It’s a must to ensure your company is best positioned to benefit from the sectors/themes most in vogue. So, what are the some of the rubrics to follow?
- Position revenues as much as possible as coming from a ‘hot area’;
- Target buyers who need to capture those specific revenues;
- Consider whether a certain business model within a sector attracts a higher multiple; and
- Think how to generate ‘hot area’ income from existing assets
A good example of re-positioning revenues is The Profile Group. The company spent three years before its sale, which we executed this February, moving from print to digital-only delivery. This was a transition that cut into company profits in the short-term, but the process allowed Profile Group to sell itself as a digital company commanding a significantly greater sale multiple than a ‘dead-tree’ print publisher.
The Profile sale – for £8m on EBITDA of £1m – to Centaur Media was helped by the fact that Centaur was under pressure from shareholders to increase its percentage of digital revenues. Targeting buyers who are looking for a specific revenue stream helps to further boost multiples on sale.
It’s a good tactic to reshape a company to adopt a business model that attracts higher multiples, naturally. For instance, when Sterilin, who make disposable packaging for medical and laboratory environments, began to consider a sale, it took steps to rebalance its activities to attract a higher valuation. Management committed more resources to R&D of new products versus straightforward manufacture and distribution. A typical valuation of an R&D orientated company in the sector is an EBITDA multiple of eight to ten times, while it is only around a multiple of five times for a traditional manufacturer and distributor.
Being perceived as a company that can potentially generate significant additional ‘hot area’ income from existing assets can also boost valuation. For example, pay-day loan company Wonga, which is reported to be mulling a US flotation, is certainly valued for the profitability of its money-lending model. However, speculation that it may float with a valuation multiple of up to 20x (the high level that LinkedIn went public at in 2011) is based on the fact that it can be viewed as a consumer data business (its lending decisions are based on algorithmic crunching of thousands of pieces of data about borrowers), giving it the potential to sell a greater array of ‘hot’ financial services to an already well-tracked community of users.
Moneysavingexpert.com, recently bought by Moneysupermarket.com, has also benefited from the fact that, far from being simply a consumer finance price comparison website, it has very active forums with many registered members giving the company a ready-made sales community to push other products and services.
What’s hot at the moment?
- Digital publishing;
- International on-line niche businesses;
- Branded consumer and food products;
- Medical device manufacturers;
- Peer-to-peer and payday lending companies; and
- Consumer data companies.
And what’s not?
- Paper-based publishing;
- Bricks and mortar retail;
- Travel companies;
- Cosmetic surgery clinics;
- Care home providers; and
- Small-cap brokers.
Potential buyers value growth potential over steady profitability. They need to be sold a story, a compelling narrative. Capturing the magic of some hot sector or service for a business adds lustre and allure – and tempts buyers to pay top multiples.
Caroline Belcher is a partner at Cavendish Corporate Finance, which specialises purely in advising owners on how to get the best price when selling their businesses and then successfully leading on the deals.
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