We’re often asked by recruitment business owners what sort of exit multiples they should aim for and/or expect to achieve. Anecdotally, an EBIT multiple range of 4 to 7 would cover most deals in the sector – albeit, more often than not, most of the aspects of deals are not disclosed. For deals involving public companies, far more is disclosed, so it’s sometimes helpful to look at those details for an idea as to current trends. In this deal analysis we’ll take a look at the acquisition of A+ Teachers by Servoca plc. All of the information is from existing sources in the public domain.
- A+ Teachers is a small company operating from one office in Hertfordshire. At the time of its acquisition it had been operating for 12 years as a specialist recruiter to the education sector. In that time it had forged a very strong reputation locally.
- A+ Teachers was owned at its sale by its two founders, L Silverdale and A Deighton.
- From 2010 onwards there appears to have been a sharp improvement in performance. For the 2011-2015 financial years, profit after tax and dividends was around the £250K mark. With around £500k of pre tax profit for the 2015 financial year.
- At its 2015 financial year end, the company had cash balances of over £1.4m so was in a hugely strong position for a company with limited working capital requirements – debtor balances were pretty low at that point for a business of its size indicating prompt payments by customers.
- Listed on the London Stock Exchange and trading on AIM, Servoca operates through a number of individual trading brands, each targeted towards specific niche markets and services.
- Servoca PLC operates in five primary markets: Education; Healthcare; Homecare; Criminal Justice, and Security.
- The initial consideration was £1.55m, with up to £2.13m being payable at the end of two year period contingent on performance (i.e. an “earn out”).
- It’s necessary to consider whether Servoca effectively used the cash that was held by A+ Teachers to partially fund the acquisition. The deal announcement mentions that A+ Teachers had net assets of 31 August 2015, so it’s likely that this did form part of what Servoca paid for.
- There’s no way that A+ Teachers needed that level of cash in the business to fund its working capital, and I would expect that a “free cash” amount of circa £1m was identified – let’s say £1.05m for simplicity.
- Servoca are then effectively paying £0.5m up front and potentially up to £2.13m via the earn out, for what we might term “capitalised future earnings”, or if you prefer, “Enterprise Value (EV)”. On the face of it, based on pre tax profits of £500K that gives a multiple of 5.26.
- For us though, the earn out payments have to be discounted to reflect the time value of money and the risk associated with them not being paid out. If we assume a 15% discount rate (probably on the low side) for each of the two years covered by the earn out period, the deferred consideration is effectively reduced by one third, so we’re now at an overall deal value of £3.16m, with only £2.11m relating to EV, which means an effective multiple on the 2015 post tax earnings of 4.22 – rather different to the 7.36 which might have been implied by the total consideration numbers. As always, the devil is in the detail.
- One imagines that even with the vendors selling their own cash, they will have secured the 10% rate of tax afforded by Entrepreneur’s Relief which would be preferable to a pre sale dividend and paying rates of 30%+, so there’s probably a bit of extra value in there for the vendors.
A+ Teachers had positioned itself very well as a specialist, and as a leading regional player. There appears to have been a strong strategic rationale for Servoca to make the acquisition, and the strong cash position of A+, plus the extent of the deferred consideration will really have widened the net in terms of potential buyers. Even taking all of those things into account though, you’re looking at a pre tax multiple of 4 to 5 here for a decent quality business, which is unlikely to create waves of excitement in the sector. What we don’t know of course is the position and mind-set of the vendors, or whether they had the right level of advice or competiveness through the sale process.