deals Impact of DD on valuation in challenging times
The impact of the current economic uncertainties on businesses, particularly in the retail and real estate sectors is well-documented. However, deals are still happening, particularly in the small to medium- sized enterprise (SME) space, writes Jonathan Thornton of Quantuma
If you are looking at completing a deal in this environment, what should you look out for in your diligence? Even more importantly, how should you treat the findings in your valuation of the business that you are looking to buy?
Many businesses we are looking at are taking longer to get paid by their customers. This means that their debtors are older, with an associated increased risk of debts going bad. A survey by Market Finance has found that SMEs had to wait an average of 23 days to receive their money in 2019, up from 12 days in 2018.
Any valuation needs to take into account a higher level of working capital to reflect this, plus considering the likely increase in bad debt expense in future. In addition, buyers should ensure that there are adequate provisions for bad debts in the completion balance sheet.
The £25 million inventory issue at Ted Baker is well known. Levels of inventory may increase in poor economic conditions. There may be a risk that some of this inventory is not saleable and should be written down. This could particularly be the case in the retail sector post-Christmas.
100GROWTH THAMES VALLEY SME TM
With higher levels of debtors and inventory, we are seeing businesses delay their payments to their suppliers. Any ‘stretched’ creditors – that is, those beyond their normal or contractual payment terms – should be treated as a form of debt and adjusted in the purchase price. These creditors will have to be settled post-transaction.
Most valuations of businesses are driven by the future expected cashflows. Predicting the future is always hard, but it is even harder during uncertain economic times. So how can you judge if the company’s projections are reasonable and should be used as the basis of your valuation?
The first place to start would be a company’s order book or pipeline of new projects. How does this compare with similar periods in the past? Does it support the projections that are being presented?
Has the company achieved its budgets in the past? A persistent failure to meet budget does not instil much confidence that the current projections will be achieved.
Once a view is taken of the most likely Search is on for fast-growing SMEs
SMEs throughout the Thames Valley have the opportunity to join The Business Magazine’s Growth list in 2020
The Thames Valley SME 100 Growth Index will be published in our March/April issue – and our researchers are looking for fast- growing businesses with turnovers from £1 million to £17.5m.
If your company matches the criteria, contact listings manager Jo Whittle at jo@
elcot.co.uk.
As part of the SME 100 you will be invited to our annual summer networking evening as well as appear in our list alongside similar high-flying small and medium-sized enterprises.
The SME 100 Growth Index is sponsored by law firm Herrington Carmichael, business advisers Wilson Partners and new sponsor, Hicks Baker, the commercial property consultants and letting agents.
Hicks Baker is synonymous with the Thames Valley. The region represents one of the
most dynamic commercial markets in the UK. Based in Reading, the ‘capital’ of the Thames Valley, Hicks Baker has intimate knowledge of the local and regional market.
Managing director Giles Blagden said he was “delighted to be sponsoring the SME 100” and looked forward to working alongside Wilson Partners and Herrington Carmichael in the year ahead.
The SME 100 listing covers independent businesses in the Thames Valley that are unquoted, private entities. Based on growth in turnover, the listing takes data from the business intelligence service FAME and Companies House.
At the top of the 2019 Growth List stood Redbox Mobile plc, founded in Newbury by Rory Mudie in February 2013. With a team of 20 staff, it is an expert in app- store marketing, helping companies of all sizes acquire customers for their apps.
THE BUSINESS MAGAZINE – JANUARY/FEBRUARY 2020
The company’s Blackbox platform is an automated search platform for app developers that makes over half a million decisions a day to bid on the cheapest keywords to offer the client. The BlackBox platform currently runs campaigns in 13 territories and 20 languages.
With offices in Hungerford, London and New York, Redbox Mobile has recorded substantial growth of 177% taking its turnover to £2.5 million, making it top of the list.
businessmag.co.uk/thames-valley-sme- 100-growth-index/
sponsors
future of the business, this should be used as the basis of a discounted cashflow valuation. Normally this would be cross- checked against a multiples-based valuation. It is essential that the profit measure being used for the multiple is sustainable and does not include any one- off items such as releases of provisions.
To summarise, we believe that it is still perfectly possible to get deals done, even if they are taking a little longer. However in uncertain economic times you have to be extra diligent and make sure your valuation is appropriate.
Jonathan Thornton 07768 889637
jonathan.thornton@
quantuma.com
quantuma.com
WILSON PARTNERS CORPORATE FINANCE
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