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:
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.
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.
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.
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.
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.