In this Institute of Directors’ Academy podcast, Jo Haigh offers practical insights into the key factors you’ll need to consider when buying or selling a business – from maximising business valuation for sale in accordance with due diligence practices, effective negotiation exercises, to knowing when to walk away.
Jo has 36 years of experience, including involvement in over 400 mergers and acquisitions. In this podcast, she discusses the critical influence of people and culture on return on investment and why valuation is always personal. ‘Value is like beauty – it’s in the eye of the beholder.’
Listen to the podcast: IoD Academy Podcast – Deal Fever
The Interview
To start simply, I’d like to ask how you personally assess the value of a business?
Assessing the value of a business in the private sector is a totally personal approach. The value very much depends on who is buying and who is selling. The other dimension to this is if the buyer can find the funds to carry out the transaction, regarding the value that is agreed upon. While there is always money to do a deal, it may not necessarily be the right amount, the right type or at the right cost.
So, value is more of an art than a science. Is there any process you can share with us?
The technical valuation process I’m going to share with you is just a technical process- it does not mean that this is what your company is worth. The reason why I’m going to give you this technical process is because it is a process that is used by advisors and therefore gives you a benchmark. If you want to find out more about different ways of valuing businesses, you might like to have a look at my book, available on the fds website, called Buying and Selling a Business: An Entrepreneur’s Guide.
As a straightforward look at valuing a business, you take the last three years weighted normalised EBITDA. EBITDA means earnings before interest, tax, depreciation and amortisation. Normalised means restating those numbers to what they would look like if it weren’t you who owned the business. Within owner-managed businesses, you often get a lot of costs that wouldn’t necessarily be there for the new buyer. You may have a spouse on the payroll, for instance. We call those discretionary costs, and then the other cost we normalise is what we call one-off costs. These are costs that perhaps won’t occur for a number of years, so you restate those figures. Therefore, what I mean by normalised EBITDA is to restate your EBITDA for those three years, and then you need to weigh them using the greatest weighing to the current year- this is how you find your average normalised EBITDA.
That’s the first part of working out what your technical valuation is. Having done that, you need to apply a multiple, which depends hugely on the nature of the industry. Some industries will attract a higher multiple than others.
Let’s pretend I have no idea what a multiple is or the value of my business. How would you explain it to me?
A business publication called the Private Company Price Index (PCPI) tracks the average multiple of private companies over the last quarter. The amalgamation of different kinds of industry can be skewed incredibly one way or another. Also, the larger the deal, the higher the multiple. So, if you want to prepare a really easy way of valuing your business using this method, I would say halve whatever the PCPI multiple is, unless your company is of some substantial size, to give you an acceptable multiple as a start point.
This gives you what we call enterprise value. To recap, that is the average weighted normalised EBITDA multiplied by the number of the multiple that we have chosen to be most appropriate. But enterprise value is not the total consideration. For this, we have to take off that figure from any interest-bearing debt (loans and overdrafts), and then we have to add on excess working capital. Excess working capital is a real challenge to calculate and varies tremendously from business to business.
Moving beyond value then, what should our potential acquirers consider?
It’s a fact that 75% of transactions fail to add value to the acquirer. This is typically nothing to do with the price, but because of culture. When you are looking at a possible opportunity, you need to assess whether you can amalgamate the two businesses. If not, how will you deal with that? The people become really important in terms of staff retention. Whilst a lot of due diligence concentrates on the financial and legal aspects of a transaction, which are important, not enough time is usually spent on the people. There are all sorts of ways to keep employee motivation high: growth shares, phantom shares, long-term incentive plans, and EMI schemes.
Based on your experience, how should our potential buyers and sellers enter the negotiation process?
With caution and respect. However long you think a negotiation process will take, it will almost certainly take you twice as long. I mention respect because if you are a bigger company acquiring a smaller business, this doesn’t mean that the company you’re buying shouldn’t be treated appropriately. The owner-manager has likely put their whole life and soul into this business. While it may just be a small transaction for the buyer, it’s a very, very important transaction for the vendor. And as such, you need to treat it properly and carefully.
And therefore, don’t be rude. My advice is to keep the lawyers out of the room during the negotiations, or even the negotiation process entirely. Preferably until you want the lawyer to help mitigate any potential risk. You need to brief your lawyers very carefully before you let them look at any of the documentation to start renegotiating it.
With no lawyers in the room, how should they prepare for the trickier aspects of the negotiation?
My other piece of advice is to take a small piece of paper like a postcard and write on it the half a dozen things that you will not compromise on, no matter what. What happens in a negotiation process is that one party can get what we call ‘deal fever’ or ‘deal fatigue’, and you start to give in on the bigger things because you’re getting to the stage where you just want the deal to be completed. So, keep referring to that document. If you feel that you’re being pushed into a corner where you aren’t happy, then walk away.
Do you have any additional advice if you and the seller don’t agree on that final price?
When you are producing your non-negotiable list, be sensible. Don’t just put a valuation on it, because valuation can actually be activated in all sorts of different ways- and I don’t just mean earn-outs. I’m referring to a ‘put and call’ option, where you sell a part of your business and have the option to put your shares on the table for the balance of that transaction at a later stage.
It isn’t price that makes deals fail, it’s the terms. Do not get fixated simply on the price. Consider what is important to you and put those on your six critical lists.
When selling your business it is important to use an advisor. You need a good cop and a bad cop on this. This is particularly prevalent if you’re going to remain in the business, as you will need to be the good cop because you’ve got to be friendly and continue with the transaction post the actual initial deal. The bad cop can help you get the best possible deal without you losing faith.
Let’s say it’s all happened then, and the deal is done. How do you ensure you get the benefits of the acquired business?
When selling your business, it’s all about making sure that you have a cultural match. And if not, you’ve got to plan on how to manage any perceived mismatch. Return on investment will depend on the type of deal that you’re doing. If this is a pre-revenue deal, for instance, the turn on the investment could be years away. If it’s a cash-rich deal, the return on investment is going to be much speedier.
I generally only work with organisations up to the point of completion. However, there are businesses out there that work on companies’ post-acquisition on an integration plan. You need a very thorough post-acquisition integration plan with cross-functional teams. The key to making this work is constant communication and review to ensure that things are working effectively. Keep reminding people that you are one organisation and why it’s working better together.
As a buyer, what one piece of advice you would give to someone looking to sell a business.
Anybody who is considering selling their business should be making preparations for the sale of their business a good 12 months in advance of actually going to market. We always have a much higher success rate if people come prepared. Make sure that everything that can possibly look better is improved on. This may be the state of your financial records, your data fields, your computer system, your management team. Get them in order.
Everything should be working towards an exit value, so look at what is likely to make your business look more attractive to potential acquirers. Pay down debt as much as you can. When entering the process of selling your business, bear in mind that it is going to take at least nine to 12 months to get a sale from the point of putting your business on the market. And when I say nine to 12 months, you need to bear in mind that some months in the corporate finance calendar frankly do not work very well for doing a deal, due to seasonal events.
The other thing is getting yourself mentally fit. You need to make sure that your family understand what you’re going through. You will be running your business as well as being involved in the transaction. However good your advisors are, you will be doing a lot of the work yourself. This could include going to meetings, getting data ready, or anything else.
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