When a deal is being discussed, two questions tend to dominate: how is the business valued, and how is the deal going to be structured? Both deserve more scrutiny than they typically receive and the interaction between them is where buyers most often come unstuck.
Valuation: both sides of the equation need interrogating
SME businesses are typically valued using EBITDA multiplied by a multiple. Simple in concept. More complex in practice. EBITDA adjustments are used to normalise costs, adjust for owner remuneration, and remove or add one-off items all of which can have a significant effect on price. Small movements in EBITDA, multiplied by even a modest multiple, produce material changes in value.
The multiple itself reflects risk and quality — consistency of performance, cash conversion, customer concentration, key person reliance, regulatory exposure. Two businesses with identical EBITDA can justify very different multiples.
Structure: share or asset purchase?
The right structure follows the substance of what you are acquiring and the risk you are prepared to take on its not a general preference for one approach.
Working capital: the detail that changes what you actually pay
Many SME acquisitions are structured on a debt-free, cash-free basis. But the business still needs enough working capital to operate from Day 1. The deal will reference a 'normalised' level of working capital that the seller leaves in the business at completion. Fall short and the price adjusts down. Exceed it and the buyer pays more.
Working capital sits outside the debt-free, cash-free adjustment and is negotiated separately. Treating them as the same thing is one of the more costly assumptions a buyer can make.
Our Factr capability is strengthened by Geoff Kwateng who brings considerable deal and valuation experience.