IF you have an established business with a good track record of sales and profit, how much can you expect from a sale?
IF you have an established business with a good track record of sales and profit, how much can you expect from a sale?
Judging by publicly announced business sales completed this year in Western Australia, your goal could be five times underlying profit, or even higher in rare cases.
Recent transactions in WA include national infrastructure group Cardno buying South Perth firm BEC Engineering for up to $45 million. That price equates to a multiple of five times earnings before interest and tax (EBIT).
Another transaction announced earlier this year was Global Construction Services’ $42 million purchase of labour hire firm Global Industrial Services.
That deal was priced at 5.1 times ‘normalised’ earnings before interest, tax and depreciation (EBITDA).
The earnings multiple is a critical variable in business sales, and is a signal of how bullish the purchasers are about growth opportunities.
During the boom years prior to the GFC, some private businesses were selling at earnings multiples as high as eight to 10 times.
In the depths of the GFC, the same business might have sold for three-to-four times annual earnings – if the owner was willing to sell at that price, which in most instances was not the case.
KPMG partner Adrian Arundell said the Cardno and GCS transactions supported his view that the market is moving towards a five-times valuation.
He cautioned that comparing deals is complicated by the use of different earnings measures.
Listed drilling services company Imdex, for instance, announced the purchase of Australian Drilling Specialities last month for a price of $12 million. It said the deal was priced at five times “forecast pre-tax earnings”.
The Imdex deal also evidenced another trend.
Mr Arundell said earnings were starting to stabilise and grow, which was allowing buyers to purchase on a prospective basis.
His experience is that vendors are starting to show more interest, with private equity deals stimulating a lot of conversations.
On the buyer side, he said it was common to see payments in the form of shares and earn-outs, where the final price is dependent on the future performance of the business.
Mergers & Acquisitions managing director Ross Goldstein, whose firm specialises in the sale of private businesses, has observed a similar pattern.
He said most buyers were seeking to gain market share through their acquisitions and were looking for a close alignment to their existing operations, so they could leverage their industry knowledge and achieve synergistic savings.
Mr Goldstein said buyers were risk-averse, not wanting to overpay.
Equally, he said, sellers were often not inclined to sell their businesses based solely on historical profits, because they may have been adversely affected by the GFC, or it may not reflect the increase in value the business may achieve in future.
“With many of the transactions tied to an earn-out component, the concerns about overpayment or underpayment based upon post-settlement results are addressed,” Mr Goldstein told WA Business News.
Mr Goldstein said the additional earnings potential also acted to ensure the corporate culture of the merging entities was consolidated during the earn-out period.
Goodwyn Mitchell O’Hehir managing director Graham O’Hehir, whose firm is the largest business broker in Perth, said most business sales were occurring at lower earnings multiples.
For instance, he said middle market wholesale and distribution businesses, with turnover between $5 million and $15 million, were selling for multiples between 2.1 and 4.3 times.
The BEC Engineering sale was one of the simplest transactions completed this year.
Founded by current managing director Geoff Bailey 15 years ago, BEC has grown to have 100 staff and offices in Perth, Brisbane and Tanzania to service its mining and resources clients.
The business is expected to generate revenue of $35 million in the 2011-12 financial year, delivering profit before interest and tax of $9 million.
The $45 million purchase price includes a very small earn-out component ($1 million) and most of the consideration will be paid in cash (75 per cent), with the balance in Cardno shares.
Ausdrill’s purchase of Connector Drilling, announced in February, was also a very clean deal.
The vendors were paid $30 million in cash, and in addition will retain 50 per cent of EBITDA between the settlement date and June 30. (The earnings multiple for this transaction was not disclosed.)
Most other transactions involve a large equity component.
GCS, for instance, split its $42 million payment into a cash component ($16.4 million) and a larger scrip component, worth $25.6 million.
The value of the scrip varies in line with share price movements, which is the aim of the exercise. It means the vendor has a stake in the success of the merged business.
Some transactions are more complex, because they amount to a transforming change, or even a reverse takeover of the purchaser.
Engineering group Emerson Stewart, for instance, has agreed to purchase Ocean to Outback Contracting for up to $28 million.
OTOC specialises in the installation of remote accommodation camps, and has grown since 2003 to have 160 permanent staff.
The deal will result in OTOC founder Adam Lamond and his fellow directors ending up with as much as 42 per cent of Emerson Stewart.
Exactly how much they own will depend on the profitability of their existing business in the 2011-12 financial year.
The deal includes a $20 million up-front payment, split 50:50 between cash and scrip. The balance is in the form of performance shares.
If OTOC’s profit before interest and tax is less than $5.5 million, the vendors do not get any performance shares.
If EBIT is greater than $6.5 million, the vendors will qualify for $8 million worth.
Another notable deal is Allmine Group’s purchase of engineering and construction firm Arccon.
This deal is priced at six times EBITDA, which on the surface makes it the most generous transaction.
However this deal is more complicated, because the Arccon business will become the major activity of Allmine, and Arccon founder Robert Wilde will be joining the board.
By far the most complex deal was the purchase by Australasia Consolidated of Emerchants, a company headed by Perth travel entrepreneur John Battley.
Australasia, recently renamed Adept Solutions, is the vehicle being used by former Alinta and Austal managing director Bob Browning to build a new company following his return from the US to Australia.
The Emerchants purchase is his first deal, and it’s a transaction that is all about the growth potential of the business, which is a market leader in the pre-paid cards market.
The transaction involves a small up-front cash payment of $2.5 million, and the issue of up to 19 million shares to the vendors.
When the deal was announced, Australasia said the maximum payment was $28 million, and that is dependent on the Emerchants business hitting profit targets for the next three financial years.
