It is one thing build up enterprise value – quite another to know when you should cash in your chips.
After all of the challenges and anxieties involved in developing your own business, you won’t want to be full of regret if you get the timing of the sale of your company badly wrong. If you are looking to buy an environmental business, you equally won’t want to later regret for paying an inflated sum for your acquisition.
The topic of exit strategy and timing has special resonance as the UK / global recession continues into its third year with little respite in sight – particularly for those environmental businesses which may have little choice but to put themselves up for sale in these tough times.
What is enterprise value and what factors impact upon it?
Enterprise value is the price at which businesses are bought and sold. As is the case with all markets, prices fluctuate up and down over time, depending upon micro economic and macro economic factors.
Factors which can have a positive impact on enterprise value for environmental businesses include:
a) Strengthening of the senior management team through recruitment or promotion;
b) Launch of a new product with substantial revenue potential;
c) Expansion into new markets and territories;
d) Implementation of a new environmental / health and safety or energy related law (whether at the EU or devolved administration levels) which creates fresh opportunities for growth;
An often overlooked value maximiser is the financial benefit which the acquisition can bring to the business which buys it. In difficult economic times, an acquisition which creates powerful synergies between the entity buying and the one being bought can make all the difference.
Factors which can have a negative impact on enterprise value for environmental businesses include:
a) Loss of senior management, e.g. as a result of poaching by a competitor;
b) Introduction of a new and aggressive competitor;
c) Damage to environmental / CSR reputation – e.g. if the environmental business’ own environmental performance is either not independently monitored or else is extremely poor (e.g. the size of its carbon footprint);
d) Poor practice resulting in the negligent delivery of products and services, PI claims, and bad publicity; and
How are environmental businesses valued?
Notwithstanding these potential fluctuations in value, some general rules of thumb have become clear evolved during the past 20 year of amalgamations, and environmental M&A activity, especially in the global environmental consultancy market.
Many environmental consultancies have little or no intellectual property, and are valued on the basis of a multiple of their profit after tax (known as the EBIT – Earnings before Interest and Taxes). A range of six (6) to nine (9) times EBIT was typically achieved by business consultancies up to the start of the current recession.
Current deal activity in 2009 / 2010 indicates that EBITs have dropped – cheap debt is no longer available to buyers, and hence the number of cash rich buyers has reduced.
Enterprise value can be dramatically enhanced if the business can generate its own intellectual property – be that a patented piece of pollution / carbon abatement technology, a powerful brand name, etc.
Getting the timing right
An example from the environmental business sector helps to illustrate the importance of getting the timing right (for the original founders of the business at any rate):
Built up since 2001 and backed by a Venture Capitalist one environmental data and consulting business had a turnover of around £5M and about an 18% profit margin. The business, Groundsure, was sold in 2007 at the top of the market for a reported £44M (£30M upfront with a £14M earn out) to Emap, now a subsidiary of Guardian Media Group. As far as the Venture Capitalist and other shareholders were concerned, this was a great deal – the timing was perfect. With a digitised database of historical maps for the UK and associated desktop environmental data, the EBIT for Groundsure was 30+.
Groundsure has just posted its accounts for the year ending to March 2009. In the teeth of the property downturn, income was reported to have reduced to £3.2M, with a pre-tax loss of £1.34M.
What can we learn about how to maximise enterprise value?
Anyone who is building up an environmental business or otherwise preparing to sell their business, even in these difficult market conditions, would do well to keep the following in mind:
a) Understand how comparable businesses are valued, and what values these businesses have achieved in recent times. You can then build your own pricing model – if you are a consultancy then this will involve an estimate of EBIT and the application of a suitable multiple – and have a better of idea of what your business might be worth.
b) Well in advance of any exit, work hard to maximise value, amongst other things, by:
i) Protecting IPR;
ii) Strengthening important contracts, business partnerships;
iii) Keeping the client database up-to-date;
iv) Maintaining a strong management team; and
v) Developing cogent strategies to survive in the current market conditions, and to generate new revenue streams as and when more favourable market conditions return.
c) If and when a potential buyer is identified (and it makes sense to have a proactive plan to find a suitable buyer who will pay a premium for your business), consider the acquisition from their standpoint. Think hard about how the acquisition of your business would generate substantial and new revenue streams for them. This will help you to best display your strengths when negotiations commence.
In these challenging times it is entirely understandable for business managers to concentrate on the survival of their enterprise. At some point in time – and this may not be too far off – the market will turn and then the very vigorous interest that we have had in the past in buying environmental businesses will come back. If business owners and managers can keep this in mind, and take on board some of the learning points noted above, they will be rewarded when enterprise value is calculated when they come to sell.