Services provided by JPAbusiness:
Business valuation
Business sale transaction advice and support
Business advice
Business background
- An engineering firm servicing commercial and corporate clients.
- Approximate turnover $15 million.
- The business had been formed by two partners who ran it successfully for 20 years.
- We initially met the business owners about six years earlier, when they were engaged in protracted and difficult negotiations to end their partnership.
- We told their story in our blog Why do I need a shareholders’ agreement. (On a positive note, the partner who had chosen to leave the business due to a serious illness is now doing well.)
- They eventually settled on a price, and one partner took on 100 per cent ownership of the business.
The issue
About three years after our initial interaction, the business owner called us up and said: “I think I’ve taken this business as far as I can.
“I’m in my 50s, and my wife and I think I need to work less hours, see more of my children and have less stress.
“The business has provided me with the means to make other investments, so I now have other income streams.
“I love this business and it’s been good to me, but I know there are a lot of risks associated with it and I’m not sure anyone else would want to take it on.
“Is it saleable?”
Our involvement
Our response was: “First we need to value the business as if we were a party looking to buy it. We will independently assess what it might be worth in the marketplace and look at potential paths to exit.”
The business’ financials, in rough terms, were as follows:
- 2018 – $20m turnover delivered $1.8m earnings
- 2019 – $15m turnover delivered $800,000 earnings
The business had just had one extremely good year, followed by a poor year. Part of that poor result was external market factors, including the project and cyclical nature of the sectors in which the business operated.
The business also had net tangible assets (P&E and working capital) of about $1.6m. It didn’t have much debt – about $300,000 owing on some P&E.
Based on these figures, we said: “The top of the market for this business is in the order of $3m.”
Assessing the exit options
After receiving our valuation, the business owner told us his ‘magic number’ – what he wanted to walk away with if he sold – was $5m. (We purposefully had not asked for this number prior to our valuation.)
We said okay, if that’s what you want, here are your options:
Option 1
Given the poorer performance in the most recent year, what if we don’t proceed to market the business for sale right now?
Instead, you stay in the business for a couple more years and try to get it performing consistently at levels that will substantiate the $5m value:
$5m, with assets of $1.6m, leaves $3.4m of goodwill you need to achieve
$1.5m of earnings, with a multiple of 2.3, gives you just over $3.4m
If you could achieve $1.5m of consistent earnings, the business would probably be worth $5m.
Option 2
A variant of option 1 involved a senior employee share arrangement.
There were two senior people in the business other than the owner, one on the finance and administration side and one on the operations side, but they didn’t have any skin-in-the-game i.e. a shareholding, or many means to develop one.
We considered a process where, through the delivery of a business plan, they would be allocated shares and could borrow from the company – subject to the relevant regulations – to fund the purchase of shares over time. (We also looked at our client selling some of his shares and providing vendor finance, but that option had capital gains tax implications that did not suit him.)
This option involved these two employees taking both a larger share and larger control of the business over a five-year period. Our client would proportionally (by dilution) reduce his holding and also have less operational involvement, effectively becoming a board member rather than the CEO/MD.
Our view was that, ideally, our client would need to remain a shareholder to make the numbers work and because the company would still require his expertise.
Option 3
This option investigated the potential to split the business in two, because there was two business lines: one centred on a branded product, and the other involved more generic engineering and fabrication services.
The objective here was to see if the sum of the parts had more value and attraction in the market, versus the whole business as one entity and operation.
We assessed the value of both of those elements and how attractive they would be as standalone businesses. We also examined whether we could split them and not ruin the cost base of the element left, if we sold one versus the other.
Option 4
Another option we offered was to facilitate a very targeted and confidential ‘market sounding’ process, to test potential interest and appetite.
We had identified about 20 parties from around Australia and internationally who we thought might see this business as a strategic opportunity – parties that were operating in the same industry, or in related industries with complementary business lines.
The business wasn’t ‘openly’ for sale, so we did not disclose its name or other identifying details when we initially approached these parties.
Five parties that indicated interest progressed to the next stage – they signed confidentiality agreements, after which we named the business and provided more detail.
We eventually held meetings with three parties and had strategic discussions around options, ranging from an outright sale to an injection of capital and partnering with the existing owner.
The result
In the end the business was purchased outright by a national firm which was looking to ‘bulk up’ the newly established engineering side of their business and take advantage of our client’s existing strong relationships with blue chip companies.
They were also interested in our client’s branded product, as they had recently begun targeting the same emerging market with their own, complementary products.
These synergies gave their interest a strong strategic flavour and the company we initially thought would achieve a maximum $3m, sold for $6m – a multiple of almost 6 x earnings!
Testimonial: Owner, Engineering business
JPAbusiness was initially referred to me by my accountant/business advisor to conduct a business valuation. Our engagements were ad hoc for the first few years, during which time James and I got to know each other. I have now been a JPAbusiness client for over 10 years, though I have worked particularly closely with James over the past three years.
Over the years James and the JPAbusiness team have provided me with business valuation, strategic advice and transaction services, as I have successfully sold one business and started another.
Impartial and practical
In terms of valuing my business, I believe it’s important to have impartial and independent advice around business value, because otherwise you’re just guessing. James’ particular strengths in this area are his broad knowledge and practical understanding.
James and the team provide business advice on an ad hoc basis, including an assessment of a proposed business expansion into interstate markets for my business. Their advice enables me to make clear and well-informed decisions about my business.
Experience and honesty
When it came time to sell my business, James managed a very successful sales process, and his particular strengths were his experience, sincerity and honesty. Independent advice and support when selling is important because everybody needs support, especially for something as important as selling one’s business.
It’s hard to define exactly what the JPAbusiness team has brought to my business, but I know that I could not have achieved what I have without James and the team.
If you would like support with any aspect of buying, selling or running a business, contact the JPAbusiness team on 02 6360 0360 or 02 9893 1803 for a confidential, obligation-free discussion.