Stop valuing your business on a spreadsheet

Two acquisition deals we recently reported on nicely illustrate a few points we have previously made about business valuations.

If you strictly followed EBITDA multiples, Jadu Holdings - a software firm based in Leicester with a £0.3m loss last year - should have been worthless.

Instead, it just sold for up to £19.2m to tech firm Netcall.
Read: Digital experience software firm acquired for up to £19.2m

That comprised £11.2m in cash, £4m of Netcall shares and up to £4m in earn-out contingent on hitting targets including ACV growth of 20% per annum for 2 years. Jadu has revenue of £7.4 million (76% recurring).

Meanwhile, Victorian House Window Group (a window manufacturer based in Carmarthenshire, South Wales) just commanded a £60m valuation on £3.1m profit.
Read: £33m-turnover window manufacturer acquired in £60m deal

That’s a ~19x multiple in a sector where ‘the book’ says you should get 5-7x. The price was paid on a cash and debt-free basis. The group generates annual sales of £33m.

What is going on?
The calculator-wielding ‘deal pie’ buyers and advisers will tell you these are outliers. They aren't. They are examples of Strategic Value crushing Financial Theory (and Trickery!).

** In the software deal: The buyer (Netcall) wasn't buying profits. It was buying strategic footholds in the UK and US public sectors and deep cross-sell opportunities. They paid for the future, not the past.

** In the manufacturing deal: The buyer (Inwido) didn't just buy a window factory. They bought market dominance, a vertically integrated recycling facility, and a circular economy engine that no competitor could easily replicate.

The UK’s sash window market is anticipated to achieve strong growth over the coming years as a result of pent-up demand and the relaxation of planning restrictions, which will enable uPVC windows to replace timber windows.

A lazy M&A adviser lists your business based on what you did (past EBITDA).

A smart M&A adviser sells your business based on what the buyer needs (Strategic Fit).

If you are building a business for an exit, stop obsessing over your multiple. Start obsessing over your strategic scarcity.

The former gets you a 'fair price'.

The latter gets you a bidding war.

Are you building a business that is 'profitable enough to sell' or one that is 'too valuable to ignore'?

If you're unsure, one of our exit planning advisers would be happy to discuss.


Also read:
Business valuation: Why cash flow is more accurate than EBITDA
Internal Rate of Return and the Discounted Cash Flow Model
Business Sale Report Deal Value Index

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