I always find it instructive to look at deals done in the sector by listed companies. This is because of the level of detail that is disclosed. An example of this is the deal announced by Servoca plc (listed on AIM) at the start of the month (1 July). They had an existing specialism in the education sector and it’s no great surprise to see them adding another company to that stable. The press release was as follows:
Servoca, the AIM listed specialist recruitment and outsourcing solutions provider, is pleased to announce the acquisition of Classic Education Limited (“Classic Education”). The acquisition is to be funded from existing cash resources and debt facilities and the initial consideration is £1.2m.
In addition, Servoca will pay deferred consideration of up to £1.9m, subject to Classic Education meeting certain profit targets for the two years following acquisition.
Information on Classic Education
Classic Education has been established for 11 years and holds a strong reputation for the delivery of quality Education Recruitment services into its local markets. The business operates from a single office in Gravesend, Kent. In the year ended 31 March 2016 unaudited pre-tax profit was just under £0.6m. In the opinion of the Board, the adjusted sustainable pre-tax profit at constant gross profit levels is circa £0.4m to £0.5m. At 31 March 2016, unaudited management accounts showed Classic Education had net assets of £0.4m.
The board of Servoca expect the acquisition to be earnings enhancing in the year to 30 September 2017 with minimal impact in the current year. Classic Education is a bolt-on to the Education Recruitment business in a geographic area with high levels of demand but
where Servoca does not currently hold a local presence.
Andy Church, CEO of Servoca commented,
“We are delighted that Classic Education is now part of Servoca. This acquisition complements our existing branch network in education and gives us a local presence in the Kent and South London market, an area with significant demand for education recruitment services. The acquisition of a long-established local provider in this area increases our national branch network coverage. In total we now have 15 UK locations and one overseas office from which we service local schools. We look forward to working with the staff and management that have helped build the business into one of the leading providers in the area.”
What can we learn from this?
The overall deal is valued, on the face of it, at £3.1m. Let’s assume that of £0.4m of net assets, £0.3m was “surplus” to working capital requirements. That would translate to an Enterprise Value (EV) of £2.8m. Classic have apparently reported profits for its most recent financial year of £0.6m, but the buyer feels £0.4m to 0.5m is more like a maintainable earnings figure. From the buyer’s perspective that means they’re willing to pay around 6 x Profit Before Tax (PBT), right? Well, kind of…
Valuing an earn out is a tricky task but given that there’s no certainty of a pay out you really have to discount the headline figure. If you used a 20% discount rate over the 2 year period that applies here, the value of the earn out in today’s terms goes down to around £1.3m. That takes the EV/PBT multiple down to around 5.
Even so, for a business of Classic’s size in terms of earnings, the EV/PBT multiple looks a reasonable result for the vendors and this highlights the importance of finding buyers for whom the acquisition presents a strong strategic rationale.
If you would like to discuss your exit strategy then please contact James Price, or the Recruitment Accountants team.