We had 2 of Yorkshire’s most prolific buyers of businesses on the panel at our Masterclass in Sheffield this week. Graham Royle of GRI Group said he had done about 35 acquisitions and disposals throughout his career, and John McArthur, the CEO of AIM listed Tracsis plc had done 10 acquisitions if the last 7 years both big and small.
How to find the right business
Graham Royle looks for underperforming stand-alone businesses in the chemical sector. GRI makes ingredients for a variety of personal care, household and industrial products and has a few of of its own labels. Its targets preferably have an owner who wants to sell and a senior management team that will stay. GRI aims to improve the performance.
Tracsis is an IT business providing systems enabling transport companies – rail, haulage, bus etc to operate more efficiently.
Most purchases are found in your supply chain occasionally amongst customers, in GRIs case in the chemical industry and in Tracsis’ case in the IT transport sector – exhibitions, conferences, professional bodies etc. Avoid Information Memorandums from corporate finance types and approach targets direct.
How to value the Target
Many of Tracsis’ targets are SMEs in a related sector with a couple of techy owners. The sales pitch to them is that if they get the equivalent to say 7 or 8 years income in a lump sum they will have a less worried life while continuing to work at Tracsis. Key to making this work is using Entrepreneurs Relief which reduces the Capital Gains Tax to 10%, which is a lot less than the rates of income tax which they would of course pay on the income they draw from their company.
Tracsis are on a p/e ratio of approx 20; if he can buy a business at say a p/e of 10 then he will make money.
Graham Royle values a target in a fairly traditional way usually on a multiple of profits sometimes with a brand a multiple of turnover. Look at other deals in the sector.
Both were adamant that that you should only look at historic profit not the hopelessly optimistic future most vendors paint; if at all possible only deal direct with the owners not with selling agents such as corporate finance/accountant advisers.
Heads of Terms and Due Diligence
Heads of terms are non-binding and set out the main terms. After that due diligence begins. John uses their own in house finance team to do the finance DD.
Speaking to the customers of the target before you sign is vital, but often very contentious. Don’t give away too much in case they walk away.