How do you value a business? Lessons from the FTSE
There was a news story this week that will be of interest to any business owner – because it raises the oldest question in the M&A book: “How much is my business worth?”
The news that activist investor Edward Bramson has taken a 5% share in Barclays was big for the stock market. It pushed the share price immediately, and with it the market capitalisation of the business. Why? Because as an activist investor, Mr Bramson has something of reputation for making strategic investments, shaking up corporate culture, and returning cash to the shareholders. Investors like his track record, and it gives them confidence in a business’ future potential.
How much is Barclays worth? It changes hourly, of course, because the business is valued by its share price. It’s worth more this week than last, thanks to Mr Bramson. (£37.01bn at time of writing.)
But what about your business – presumably not FTSE listed, and with an enterprise value in the millions, rather than billions. Interestingly, your company’s value is all about future potential too, certainly in our experience as an M&A advisor.
In business sales, traditional valuation methods focus on a multiple of your past profits, known as EBITDA multiples, where investors calculate an enterprise value by applying a factor typically between 3 and 7. These vary by sector, and some sectors – including pharmacy sales, or Software as a Service (SaaS) businesses - use completely different valuation methods altogether.
But anyone who has been to a BCMS Masterclass will know we believe these desktop valuations don’t reflect the full future potential of that business. They’re a useful tool for buyers. But, faced with competing bidders, the strategic importance of acquisition is often worth much more to a buyer than the calculator tells us.
A recent example from one of our clients makes the point.
Our client received offers from three seasoned acquirers. The first came in at £11m, but the second (a week later) was £20m – designed to secure a period of exclusivity. The first bidder then raised their offer to £14m before duly bowing out. Then, the second bidder started chipping at the price, bringing their valuation down to £18m and dragging their heels. This is a common tactic, but hair-raising stuff for any business owner. Who blinks first is a common theme in deal-making.
But at BCMS we always like to have an extra card to play: competition. We brought in a third bidder, whose £23m cash on completion offer – a healthy 12 times EBITDA multiple, in case you’re interested – was duly accepted by our client.
The conclusion? The maths only tell you so much. And if every buyer used the same formula, why does one buyer value a business at £9m less than another, based on exactly the same information? This, in a nutshell, is why we never take a business to market with a price attached.
Thanks to Mr Bramson, we know that this week the value of Barclays is on the rise. I know it’s not the answer you want, but you don’t realise the true value of your business until you approach the wider market of acquirers and investors, and find out what they are prepared to pay.