Paul Collins, Chairman of the Board of Directors at Equiteq, shares some advice.
When building my first professional services firm, I was told that unless the firm generated ten times more than its existing revenue (£4-5million), the business would never sell. On the back of that advice we built the firm’s revenues up to £50million. Although the firm sold successfully, with hindsight the advice we received wasn’t very accurate.
In my experience since my first firm, I’ve discovered that the average (median) market price for a professional services firm is around the four to five million pound mark ($8-10m). A firm can realistically sell for that value and in some cases when smaller. Smaller firms that demonstrate something ‘hot’ from a capability or intellectual property point of view can get snapped up early by buyers seeking a competitive advantage.
Generally M&A advisers will identify three things that need to be in place for a firm to sell. Business growth should be at its peak performance, the firm’s market should be strong and the wider economy should be in rude health. The truth is that getting all three of these is a nirvana and only the very lucky will sell when all three factors are in their favour. Following on from the crash of 2008, many of the clients we’ve worked with reduced revenues and profits to suit market conditions. This acted as a reset button for their timelines for selling.
In today’s marketplace, a company should show at least two years of growth. This is lower than ten years ago when showing three or four years of growth was necessary. Yet given the turbulence in the market, buyers are open to shorter periods of proven performance. As a minimum performance for today, a firm should demonstrate at least 15 per cent EBIT, ideally closer to 20 per cent and at least 20 per cent growth per annum over two years.
From a size perspective, if a seller is looking for money up front then the firm should have over the four million pound mark in sales. In a typical deal structure this should see half of the firm value paid upfront. In a deal structured this way, the remaining fifty per cent will be paid over a period of time where the seller is locked into the business to deliver the profit performance. The likelihood that a buyer will put money up front for a smaller deal is low as such deals are viewed as high risk. A buyer needs to keep senior staff interested over the transition period to avoid a decline in business performance.
Where value lies between five and fifty million pounds, interestingly there isn’t much economy of scale where EBIT multiples are concerned. Although there is linear growth in EBIT multiple between zero and five million in sales, at the fifty and over mark it begins to decline due to a diminishing number of qualified prospective buyers.
The range of buyers has certainly shifted in the last ten years as well. In the build up to 2008 the largest buyer in percentage terms, driven by availability of cheap debt, was private equity investors. PE is currently making a resurgence in the market but trade buyers – mostly other professional service firms – are in the majority today.
Many factors affect the attractiveness of a firm to buyers. Absolute size in revenues and a good track record of growth will definitely attract buyer attention, especially if the company is in a service area in demand by clients. Smaller firms – less than $10m in sales – do sell in large numbers. However, the prices and deal structures in these sales are sub-optimal for selling shareholders. Selling your firm can make real financial sense if you put in the groundwork first and make sure you prepare for a sale. Firms should look to achieve greater than $10m in sales with profits of greater than 15% and demonstrable growth. By doing so, they will attract the right kind of buyers and be far more likely to sell successfully.
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