PKF Francis Clark and Steele Raymond: Slide pack for 'Maximising and realising value from your business' workshop 17 May 2018

1. 1
Maximising and realising value from your business
17 May 2018

2. 2
• PKF Francis Clark - Paul Stout/Andy Killick
• Tim Stone & Nick Davies – Steele Raymond
• Aim of today’s event…
• Table hosts
Welcome and introductions

3. 3
8.30 – Welcome and introductions
8.45 – Maximising and realising value from your business:
• Unsolicited offers – ‘what should you do?’
• Understanding valuations – ‘art not a science’
• Securing the value: part 1 – ‘impact of actions now upon future value
--- Coffee break ---
• Securing the value: part 2 – ‘holding onto value during exit process’
• Evaluating offers and alternative structures – ‘which is the most
appropriate structure?’
• Questions and wrap up
Circa 13.00 - Buffet lunch and networking
Finish
Today’s timetable

4. 4
Administration

5. 5
PKF Francis Clark
The Firm
• UK member firm of PKF International
• Led by 55 partners with 700 staff
• Largest regional accountancy firm in
England & Wales
• Operates from 8 offices across the
South
• >20,000 clients across the UK
• Integrated tax service also providing
technical support to over 400
accountancy firms
• Award winning CF, Tax, Audit and
VAT offerings
The CF Team
• 20 full time specialists – largest
team in the region
• Most active dealmaker in the region
for the last decade
(source: Experian / MarketIQ)
• 63 completed transactions >£500k
in 2017:
 29 completed disposal mandates
 6 MBOs
• Recent transactions have included
acquirers from Europe, USA, South
Africa and Australia

6. 6
PKF Francis Clark
Chartman
Advised on the
sale of
Chartman to
MRH
Gilletts
Advised on the
sale of Gilletts
Callington to
Appleby
Westward
ESSA
Advised on the
sale of ESSA to
German
company
Jenoptik AG
Dr Organic
Advised on the
sale of Dr
Organic to
Holland &
Barrett
Prolift Access
Advised on the
sale of Prolift
Access to
Speedy Hire plc
John Fowler
Advised on the
sale of John
Fowler Holiday
Parks to
Intersand
KandyToys
Financial
advisers in the
MBO of
KandyToys
Wessex GS
Financial
advisers in the
MBO of Wessex
GS
Hoist Hire
Financial
advisers in the
MBO of Hoist
Hire Services

7. steeleraymond.co.ukMaking Experience Count
| Steele Raymond
 Legal 500 – Top Tier Firm – 13 consecutive years
 Corporate & Commercial
 Commercial Property
 Dispute Resolution
 Employment Law
 Four full time partners (fifth in June 2018) + a team of
solicitors and paralegals exclusively within the
Company & Commercial team
 Regularly undertaking M&A work
 Landmark deals
 Full business service across the firm
 Private Client

8. steeleraymond.co.ukMaking Experience Count
| Notable Transactions
Sale of BOFA
International in a
£23m management
buyout
Sale of Sunseeker
to the Chinese
conglomerate, the
Dalian Wanda
Group, circa £300m
Sale of Rotable
Repairs to a U.S
strategic Buyer for
an undisclosed sum
Purchase of
Netescape Limited
by transport
specialist Passenger
Technology Group
Sale of Bath Travel
to Hays Travel for
an undisclosed sum
Sale of Poole-based
manufacturer
Ability Projects to
the Glen Dimplex
Group

9. 9
Unsolicited offers for your business
Andrew Killick, PKF Francis Clark

10. 10
• Introduction
• Round table discussions - What do you do next?
• 10 mins please
• Feedback from the tables
Unsolicited offers for your business

11. 11
• Show of hands
• Any particular comments / reasons?
• As a minimum…
• It does happen!
Unsolicited offers for your business - feedback

12. 12
Understanding valuations
Andrew Killick, PKF Francis Clark

13. 13
• Presentation:
 Background
 Review of methods
• Round table discussion:
 Case studies – what is the value of the business?
 How to enhance value
• Feed back from tables and summing up
Overview

14. 14
Why value?
• Transactions:
 Sale/Acquisition/MBO
 Exit minority shareholder
 Stamp duty
 Fundraising
• Non-transactions:
 Divorce/litigation/death
 Employee incentivisation
eg. EMI options
 Family succession
 Wealth management
Why value?
Formal or informal?

15. 15
Background to valuations
Enterprise value
The valuation of the
business ascertained
using a valuation method
Excess assets/ liabilities
The sum of the excess
assets / liabilities
(property, cash, directors
loans) less debt
Based on standard
methodologies but with
subjective assumptions
Largely factual but still areas
of uncertainty around what is
included and what level of
cash is excess
Can be significantly
different to enterprise value
Share value
Proceeds received from
disposing your shares
before tax

16. 16
Desktop Valuations - methods
• Discounted free cashflow
 Technical method assessing the present value of free cashflows
to perpetuity
• Capitalisation of maintainable earnings:
 “Normal” method for trading SMEs
• Dividend yield
 Minority shareholdings with a dividend stream
• Asset based valuation
 Property and other asset based businesses
• Sector specifics
 Sector multiples of financial and non financial metrics

17. 17
PERDA graph - www.perda.net
PAT
EBIT

18. 18
• Case A Company
 Manufacturing company B2B
 All three shareholder/directors work full time in the company
 Business premises acquired 4 years ago.
 Current MV of freehold property £2m (equivalent rent £160k per
annum)
• Case B Company
 As above
 Three years ago recruited a technical director and sales director
to supplement and ultimate replace themselves.
• Further details on your tables
• Case study rules
• Back in 35 mins
Group discussions & case studies

19. 19
How to influence value
Management
team
Location
Product /
technology
Demonstrable
roll out – e.g.
restaurants
Capital
equipment
Staff – eg
domiciliary
care
Licences /
IP
Property
Brand
Growth
prospects
Market
share
Barriers to
entry
Financial
performance
Contracts
Customers
Tax
Products

20. 20
• Feedback from group discussions
• Many ways to value a company - ‘a formulaic calculation
reliant on subjective assumptions’
• Profit ≠ value
• Value drivers – ‘looking for the strategic purchaser who will pay
more than the financials disclose’
• Market will speak in terms of value
• ‘An Art not a Science’
• ‘Securing value in your business’ – next session
Summary

21. steeleraymond.co.ukMaking Experience Count
Securing Value
in Your Business
PART 1
Tim Stone
Chairman, Partner and Head of Company & Commercial Team

22. steeleraymond.co.ukMaking Experience Count
| Actions and impact on future value
 Looking at ‘value’ through the prism of an exit
 Sharing some experiences – Michel Roux’s recipe
 The intensity and emotion of the sales process
 Structuring the business and property assets
 Heads of terms…
 Recruitment & retention of key staff…

23. steeleraymond.co.ukMaking Experience Count
| Heads of Terms
 Two main points of deal intensity – Heads and closing stages
 Generally non binding but…
 Set tone for entire deal
 Delicate balance on level of detail
 ‘Subject to contract’ but difficult to navigate away from in practice

24. steeleraymond.co.ukMaking Experience Count
| Finding and keeping key staff…
 Employment terms, bonuses, incentivisation
 Notice Periods
 Restrictive Covenants – worth the paper?
 Share Option Schemes – freezer schemes – growth value
 Drag and Tag and leverage over minorities
 ‘Good’ and ‘Bad’ leavers

25. steeleraymond.co.ukMaking Experience Count
| Break Out Session
3 Internal actions on future value
3 External actions on future value

26. steeleraymond.co.ukMaking Experience Count
| Discussions and Feedback

27. steeleraymond.co.ukMaking Experience Count
| The ‘dummy’ dd exercise (legal)
 Corporate Structure and share capital position - internal
 Contracts and trading - external
 Disputes - internal and/or external
 Intellectual Property - internal and external
 Consents and Compliance - internal and external
 Employment - internal
 Property, Environmental and Health & Safety - internal
and external

28. steeleraymond.co.ukMaking Experience Count
| In summary
 Create the data room now
 If you can’t create it, resolve it!
 Always keep your eye on the operational ball
 Be prepared to sell but be prepared to walk away!

29. steeleraymond.co.ukMaking Experience Count
Time for a break?
Making Experience Count steeleraymond.co.uk

30. steeleraymond.co.ukMaking Experience Count
Securing Value
in Your Business
PART 2
Nick Davies
Partner Company & Commercial Team

31. steeleraymond.co.ukMaking Experience Count
| Securing Value in Your Business [2]
 We now understand some of the key actions for securing future value.
 Moving on to Part 2….
 Can be said advisers have two key roles;
 Maximizing and securing future value; and
 Ensuring value retention.
 All very good and well ‘maxing out on completion’, not very good if you give
it all back 6/12 months later on a warranty claim
 Let’s focus on retaining value

32. steeleraymond.co.ukMaking Experience Count
| Securing Value in Your Business [2]
Before we discuss retaining value lets touch on how we could possibly lose value.
 Any Buyer (almost!) will require a Seller to provide certain statements of facts
(warranties)
 Tax provided for separately (tax covenant)
 Any risky areas identified subject to a specific indemnity form the Seller to the
Buyer
 By signing the SPA you will have some liability under it for a period of time
 If any warranty or indemnity given by the Seller to the Buyer transpires to be
false or mis-leading the Buyer may have a claim
 Claims are typically quite rare. Can be expensive to bring and hard to prove. A
Buyer has to be certain they want to go down that route.
 Claims rarely for operational issues unless something obvious has not been
disclosed

33. steeleraymond.co.ukMaking Experience Count
Break Out Session
Practical Steps For Retaining Value
What Can We Do?

34. steeleraymond.co.ukMaking Experience Count
| Discussions and Feedback

35. steeleraymond.co.ukMaking Experience Count
| Securing Value in Your Business [2]
 In summary and conclusion - how do we retain value?
 Use an experienced adviser
 Someone who regularly completes transactions at this level and who is
familiar with market practice
 Be thorough and comprehensive in due diligence
 Examine carefully the drafting of each warranty
 Consider the drafting – and applicable time periods – for the tax covenant
 Keep warranty limitation periods to a minimum – 18 months becoming fairly
standard – US buyers push for longer
 Cap maximum liability – often to the price – why not less?
 Include de minimis and basket levels
 Include all other applicable and relevant limitations
 Remove indemnity risk points – if an indemnity must be given quantify the
worse case scenario and negotiate to limit the indemnity to that

36. steeleraymond.co.ukMaking Experience Count
| Securing Value in Your Business [2]
 In summary and conclusion - how do we retain value?
 Deal structures;
 A share sale should mean 10% ER
 Asset sale can be tax inefficient for seller which may pay CT on proceeds
 Cash is King – be happy with what you get on completion
 Retentions and escrow accounts
 Think carefully about deferred, contingent or earn out consideration,
often complicated formulas involved
 Tax on deferred – loan notes can be more tax efficient
 Beware the “roll over” equity deal – not all bad but hard to crystal ball
gaze what the future might bring
 Employment / consultancy consideration – tax consequences?

37. 37
Evaluating offers and alternative structures
Andrew Killick & Paul Stout, PKF Francis Clark

38. 38
• Presentation:
 What are the alternative structures?
• Room discussion:
 What are the differences between the structures?
• Feed back from tables and summing up
Overview

39. 39
• Range of structures
• Trade buyer
 Trade and assets
 Share purchase
 Deferral / Earnout
• Vendor backed MBO / FAMBO
• PE backed MBO
Structures

40. 40
Example structures
Deal type
Trade asset cash
buyer
Trade share cash
buyer Trade earnout buyer
Vendor backed
MBO/FAMBO with
vendor retaining 25%
PE backed MBO with
vendor retaining 10%
A B C D E
Multiple - illustrative 6.5 6.0 6.0 6.5 6.0
Enterprise value - £1m EBIT 6,500 6,000 6,000 6,500 6,000
Excess assets 1,000 1,000 1,000 1,000 1,000
Deal value 7,500 7,000 7,000 7,500 7,000
Proportion cash received at completion 100% 90% 50% 30% 90%
Cash at completion 7,500 6,300 3,500 2,250 6,300
Tax at completion 1,862 700 350 225 630
Net cash at completion 5,639 5,600 3,150 2,025 5,670
Deferred/loan note - 700 - 3,375 700
Earnout likely to be paid 6,000
Tax on post completion proceeds - - 1,200 338 70
Net deal proceeds 5,639 6,300 7,950 5,063 6,300
Value of retained equity in medium term - - - 3,000 1,500
Total long term value 5,639 6,300 7,950 8,063 7,800
Clarity of final price High High Medium Low Low/Medium
Risk of not getting full price Low Low Medium High Medium/High
Non-cash consideration? All cash All cash All cash 25% consideration as
shares in buyer - est.
EV on disposal of
£12m
10% consideration as
shares in buyer - est.
EV upon disposal of
£15m (PE driven)
Timeframe to receive total proceeds 0 months 12 - 24 months 2 - 4 years 5 - 8 years 3 -5 years
Likelihood of achieving stage 2 Exit? N/A N/A N/A Medium High

41. 41
• Greater range of alternatives
• Financial v non financial factors
• Risk & certainty
• Which is best – depends on your personal preferences
• Importance of advisers to ensure you achieve your
aims
Structures - summary

42. 42
Q&A and Wrap up
Andrew Killick & Tim Stone

43. 43
• Questions?
Q&A

44. 44
• Underlying principles of valuing a business
• Never too early to start planning an exit
• Decisions now can impact upon future values
• A variety of structures to suit your future plans
• Proven benefit of using advisers!
Wrap up

45. 45
• Feedback forms
• Thank you
• Lunch
Let’s book a meeting to discuss your circumstances confidentially
to ensure that you can make the most of the range of opportunities
Feedback and comments

46. steeleraymond.co.ukMaking Experience Count
| Disclaimer
This presentation and supporting notes/slides are of a general nature and
have been produced for the guidance of delegates at the event for which they
were prepared. They are not a substitute for detailed legal and professional
advice. No responsibility can be accepted for the consequences of any action
taken or refrained from as a result of these notes/slides or the talk for which
they were prepared.
Copyright of Steele Raymond LLP

47. 47
(c) copyright PKF Francis Clark, 2018
You shall not copy, make available, retransmit, reproduce, sell, disseminate, separate, licence, distribute, store electronically, publish, broadcast or otherwise
circulate either within your business or for public or commercial purposes any of (or any part of) these materials and / or any services provided by PKF Francis
Clark in any format whatsoever unless you have obtained prior written consent from PKF Francis Clark to do so and entered into a licence.
To the maximum extent permitted by applicable law PKF Francis Clark excludes all representations, warranties and conditions (including, without limitation,
the conditions implied by law) in respect of these materials and /or any services provided by PKF Francis Clark.
These materials and /or any services provided by PKF Francis Clark are designed solely for the benefit of delegates of PKF Francis Clark.
The content of these materials and / or any services provided by PKF Francis Clark does not constitute advice and whilst PKF Francis Clark endeavours to
ensure that the materials and / or any services provided by PKF Francis Clark are correct, we do not warrant the completeness or accuracy of the materials
and /or any services provided by PKF Francis Clark; nor do we commit to ensuring that these materials and / or any services provided by PKF Francis Clark
are up-to-date or error or omission-free.
Where indicated, these materials are subject to Crown copyright protection. Re-use of any such Crown copyright-protected material is subject to current law
and related regulations on the re-use of Crown copyright extracts in England and Wales.
These materials and / or any services provided by PKF Francis Clark are subject to our terms and conditions of business as amended from time to time, a
copy of which is available on request.
Our liability is limited and to the maximum extent permitted under applicable law PKF Francis Clark will not be liable for any direct, indirect or consequential
loss or damage arising in connection with these materials and / or any services provided by PKF Francis Clark, whether arising in tort, contract, or otherwise,
including, without limitation, any loss of profit, contracts, business, goodwill, data, income or revenue. Please note however, that our liability for fraud, for
death or personal injury caused by our negligence, or for any other liability is not excluded or limited.
PKF Francis Clark is a trading name of Francis Clark LLP. Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered
number OC349116. The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for
inspection and at www.pkf-francisclark.co.uk. The term ‘Partner’ is used to refer to a member of Francis Clark LLP or to an employee. Registered to carry on
audit work in the UK and Ireland, regulated for a range of investment business activities and licensed to carry out reserved legal activity of non-contentious
probate in England and Wales by the Institute of Chartered Accountants in England and Wales. Partners acting as insolvency practitioners are licensed in the
UK by the Institute of Chartered Accountants in England and Wales. A partner appointed as Administrator or Administrative Receiver acts only as agent of the
insolvent entity and without personal liability. Francis Clark LLP is a member firm of the PKF International Limited network of legally independent firms and
does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.
Disclaimer & copyright
pkf-francisclark.co.uk

48. 48
Maximising and realising value from your business
17 May 2018