writing before we start.
5. What is my business worth to a buyer? The price you get when selling your business will normally be a multiple of its profits, usually expressed as EBITDA (earnings before interest tax depreciation and amortisation). Revenue, or assets can be relevant for some businesses. You’ll get the best price if you’re well prepared and from a strategic buyer who really values its key features and so is tempted to pay a higher profit multiple.
6. How can I be sure I get the best price when selling my company? The best way is to use an adviser and go through a competitive process. An adviser can coach you on the preparation for sale for a period of months or years before the date. They’ll manage a confidential competitive process to ensure the right buyers are put into completion to encourage then to pay a good price. The adviser should help you present your business in the best light.
7. What is the best way to maximise the value of my business? Buyers pay profit multiples for their acquisitions. So if you’re selling your company you should try to maximise profits. Top multiples are paid for strategic targets so consider shaping your business to suit likely purchasers. Buyers pay more if the key value drivers of the target are strong – things like quality of management, scalability, intellectual property, earnings track record, cash dynamics, lack of dependencies.
8. When is the best time to sell? The best time to sell your business will depend on a number of factors working together. Most important will be the dynamics of your business – is it growing, is it ready for sale, how might a buyer view it. But also the situation in your market and the M&A market generally. Ideally you should sell when you’re some way up the “S curve” leaving some growth for the purchaser – in the hope that they’ll pay a premium price for that potential.
9. How long will it take to sell my business? Typically between 6 and 9 months if you are marketing it to strategic buyer. Sometimes it can happen much quicker, occasionally slower. If you are simply negotiating a sale with one buyer it can be quicker but of course without competition you may not get the best price.
10. How can I find a buyer for my business? A good corporate finance adviser will come up with a list of potential strategic purchasers for your business based on insightful research. This needs to take account of who might be interested based on your market sector and strategy. You might start looking amongst your customers, suppliers, and other key players in your market. Financial institutions can also be a good source of potential buyers.
11. What does a “deferred consideration” mean? Deferred consideration is payment for your company at a date after the completion of the transaction. Sometimes this is simply delayed to a later date, or paid to a schedule with no conditionality. In other deals there may be a payment which is variable linked to company performance. This is usually called an earnout.
12. What is an “earnout”? An earnout is a payment, usually only part payment, in a company sale which is variable linked to the performance of the company in some way. This might commonly be linked to profit, but sometimes turnover or customer retention. The key is to define it in a way that gives the seller confidence of his or her chances of “earning” it. Some earnouts are little more than a fig leaf to cover a negotiating gap between the parties, but often they are intended to drive company behaviour and the seller can look forward to a second significant payment after the deal is done. They need to be judged on their merits. You can explore more about this topic in the article “What is an earnout?”
13. What is a “cash out”? A “cash out” is a transaction where the business owner who is selling exits and takes most or all of his value “off the table” in the form of a cash payment from the purchaser on completion of the deal.
14. How long will it take to buy a business? How long is a piece of string? If you’ve not identified a target you’ll need to allow some months to find and court the right one. If you’ve already met with a target then provided you and the sellers are on the same page on price it should be possible to conclude within three months. What might cause it to take longer is if you have finance to raise to fund the deal. Raising bank debt and especially private equity can add a lot to the timescale and costs involved in a transaction.
15. What is a warranty? A warranty is a legal provision to be found in the Sale and Purchase Agreement (often referred to as an SPA) where the sellers of a business warrant certain things to the buyer. This gives the buyer some protection if things go wrong later that were not disclosed at the time of buying the business. If it was disclosed at the time and the buyer accepted it then there’s not usually any comeback. It is really important to get the warranty provisions right, and to take good legal advice, whether you are buyer or seller.
16. How do I value a target company? The valuation of acquisition targets is no different from valuing any company but there are additional factors to take into account. A valuation will usually be driven by the earnings and assets of the business, benchmarked against similar business to drive valuation based on multiples of profits. However if you’re buying you also need to think what the specific target is worth to you as part of your business – this may be a higher sum than a standard valuation if it’s especially important and strategic to your plans. You also need to think about the position of the buyer, are there any key factors that will drive the price they’ll accept such as age or the financial position of the business.
17. What is a “MBO”? In this context, MBO stands for Management Buyout, and describes a management buyout to which an existing manager has taken over the company they work for.
18. What is a “BIMBO”? In this context, BIMBO stands for Buy-In Management Buyout, and describes a management buyout to which new management has been added and has bought shares at the time of the transaction.
19. What is a “VIMBO”? VIMBO stands for Vendor Initiated Management Buyout, and describes a management buyout which has been driven by the existing shareholders. This can often be the case where a buyout is the result of succession planning.
20. What is a “FAMBO”? A FAMBO is a buyout used to facilitate succession in a family business. This might be a tool to allow older generations to extract capital and to pass the business on in ownership proportions that allow the right members of the next generation to hold the equity. This will often provide for a concentration of ownership amongst the family members who will actually run the company going forward.
21. How can I get an indication of the value of my business? It’s difficult to get a quick or cheap valuation of a business that’s actually meaningful. To do the job properly a valuer must consider specific factors about the business including trading and value drivers. However as a rule of thumb most SMEs will be fairly valued at a single figure multiple of Earnings before Tax Depreciation and Amortisation (‘EBITDA’). You will also need to consider any surplus net cash or debt in the business alongside an assessment of whether it is under or over invested in working capital and other assets.
22. How often do I need to value my business? If you have a strategic plan which involves an exit at some future date at a target value, then it’s worth checking value every year or so. If not, the need for a value is usually driven by external factors such as shareholder exit, divorce, or insurance needs.
23. What is the usefulness of a business valuation? A good well-reasoned business valuation will give you a useful insight into your business and how others see it. It can be a springboard for planning how you’d develop in the future. A valuation can also be useful for negotiations with equity investors if you’re raising finance, and exiting shareholders to help agree a price for their shares. It can also be used as part of a share incentive or reward scheme.
24. Where can I raise funds for my business? There are many sources of funds for business, and there has been a growth of alternative sources in recent years. Banks, invoice finance provides, asset financiers, and alternative lenders including crowdfunding can all provide debt related products. Business Angels, crowdfunding, venture capital and private equity houses can supply equity finance. Don’t forget that funds might also be available from suppliers, from HMRC via R&D tax credits and sometimes in the form of grants.
25. Why do I need due diligence? Due diligence allows the buyers of or investors in a business to check their assumptions and make sure the business is as it has been described to them. If you are making an acquisition, you will want to be sure the target performs as you’ve assuming in your funding calculations. Due diligence will also flush out any issues that need to be addressed in the legal documentation for the transaction, usually in the Sale & Purchase Agreement (SPA) and often directly influencing the drafting of warranties.
Just call us – we don’t charge for chatting through your issue and giving you our initial thoughts on how we might help. If we can’t help, we’ll probably point you in the right direction towards someone who can!
