Nick Hulme, Managing Director for Benchmark International’s Manchester site, wrote an article pre-Covid around company valuations based on ‘multiples of earnings’.
Recently, articles around ‘EBITDAC’ have emerged – a measure of Covid adjusted earnings, and while he agrees that there is some great literature about EBITDAC, Nick warns that we need to be wary when negotiating so it doesn't take over.
In this blog, Nick summarises the most important takeaways from Covid, and what we can look forward to post-Covid.
A key message in my article on company valuations was that we all-too-often fail to sell on the real essence of the opportunity and that we can miss a trick if we allow our negotiations to become a number-crunching exercise, especially if the focus is on the past. Of course, buyers will want to understand the past and will be pretty focused on Covid right now, but we should remember that the ‘multiples of earnings’ valuation methodology is just an approximation of ‘net present value (NPV) of future cash flows’. The emphasis here is on the future and to get the best deals for our clients; our valuations need to look forwards, not backwards. Now more than ever.
Negotiations start with the marketing materials, otherwise known as the Information Memorandum. At Benchmark International, we are now adding a statement regarding the impact Covid has had on the business, bringing out any positives (‘resilience’ being a key word) and explaining the likelihood and timing of a return to normality. On top of this, we are ensuring that projections over the next 2-3 years are robust enough to focus discussions on the opportunity post-Covid.
Both trade and PE buyers will understand the need to focus on the opportunity to its fullest and not to insist that valuations are based on some form of EBITDAC assessment. Trade buyers will usually have a great insight into the sectors in which their targets operate, and PE buyers will do what they are good at, focusing on people and growth.
Stay Positive
Post-Covid, there will be plenty to be positive about:
There will be some issues we need to keep a close eye on, of course, but UK business is ready:
There is little doubt that M&A activity is on the up. In a recent spot poll of Manchester professionals, 50% said they are feeling an increase in activity levels on both sides, buyers and sellers. The other 50% will get left behind!
Nick Hulme
Managing Director
Benchmark International
T: +44 (0) 161 359 4400
E: Hulme@benchmarkintl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximising solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $6B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 12 offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.
Website: http://www.benchmarkintl.com
Blog: http://blog.benchmarkcorporate.com