Acquisitions

Our approach

Since our IPO in 2007, Tracsis has made seven successful acquisitions and, as a naturally acquisitive business, always seeks well-run technology and service businesses that will enhance the wider Group and drive shareholder value.

Our approach to acquisitions is by no means a one size fits all approach but in general we look to buy good businesses that have the following common traits:


Great management team

Personal chemistry is important and given that many company founders wish to stay on post-acquisition in some capacity our ability to work together is critical.


Our ability to leverage new sales

The previous businesses we have acquired have all had good up-sell/cross-sell potential.


History of profitability & recurring revenue

Perhaps unusually, we are more interested in businesses that have shown consistent strong financial performance rather than meteoric growth.


Niche & defensible proposition

Part of our success at Tracsis is from having a truly unique offering which has high barriers to entry so this is what we look for in target businesses.


Company culture

These need to be broadly aligned; we are a diverse team of professionals which share a common goal – providing outstanding solutions to our customers. Tracsis is a relaxed, fun place to work and ensuring our enlarged team can work together is important.

Approach to valuation

We place a large emphasis on the historic financial performance of target businesses. While future growth is always a plus, we are more interested in understanding the extent to which status quo trading can be maintained so our valuation principles are based along the following lines:

We look to establish the underlying profitability of a business adjusted for dividends and bonus payments (given that many private companies will forego Director salaries in lieu of these).

Once the underlying profitability is known we would look to apply a multiple on post-tax profit to arrive at an initial valuation. This multiple will vary considerably from business to business.

Factors which will impact valuation will be:

Recurring revenue

The strength of recurring revenue which is delivered under contract. In other words, how stable is the on-going trade and how much repeat business happens each year. The higher the recurring revenue the better.

Uniqueness

The uniqueness of a product and service and the strength of the competitive landscape. Businesses that operate within a highly defensible niche with few direct competitors will command a higher valuation.

Longevity

The longevity of a product or service and the chance of the business maintaining its trading profile going forwards. Businesses that are susceptible to advances in technology (i.e. the better mousetrap) or changes in a political/legislative landscape can impact on the predictability of forward trading.

Cross-sell potential

The extent of any cross-sell/up-sell potential. Businesses that can leverage our existing Group resources and are likely to grow as a result of acquisition will command a higher valuation. Although we don’t limit our acquisition searches to the passenger transport industries, businesses which operate within this market will have more obvious sales and marketing synergies.

Cost savings

Whether any cost savings will be realised as part of the Tracsis Group. We have no interest in slashing costs but if there are obvious areas of duplication, naturally we will aim to become more efficient.

Tracsis would also look to place a valuation on the future growth element of a business where the financial outlook is forecasting unprecedented growth. Normally, this element of consideration would be paid on actual delivery. This is traditionally known as an ‘earn out’. We keep an open mind with regards to the shape and form of this.

Finally, Tracsis would look to establish the surplus current net asset position of a business and add this to the overall consideration paid. For example, any cash reserves and the debtor book would potentially be paid for on a pound for pound basis, taking account of current liabilities and working capital requirements. For a company founder, the attraction of doing this is to take advantage of entrepreneur's relief which provides for an effective rate of just 10% (by comparison, company dividends attract a tax rate of 30%). *

*Potential vendors are responsible for seeking their own tax advice from independent professional advisors.

Worked example

Every deal is evaluated on its own merits, but this worked example gives an indication of how we might approach valuation.

Great Company Limited has the following profile:

  • An owner managed business with turnover of £2.5M with pre-tax profit of £600K
  • It has had a similar financial profile for the past five years and is unlikely to grow in the coming year
  • The owner pays themselves a dividend of £150K per year in lieu of salary
  • The surplus net current assets position (i.e. cash and debtors, less creditors and working capital) is £1.2M
  • The Company works in a defensible niche market with most of the revenue recurring under contract
  • The Company has a clean balance sheet and share capital structure with customers who are easy to reference
  • Management have expressed an interest to stay on to run the operation post transaction and are willing to take a proportion of their consideration as Tracsis stock

Tracsis would approach valuation as follows:

  • The 'true' underlying profitability before tax of the business is £450K (i.e. £600K less the £150K dividend)
  • Corporation tax (following R&D tax credits) is 20% which results in post-tax profit of £360K
  • Given the strength of customer contracts, a low competitive environment, quality customer references and high barriers to entry...
  • The business would be considered an outstanding acquisition prospect and commands a x7 multiple of post-tax earnings
  • The overall valuation is therefore (£360K x 7) + £1.2m = £3.7m
  • All of this consideration would attract a low tax rate of 10% if entrepreneurs relief criteria is met

Dispelling a few myths

When it comes to selling their business, many owner managers will be new to the process and there can be a number of misconceptions associated with this process:

  • First off, Tracsis is not a venture capital or private equity provider. We only seek to partner with established, profitable, like minded businesses and we don’t take minority positions in businesses or enter into joint ventures.
  • We never entertain hostile/aggressive takeovers and have no interest in buying failing or distressed businesses that require cost reductions to make them work. Put simply, our management team have no appetite to have to turn a business around and generally we follow an approach of 'If it ain’t broke, don’t fix it'.
  • Sell, yes – leave, no! Some owner managers are under the impression they can only 'sell up' when they are going to retire. As Tracsis has no intention of running the day-to-day operations of a target company we would always prefer existing management to continue in their role until such time as a natural progression/succession can take place. For this reason the timing of a business being sold doesn’t have to correlate with the departure of a founding management team. Ideally, the successor will take the form of an existing member of staff of the target company who has the experience of the business and appetite to step up to a larger role.

As an acquisitive company we naturally want to meet companies that meet our criteria - we look forward to hearing from you!

John McArthur
Chief Executive Officer