Blog – January 2017

We have frequently warned about what we refer to as ‘the myth of the multiple’.

The two principal points being:
1. that unless you are privy to the full details of transactions, multiples can be highly misleading, and
2. that you must consider the relevance to your business, which will inevitably be different (often substantially so).

This week an interesting illustration of the dangers therein cropped up. A potential client cited a “similar” business that was sold for £4.2m representing a stunning EBIT multiple of c.20x! Doubtless he was thinking something along the lines of “great, so my business must be worth something similar”. Fortunately the deal in question involved a quoted buyer so with a bit of research we were able to find the announcement – which indeed mentioned the wonderful headline figure of £4.2m. However, in the detail there was a lot of structuring and less than £1m was paid on completion. What was much more revealing was hidden deep within subsequent investor reports that revealed that only £320k was ever paid thereafter. This meant that £4.2m actually worked out at £1.3m.

This illustrates how the devil is in the detail and the dangers of reaching for parallels on incomplete information (it also highlights the importance of careful deal structuring). Furthermore, in this case the acquired business was nearly twice the size of the prospective client’s and also had a significantly different business model. Suffice to say there are no standard multiples for your business. Valuations must consider a wide range of factors and not simply be predicated on a simple arithmetic process. If anyone tells you your business is worth n x its profits prior to any detailed analysis, reach for the seaweed or look at your tea leaves – they may be equally valid!