Structuring Affordable Acquisitions Optima Corporate Finance
Our Services Acquisitions Have acted for a range of public and private companies in identifying acquisition targets negotiating & structuring terms and project managing deals to completion Disposals / MBOs Have acted for large corporate in selling non-core business to the management team and numerous business owners selling to larger recruitment businesses Fundraising Have raised and restructured finance for a range of recruitment and recruitment related businesses. Strong contacts with debt and equity funders Commercial Advice Supporting management teams generally when they are starting to consider preparing to sell. We help to develop strategic plans and financial projections to plan and measure performance
Track Record We have completed deals in the following recruitment sectors over the past 15 years: Call Centre Management Finance Construction Healthcare Industrial Domiciliary Care Driving IT Education Rail Energy Secretarial Engineering Social Care
Notional Deal You wish to acquire business offering good strategic fit You generate Profit Before Tax (“PBT”) £300k per annum The vendor is not operational in the business, manages the finances Maintainable EBIT £350k Price agreed at £1m, payable: £500k cash on completion £200k cash deferred 6 months based on clients & consultants remaining £150k cash, £150k shares in your company as earnout after audit of first year’s accounts if profits in acquired company have grown by at least 10% You have £200k cash available and your invoice discounting is fully utilised£’000 £’000
Profile of Acquisition Target £’000 £’000 Permanent Placements 200 Temp revenue 2,500 Temp costs 2,000 Temp margin 500 Gross Profit 700 Salaries 250 Director’s remuneration 70 Rent 20 Telephone 10 Advertising 25 Insurance 5 Interest 30 Other 20 430 Profit Before Tax 270 Maintainable EBIT Profit Before Tax 270 Add Back: Interest 30 Director’s remuneration 50 80 Maintainable EBIT 350 Profitability in Your Hands Profit Before Tax 270 Add: Director’s remuneration 70 1 Consultant 30 Rent 20 Other 10 130 400 New Profit Before Tax
Free Cash Amount of free cash is critical to funding the acquisition Assume that 60% of PBT becomes free cash, 25% corporation tax, 15% working capital You generate 60% of £300k = £180k Acquisition generates 60% of £400k = £240k Annual free cash generated = £420k
Paying for the Acquisition You have £200k cash - £150k for the acquisition and £50k for costs Assume you are able to arrange bank loan for £250k based on future cashflow Assume vendor’s sales ledger has an additional £100k available Initial consideration £500k Deferred consideration 6 months after completion, free cash in 6 months = £210k Deferred consideration paid £200k Earnout £150k cash if growth 10%, payable after audit, say, 3 months after year- end Free cash in 15 months since acquisition: From you £180k in 12 months + £45k in 3 months = £225k From acquisition £240k in 12 months + 10% growth of £24k + £66k in 3 months = £330k Total £555k less deferred consideration £200k leaves £355k Earnout payment £150k made leaving spare cash of £205k Total cash consideration paid £850k £150k shares issued to vendor for, say, 5% of your company
Your Position after the Acquisition You have £205k cash, started with £200k cash You have a bank loan of £250k payable over, say, 3 years Your business generates free cash of over £450k per annum after allowing for tax You own 95% of the company Profits are £300k (your business) + £440k acquisition = £740k On multiple of 4, your 95% of company is worth over £2.8m
Conclusion How can a company with £200k cash and no available borrowings afford a £1m acquisition? Cleaver Deal Structuring
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