Company Valuation #2

Avocet was called in by a Big Six Firm of Accountants to help one of their audit clients. The Audit Partner had asked the Corporate Finance Partner to advise on sale valuation and process for this company but the latter had realistically concluded that his department’s overhead led pricing would take a disproportionate part of the likely sale proceeds - hence Avocet’s involvement.

Background

The 61-year old Owner of a Precision Engineer wanted to sell up and retire.

Over some 20 years he had built up an impressive list of blue chip customers in a variety of industries. His Management Team consisted of a Sales Director, Finance Director (but retiring within 12 months) and Production Manager although none were immediate or Managing Director material.

Turnover was consistently around the £3.5m level (a maximum without moving to a bigger site or subcontracting) generating pre-tax profits of £90,000 and the Balance Sheet indicated a Net Worth of £630,000.

Owner’s Dilemma

The historic multiple of pretax profits indicated a sale price of 300k even on a good day, which was 50% below the Net Worth. The Owner therefore had 3 options:

 

Try and sell off some of the assets presale to bring the Net Worth into line with the profit multiple

Play Father Christmas and sell it at the 50% discount to Net Worth

Retain the business, address the low profitability issue & build the Team up to allow him to reduce his time commitment to the business



Outcome


Following a thorough Review of the business and people, Avocet has persuaded the Owner to postpone retirement and adopt the third option.

The Sales Director and Production Manager now have regular meetings on the most profitable type of work that the factory needs, increasingly subcontracting the less profitable work

The Finance Director’s retirement has been accelerated & a new competent Financial Controller is being recruited 

The Owner now has the prospect of reducing his working week AND a credible Management Team emerging that can attract funding for an MBO/MBI on a deferred consideration basis. 



Morals

As an Owner think ahead for your Exit Strategy

Continuously review return on capital investment to avoid Net Assets/Worth outstripping profit multiples of the business