There are myriad reasons for would-be vendors to begin their exit planning well in advance of a desired exit, not least of those is the opportunity for a quality advisory team to work closely with vendors to set the context of what a realistic equity cheque should (or needs to) look like, and of course help them find a buyer who can deliver that cheque.
Yes, during that process, a great deal of emphasis will rightly be placed on areas such as:
- Improving the quality of earnings
- Solidifying the market position
- Demonstrating low vendor reliance
However, an area that is perhaps neglected at times is the “bridge” from an enterprise value to an equity value.
It is typically the case that an enterprise value offer is made on a cash free/debt free basis. It’s not as simple (for simple read, this has its own complexities) though as adding the level of cash and subtracting the level of debt that exists at a completion date. A company’s working capital profile can have a big bearing on things. The basic principle here being to establish a target net working capital level (a normal level, if you will), with a comparison being made to the working capital that is present at a completion date (we’re not using locked box here by the way).
Let’s consider two business sales, those of S Lowe Ltd, and E Fish & Xi Ltd. The two are evenly matched when it comes to enterprise value, however the latter business spent the 12 months leading to completion with a mission to reduce its normal level of working capital required, working with clients to improve invoice collection times, and with suppliers to stretch credit terms a touch, whilst this didn’t quite make it to the top of the priority list of the former business. The difference in end result is quite stark with S Lowe’s vendors leaving over £1m of equity value on the table.
Yes, we’re looking at a bit of an extreme example here but hopefully it demonstrates the point that this should not be an area to neglect and is well worth investing some time into.
For more advice on the value bridge, or on exit planning, get in touch with James Price or Stuart Hutchison and we can set up a free, no-obligation discovery session.
