EBITDA Valuation of a business

Valuing a business using EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) is a widely accepted and commonly used profit-based valuation method.

Adjusted EBITDA
When using EBITDA for valuation purposes, it is essential to calculate an “Adjusted EBITDA” figure. This process involves making normalising adjustments, including relevant add-backs, to present a more accurate reflection of ongoing operational profitability. Typical adjustments may include:
• Owner’s pension contributions, salary or bonuses that do not reflect market value
• Building expenses, repairs or maintenance expenses that should have been capitalised (e.g., improvements or office remodelling)
• Exceptional non-recurring or one-off expenses, such as legal or professional fees, donations, employee bonuses, or intellectual property costs (e.g., patents, trademarks)
Applying the EBITDA Multiple
Once the Adjusted EBITDA is calculated, a multiple is applied to derive the business’s value (or expected return if shares are sold).

This EBITDA multiple is typically based on industry averages, drawn from transaction data involving similar-sized businesses. For small to medium enterprises (SMEs), multiples often range between 2 and 5, but may reach 7 or 8, especially if a strategic purchaser is involved. In such cases, the buyer may be willing to pay a premium due to synergies or strategic advantages.
The actual multiple applied will depend on several factors—most notably market conditions, and growth potential.

Influences on Value
While the saying “higher risk, higher return” holds true for investors, in business valuation, lower risk translates to higher value. As such, valuation professionals closely assess the following risk factors, which can significantly influence the multiple used:
Factors that can enhance value:
• A turnkey /strong and independent management team
• Low reliance on the owner for day-to-day operations
• Blue-chip or well-diversified customer base
• Good revenue spread (No single customer contributing more than 10% of total revenue)
• High proportion of repeat revenue or contracted business
• Long-term contracts with suppliers and/or customers
• Operation in a niche or high-growth market
• Unique or hard-to-replicate offerings
• Low levels of competition
• Strong reputation
• Consistent revenue and profit growth
• Recognised accreditations or formal management systems

When assessing the value of a business, it’s essential to scrutinise both:
1. The adjustments made (or omitted) in calculating Adjusted EBITDA, and
2. The multiple applied to that EBITDA figure.
Both must be seen as fair and reasonable—otherwise, the resulting valuation may provide a misleading impression of the business’s true worth

Newsletter July 2023

Insights from interactions this Month
After a number of base rate rises from the Bank of England and rising interest rates there is increasing caution in the market. This does not mean that there is a fall in buyer enquiries, it means buyers are applying greater levels of scrutiny to ensure that they can satisfy lending criteria. For example, one seasoned buyer has found that lenders will only make loans available up to 2 times EBITDA for target acquisitions, so he is having to put together multi supplier / source finance packages in order to complete deals.
In June we completed the sale of a wholesaler in the water treatment sector to a US based multinational. The trend at the moment is for potential buyers to come from across the globe. We have been talking to interested parties from US, Europe, India, Dubai, South Africa and the Far East.
Sectors that have been generating the most interest are building services, manufacturing and online.

Tip of the month
Sellers need to be creative and flexible when agreeing to sell their business. With the supply of finance being tight sellers may need to agree to an installment payment plan over an agreed timescale to secure the completion of a sale. The plan could be backed warranties or guarantees.

Featured business this month
Exceptional manufacturer of traditional timber box sash windows
Operating from a factory in the heart of England this company manufactures traditional box sash windows which are simply the best on the market.

The company designs, manufactures, glazes, paints and installs custom-made traditional timber box sash windows for new-build projects, period properties, and Grade II listed buildings. Its double-glazed units are now being recommended to restorers of Grade II listed buildings by conservation officers. This puts the company in a unique position to exploit and potentially dominate supply to the timber window market which is worth c.£450 million in the UK. (there are c.500,000 listed buildings in England).
This is an exceptional company looking for an exceptional buyer.
Contact us for a no-obligation discussion about selling your business
https://www.linkedin.com/in/ruperttrevelyan/
Email: Rupert Trevelyan rupert@weybrookbusinessbrokers.com
Call +44 7826 050690

This week I have been doing valuations and talking to buyers about the asking price of some my client’s companies. I even dreamt about doing valuations, no doubt you will say that I need to get a life, but there are some triggers many of which I am familiar with.

There are buyers out there who are really keen on acquiring companies and I had 2 very long zoom calls yesterday examining the cost base of my clients and the valuation we have applied. I always tell my clients that it is essential that they continue to profitably grow their company if they want to achieve a good price, they also need to ensure that there is a strong transferable management structure in place, strong recurring revenue, shareholder agreement on the sale, an understanding of debt and how it will be treated, at the lower end many buyers prefer the target to debt and cash free.

The first caller was concerned that the profitability of the company he is looking to acquire is falling while revenue is increasing, this means the value of the company is falling, but the seller won’t accept that. Ultimately the buyer is likely to walk away, unless there is some form of price adjustment; he is willing to offer a deferred payment if things improve, but that comes with obvious risks for the seller.

The second caller was trying to get an understanding the revenue and cost implications of replace the owners of his target. The owners are a couple, they do have a team in place, but one of them is operational and works on one key sector generating a specific revenue stream, his partner runs the administration team. The buyer is astute and is working out the implications for him if he takes the business over. He is planning to make an offer but it will take into account the cost of replacing the owners.

Buyers are out there and are keen. They have added pressure that the providers of acquisition finance are still very vigilant, one buyer I am talking to spent 8 months putting together a finance package to make an acquisition, he was a week away from concluding the deal when our former prime minister and her chancellor decided to launch a budget that spooked the global market. The resultant market conditions mean buyers have to jump more and more difficult hurdles to secure acquisition finance

If you want to sell your company I am always happy to talk it through if you want to give me a call on 07826 050690

When you sell your business it would be wonderful if the buyer could pay you with one single payment on the day of transfer! The reality is that scenario is rare and most acquisitions are paid for in installments. There are reasons for this, firstly the buyer will be looking to minimise their risk (as you will as the seller) and in most cases they may not have sufficient cash to make the purchase, which means they need to raise finance which can come in a number of forms.

Funding
At the level of sale we operate at buyers tend to fund their acquisitions by a combination of debt and assets :
Debt / borrowing sources
• Loans from sources that include banks, finance providers, peer to peer, crowdfunding and even seller loans
Asset / cash investment
• Cash from the buyer, investors including angel investors and venture capitalists, asset swaps

Installments
The bigger the price tag the more likely that you will be paid in installments over a period of time . Typically you will be paid between 50 and 60% in the first installment, although we have seen 75%.
The remaining payments are made at agreed intervals in the sale and purchase agreement, sometimes these can be 6 monthly or yearly intervals. There can be qualifying criteria for these payments, we resist performance criteria because we believe the seller is no longer able to influence these, however every deal is different and there may be some justification, but this is all subject to negotiation
Typically the longer the purchase period the higher the agreed price and vice versa. Money the bank is tangible rather than the promise of a potential big pay day, so we favour larger first installments and a shorter completion period.

If you want to know more contact us on rupert@weybrookbusinessbrokers.com or 07826 050690

Monthly Newsletter – November 2022

Insights from our interactions this month
2022 has been a difficult year for business owners, we have come out of a global pandemic (or have we?), the war in Ukraine has hit energy and food supply chains and prices hard and then add to that the domestic political turmoil and the uncertainty that has created. Despite all that the general mood is surprisingly upbeat amongst all the business owners I meet and there are still buyers seeking businesses. So there is positivity out there, therefore owners looking to sell their businesses should continue to make preparations.

Tip of the month
All businesses are facing strong inflationary pressures, which lead to rising costs, which in turn can drive down profit. Profit is one of the key drivers of value when selling your business, so if you want to sell keep a strong eye on profit levels and to look to at minimum maintain current levels or grow them if you can.

Some of the steps you can take to make your journey to selling your business smoother:
– Plan well ahead, make sure your business is fit to sell
* Is profitable with good cash-flow
* Demonstrates growth and has a good level of recurring sales
* Has a strong management structure and workforce
* All contracts and legal paperwork are up to date
* All accounts and documentation are up to date
– Ensure all shareholders are in agreement that they want to sell
– Choose good advisors (commercial lawyer, accountant, and broker)and ensure your focus remains on the business
– Make sure you have a strong personal support network around you to help you de-stress and maintain your sense of humour.

Featured Business this month

WHOLESALER IN THE WATER TREATMENT SECTOR for sale
Supplier of parts and components to the water treatment industry; both installers and dealers.
Long established the company has built up an excellent reputation and operates from its own premises but is relocatable. Its product range is both bespoke and industry standard.
The company has a turnover of £1.5m and generates an EBITDA of £478k.
To maintain confidentiality we never disclose business names until applicants have signed a non-disclosure agreement.

If you want to talk to me about any of the points mentioned please message me on rupert@weybrookbusinessbrokers.com

I am lucky enough to work with #businessowners across a number of sectors, they are all amazing #entrepeneurs. I do find I get an extra buzz when I work with #manufacturers . There is something about companies making real products that really suggests added value. I recently posted about a distillery I am working with, I am now working with a #windowmanufacturer making products here in England with raw materials sourced in the UK too.

If you want to buy a manufacturer based in this country or want sell one why not contact me and start the ball rolling.

It can be stressful selling your business; letting go and ceding control to a new owner can be an emotional experience. During the sale process, things can be intense with you and your team having to answer difficult questions and provide lots of information.

On more than one occasion in the last few weeks, I have had to take the heat out of the situation to ensure a smooth handover. So, how do you prepare, firstly accept that it could well be emotional selling your business and try not to take things buyers and their representatives personally; they are just doing their job, and buying your business could represent a significant risk for them and the pressure to make the right acquisition could be very stressful to them.

Recently I started keeping bees and having bees buzzing around my face when I am inspecting the hive could be a bit daunting, but I wear a beekeeper’s suit and am very careful not to harm any bees, so what could be stressful, is actually very rewarding because I prepare appropriately. The same could be true for selling your business. I am just advocating that those who embark on the journey do so with their eyes open and prepare for your sale and a journey that may be a bit of an emotional rollercoaster.

Some of the steps you can take to make your journey to selling your business smoother:
– Plan well ahead, make sure your business is fit to sell
* Is profitable with good cashflow
* Demonstrates growth and has a good level of recurring sales
* Has a strong management structure and workforce
* All contracts and legal paperwork are up to date
* All accounts and documentation are up to date
– Ensure all shareholders are in agreement that they want to sell
– Choose good advisors (commercial lawyer, accountant, and broker)and ensure your focus remains on the business
– Make sure you have a strong personal support network around you to help you de-stress and maintain your sense of humour.

If you are thinking about selling your business contact Rupert Trevelyan at Weybrook Business Brokers on 07826 050690

On more than one occasion I have written about making a plan to get your business into a fit state to sell. Having a well-run growing cash generative company with a strong recurring revenue and management team in place puts owners in a good position to sell.

Not all owners have a plan in place for themselves once they have vacated the hot seat in their former business. Busy entrepreneurs tend not to be good at being idle for too long and no matter how appealing lying on a sun-kissed beach seems in the build-up to the sale, they soon get bored applying the suntan lotion. I have had clients who want to go and visit family members across the globe, others who want to tinker with classic cars, and others who want to start another business after they sell. I have also seen owners sell up and move to a dream location only to return after a couple of years and start again.

It pays to start preparing your personal path ahead of finding yourself drinking sundowners in a far-flung beach paradise twiddling your thumbs. It may be beneficial to start developing interests and activities that you can continue when you are no longer at the helm. For some the lure of improving their golf handicap may be the dream, for others, it could be taking on non-exec director roles and helping other entrepreneurs drive their performance. As a farmer’s son I have begun to nurture my garden (in a vain hope that I have inherited my father’s green fingers), most recently I have created a vegetable patch and apiary, it certainly gives me pleasure, whether it yields bountiful harvests is yet to be determined; I know it won’t keep me fully occupied once I eventually decide to hang up my coat, but I do believe it will be something I can draw continuity from, in what will be a period of transition in my life.

If you want to sell your business or just ask for advice please contact me, Rupert Trevelyan: email rupert@weybrookbusinessbrokers.com, mobile 07826 050690.

When the world around us feels grim, we have to start by wishing the people of the Ukraine our heartfelt support; then we could all do with some positive reinforcement, which was what I got in the form of a testimonial from a recent client.

Rupert was amazing; he fully supported us through out the entire process, whilst selling our business. He attended all the meetings with the potential buyers and provided invaluable advice to us, as novices in this area.

Richard and Gill Gibbs.
AB Alarms.

If you want to see how Weybrook could help you please contact us

email: rupert@weybrookbusinessbrokers.com
Phone: 07826 050690

Needless to say the last 20 months have been tough on us all and the arrival of the Omicron variant is set to keep us guessing what the future holds. Many businesses are now finding ways to keep things moving and are trading at pre-pandemic levels and in some cases even better, thishas lead to positive movement in acquisitions market; only this week we have sealed the transfer of an alarm installer to a trade buyer.
So, as we move towards 2022 it is prudent to consider whether now is the time sell your business.
Questions to ask yourself:
1. Is your business demonstrating profitable growth?
2. Do you have demonstratable recurring income?
3. Have you got a strong management team in place?
4. Are you looking for a new challenge or lifestyle?
If you want to discuss your answers to these and other relevant questions talk to an expert who can help you make a decision whether to sell or not. At Weybrook we are happy to have no obligation discussions and to give advice that can help you make a decision.
To discuss the sale of your business contact Rupert Trevelyan email rupert@weybrookbusinessbrokers.com call 07826 050690