Valuations in the SME sector in a post Covid world…

The news is full of negativity, be that due to COVID itself or the impact COVID is having on the UK economy, one would therefore assume that business valuations must ALL have also been negatively impacted by COVID.

Is it therefore all doom and gloom………?  Absolutely not. 

As in most cases, there will be winners and losers, but good progressive businesses will remain valuable, possibly even more so in the current climate.  On the flip side, ‘me too’ businesses may find that demand from trade buyers and private equity is more limited.

When looking at valuing a business, there are generally three key constituents to understand in arriving at an Equity Value:

  • What is the underlying earnings of the business now and in the future;
  • What multiple should be applied to those earnings; and
  • What is the net cash / debt position of the business.

For the majority of companies, earnings have typically seen a sharp fall in April, May and June with somewhat of a recovery from July onwards.  This profile suggests that the COVID impact is (on the whole) a temporary impact on earnings and a pro-forma ‘earnings’ for the COVID period could be substituted, leading to the fabled EBITDAC metric.

From a multiple perspective, the impact of COVID on the sector dynamics both now and in the future is likely to have a bigger impact on valuations.  Questions such as: Is there a % reduction or expansion in sector GDP anticipated?  Has there been a paradigm shift in operating models?

Moving on to the business itself within the sector, are supply chains robust and fit for purpose?  How much working capital does the business require going forward?  What is the potential exposure for bad debts and business failures in the customer base?

These are not unusual questions to ask when looking at business valuations, the issue is the answers are a little less forthcoming in today’s climate.

In Summary

The focus on the above questions clearly suggests more uncertainty and uncertainty tends to lead to ‘prudence’ in the valuation world.

There are essentially less businesses around where both buyer and seller are aligned as to the future trading potential of a business, hence valuations are now more than ever highly judgemental and with no single right answer.

For most business valuations in the near term, I would anticipate that EBITDAC will be a well-accepted metric, but it will not apply to all sectors.  Those businesses that have been impacted negatively by COVID, not recovered quickly and with a business model that remains exposed to any future (or ongoing) pandemic may indeed find both earnings and multiples lower, but more importantly will find less ‘buyer’ interest overall.

It has always been the case that strong management teams, contracted recurring revenues generating high margins and with a strong future outlook are all attributes that underpin high valuations.  It is no different now and those businesses that ‘tick’ the box should anticipate more interest and attract premium multiples with or without COVID.

For any further information on the content discussed in this blog, please make sure to get in touch with our Corporate Finance partner Andrew Feeke on 0161 519 5050 or

Extension of Covid business loans welcomed but “approval rates need boosting”, says advisor

A leading corporate finance advisor has welcomed the government’s decision to extend the four Covid-19 business relief schemes, but believes action is needed to get more of the loans approved.

Andrew Feeke, head of corporate finance at MHA Moore and Smalley, says chancellor Rishi Sunak’s decision to keep the CBILS, CLBILS, BBLS and The Future Fund loan schemes running is the right move, but lending is still too restrictive.

In an announcement on Thursday, Rishi Sunak announced an extension to the four schemes to November 30.

Commenting on the decision, Andrew said:

“The four government Covid-19 loan schemes were due to wind down at the end of September. Pushing the application deadline back is good news for UK businesses of all sizes and definitely the right thing to do, especially with further lockdown restrictions being announced and potentially more stringent rules on the horizon.

“Hopefully, Rishi Sunak will take the opportunity to reform the schemes to improve the success rate of applicants. The overall approval rate is too low at 63%, and this number is skewed by the Bounce Bank Loan Scheme, which is running at an 82% approval rate, the most successful of the schemes in deploying liquidity.

“The Bounce Back scheme only provides loans of up to £50,000 though and the more substantial CBILS scheme, which larger SMEs desperately need access to, is only running at a 49% approval rate.*

“Access to funds up to £250,000 is relatively plentiful currently, but more needs to be done for those businesses requiring more funding.”

Andrew believes there are a number of options available to increase the understanding, flexibility and ease of access to the CBILS facilities.

These may include providing a framework leverage calculation, such as a fixed multiple of EBITDA. Flexibility over the ‘relevant earnings’ – and therefore debt serviceability, or indeed increasing the threshold at which personal guarantees are prohibited, may also help boost loan approvals. 

“Some or all of the above could increase the applications and acceptance levels of CBILS so whilst we welcome the extension, we would like to see more,” added Andy.

CBILS (Coronavirus Business Interruption Loan Scheme) provides financial support to smaller businesses across the UK that are losing revenue, and seeing their cashflow disrupted, because of the Covid-19 pandemic. CLBILS (Coronavirus Large Business Interruption Loan Scheme) offers similar funding support but for larger businesses.

The BBLS (Bounce Back Loan Scheme) allows small businesses to access loans of up to £50,000. The Future Fund is a funding package designed specifically to help innovative UK companies battling the coronavirus pandemic.

*Source HMRC Covid-19 business loan statistics.

Corporate finance team advises on MBO at automotive parts business

A company which designs and manufactures specialist automotive parts has been bought out by its management team, in a deal supported by our corporate finance division.

Bailcast Ltd, which distributes its rubber vehicle parts to over 40 countries worldwide, including Europe, the US, Canada, Australia and New Zealand, has been purchased for an undisclosed sum.

The company’s finance director Lorraine Alty, sales director Martin Calley, and operations director David Hartley have acquired the business from founder Philip Hayward who will retain a minority shareholding.

The deal team at MHA Moore and Smalley was led by corporate finance director Stephen Gregson and tax partner David Bennett.

Philip, who established Bailcast in 1980, said:

“The business has been in the safe hands of our excellent management team for the last few years and it is a pleasure to be able to offer them ownership in the business.

“This deal ensures a seamless transition and continued certainty for the many stockists and distributors worldwide who have come to rely on the quality of our products.”

David Hartley, operations director at Bailcast, added:

“The business has been successful because of its strong engineering pedigree, backed by excellence in research and development. This ethos has allowed us to provide great products and outstanding customer care to our distributors across the world. With Philip’s continued support, we will stay true to these values as we continue to develop new markets.”

Stephen Gregson commented:

“It’s been a privilege to support a longstanding client of the firm. Not only does this deal help the founder achieve value from a business he developed over many years, it means Lorraine, Martin, and David can build on the success they have already enabled, taking Bailcast forward to the next stage of its journey.”

Bailcast makes rubber parts for vehicle drivetrain, steering and suspension systems, primarily for the spares and repairs aftermarket.

Its patented worldwide products include market-leading CV joint boots and steering rack boots, as well as ball joint dust covers, fitting tools and accessories. The business employs 13 staff at its headquarters at Chorley North Industrial Park.

North West Finance Directors Webinar Autumn 2020

The NW FD Network is run in association with AFR Consulting and Barclays. Our mission is to help Finance Directors and Senior Financial Controllers to continue their personal development through:

  • Observing key note speakers
  • Expanding personal networks
  • Exchanging knowledge and ideas with peers
  • Receiving technical updates

What the webinar covered:

During the course of the webinar our presenters looked at ways businesses can adapt and thrive as we emerge from the COVID-19 global pandemic.

Sophie Wheeler-Traherne, Assistant Vice-President, Government Relations at Barclays opened the event with a UK Political update. Sophie has spent her career working in politics. Most recently she worked for the Secretary of State for Wales as his Special Adviser, working on policy, communications, legislation and political engagement.

Andrew Feeke, Corporate Finance Partner at MHA Moore and Smalley discussed how businesses valuations will differ in the post pandemic landscape.

Thirdly the presentations turned towards a focus on the workforce. Emma Swan, Partner and Head of Commercial Employment at Forbes Solicitors provided an employment law update. Emma works with clients of a variety of sizes in contentious and non‐contentious matters, and is a Legal 500 recommended lawyer.

Please find video below

North West Finance Director Autumn Webinar

MHA Moore and Smalley advises on vulnerable care acquisition

A Manchester-based healthcare investment company has acquired a £4.5m care and education provider as part of its ongoing growth strategy.

Tristone Healthcare, a subsidiary of Tristone Capital, has acquired Southampton-based Sportfit Support Services which offers care and education services to vulnerable young people including those with learning disabilities and requiring supported living.

The acquisition is one of a number planned this year as Tristone targets £35m revenues and £7.5m EBITDA in the next 18 months through its buy, build and hold strategy.

Tristone was advised by MHA Moore and Smalley’s Corporate Finance and Tax Advisory teams who provided financial and taxation due diligence support alongside wider deal advisory services.

MHA Moore and Smalley’s acquisition team was led by tax partner David Bennett and corporate finance director Simon Carruthers.

Simon Carruthers said: “The Tristone team are passionate in their plan to build a significant social care group delivering positive social change through the alignment of commercial returns with social impact.

“Assisting the team to shape and deliver a transaction that will help Sportfit progress to the next level and provide exceptional support for even more disadvantaged young people has been extremely pleasing.

“This is the second transaction in the social care sector that our Corporate Finance team has helped deliver from start to finish during lockdown, based on the team’s deep understanding of and strong credentials in children’s and young person’s services in particular.”

The deal increases the number of vulnerable young people currently supported by Tristone businesses to 98.

Tristone founder and CEO, Yannis Loucopoulos, said: “Sportfit is a fantastic business that perfectly aligns with our values and helps us further deliver on our purpose of providing safe, essential care, while enriching lives through education for vulnerable children, young people and adults.

“It’s an excellent example of our strategy of acquiring profitable social care businesses with a track record of success and a strong management team.”

MHA Moore and Smalley advises on PE-backed acquisition of personal alarm business

A leading field service management company has acquired a North West-based lone worker protection provider in a significant private equity-backed deal.

Lone Worker Solutions, which provides personal GPS and emergency alarm devices and apps for solo workers in high-risk environments, has been acquired by Belfast-based PE-backed Totalmobile for an undisclosed sum.

Totalmobile provides workforce management software such as cloud-based job management and data analytics platforms. The company is supported by technology-focused private equity firm Horizon Capital and says the deal will add scale to its end-to-end suite of staff management solutions as part of its ambition to further establish itself as the UK’s premier field service management provider in a range of sectors.

Lone Worker Solutions was formed in 2009 and is headquartered in Rochdale, Greater Manchester. It employs 18 staff and services clients including NHS Trusts, county councils and National Rail.

The company’s management team was advised by MHA Moore and Smalley. The team comprised Andrew Feeke and Ian Waddingham (Corporate Finance), David Hackett (Tax) and Joe Sullivan (Corporate).

Andrew Feeke, corporate finance partner, MHA Moore and Smalley, said: “Lone Worker Solutions has been our client for the past five years.  We were extremely pleased to be able to bring in our corporate finance and transaction tax specialists to negotiate and structure a great deal at an important step in the company’s progression.

“Our corporate finance team has been busy throughout lockdown and it is clear there is still an appetite for mergers and acquisitions in the North West. We have advised on a number of significant deals in recent weeks with more expected to follow over the coming month.”

George Stavrinidis, chief executive officer, Lone Worker Solutions, said: “We are very excited about completing this hugely significant deal for the company. Totalmobile is a business which is well-aligned with our own culturally and will bring huge technical benefits and scale to our current operations.

“We have had a superb relationship with MHA Moore and Smalley for a number of years and were able to call on the team’s expertise at various points during the transaction.”

Forbes Solicitors also advised Lone Worker Solutions on the deal. The Forbes team was led by Nick Pickup and included Pauline Rigby and Rebecca McCann (Corporate), Mohassan Mehmood (Commercial Property) and Abigail Lynch and Sal Chowdhury (Employment).

MHA Moore and Smalley advises specialist residential care provider on new investment

MHA Moore and Smalley is proud to have supported a Cumbria-based client in securing new investment which will help it expand its specialist support for children.

A Wilderness Way (AWW), a provider of specialist residential childcare and crisis intervention services, has secured backing from BGF to support its continued investment in providing critical care to vulnerable children.

BGF has invested for a minority stake in AWW which has a portfolio of 20 properties across Northern England and Scotland.

Founded by Geoff Jenkinson and Clare Houghton in 2007, AWW has established itself as a leading provider of high-acuity, life-changing residential care for children at significant risk from exploitation, violence, crime and abuse.

BGF’s funding will be used to develop AWW’s unique provision of individualised care which delivers trauma-informed therapeutic care with contextualised safeguarding to keep vulnerable young people safe. AWW’s approach promotes the focus on developing young people’s self-esteem and confidence through outdoor adventure activities and re-engagement in meaningful learning through AWW’s individualised education programme.

Geoff Jenkinson, CEO of AWW, commented: “BGF’s ethos and values are well aligned with those that we hold so dear at A Wilderness Way, allowing us to continue to put quality of care and education of our children at the forefront of everything that we do.

“Quality, creativity, safety and creating opportunity for some of the most marginalised children in society is what we have excelled in over the last 13 years, and we are confident that this partnership and investment will allow us to develop further in accordance with our values.”

MHA Moore and Smalley’s corporate finance and tax teams advised the shareholders of AWW on the deal.

Simon Carruthers, corporate finance director at MHA Moore and Smalley, said: “Having worked with Geoff, Clare and the team for many years, we knew their ambition, strong management structure and clear plan for growth would be a great fit for an investor like BGF. It’s been incredibly pleasing to help put this deal together and see Geoff and Clare’s and their wider management team’s hard work rewarded.

“A Wilderness Way provides strong outcomes for children because of its commitment to the highest quality care that has been at its heart since starting the business in 2007. The investment and additional expertise offered by BGF will help the management team take the business to the next level and provide that exceptional support for even more children across the region.”

Harry Jones, investor at BGF, said: “AWW has established itself as a truly differentiated provider that delivers exceptional outcomes for the young people in its care.

“As a business that focuses on delivering social purpose, we are delighted that our investment will help to mobilise additional services to provide for the overwhelming demand for these services.”

AWW will be joined by Fiona Lowry, who has been appointed as Non-Executive Chair. Fiona brings a wealth of experience to the role, having founded several successful businesses in the Healthcare sector, including The Good Care Group, a former BGF portfolio company.

As part of the BGF deal, AWW has implemented a new organisational structure, establishing a leadership platform that can continue to deliver services of excellence and a structure of governance that ensures the safety and progress of children, staff and the organisation. Under the changes, Geoff Jenkinson will remain Chief Executive and Clare Houghton will transition to Multi-Disciplinary Team Director (MDT Director),  responsible for setting the agenda in relation to the therapy model across the organisation and promoting the best interests of children in accordance with the statutory framework.

Robbie Burke, who has worked with AWW as a consultant and Non-Executive Director since 2015, will take on the role of Chief Operating Officer, to oversee quality throughout the organisation, establishing goals for care, education, outdoor education and therapy in partnership with senior managers.

Cheri Jenkinson, who joined the organisation in 2017 as HR Manager will take on the role of Director of People and Organisation. Cheri will be a member of the Executive Board and accountable for the performance of the P and O function, as well as providing strategic counsel on all people matters.

BGF’s investment will support the growth and development of more services to the most vulnerable young people across the United Kingdom.

BGF’s Pinesh Mehta led the deal and Harry Jones will join the AWW board. BGF was advised by Hill Dickinson. AWW advised Browne Jacobson.

The impact of Covid-19 on transaction structures: A focus on earn-out structures

The economic impact of Covid-19 has been well document in the media, and there is currently significant uncertainty both in terms of the timescale and shape of the recovery, and also whether the pandemic will lead to permanent structural changes in some areas of the economy.

The above can potentially raise significant issues for sellers who have recently sold, or who intend to sell their business using an earn-out structure.

What is an earn-out?

Earn-outs have been a common feature of M&A transactions, with approximately 40-50% of transactions using some form of earn- out structure.

Consideration received for the sale of a business can be split over time, with an amount due on completion, and further amounts deferred to a later date.

The deferred element of the consideration is often contingent on certain conditions being met, and where these contingencies relate to the business achieving certain performance targets in the post- acquisition period, the deferred consideration is commonly referred to as an ‘earn out’.

Earn-outs are particularly useful in bridging a valuation gap between the acquiror and seller. This can arise due to different views on the future performance of the business, and the degree of risk attached to the forecast performance of the business.

Earn-out periods typically range from 1 to 4 years, thus providing the sellers with an opportunity to demonstrate the value of the business (often through retaining an active role in the business), and therefore receive an increase in their consideration as the future performance is delivered.

The potential impact of  Covid-19 on earn-outs

Covid-19 is likely to have impact on earn-outs in a number of ways. The impact is likely to be felt in three key areas:

1. Financial performance

Perhaps the most obvious impact is likely to arise from the impact of Covid-19 on the financial performance of the target business.

Earn-out payments are typically linked to the financial performance in each year of the earn-out period.  It is therefore likely that if the business has been adversely impacted by Covid-19, the earn-out payments relating to this year’s performance (and possibly future years) could be significantly reduced.  

2. Potential solutions could include an extension to the earn-out period, or the inclusion of Covid-19 adjustments to the earn-out profitability calculations.  Demotivated management

It is important to note that a missed Earn-Out target is potentially a significant issue for the Purchaser as the business they have acquired is now underperforming.  Faced with a significantly reduced earn-out payment, possibly coupled with a perception that earn-out targets in future years are now unachievable, sellers may lack an incentive to ensure that the profitability of the business, or the division of the business which they control, is maximised.

If this issue is not addressed this could, in some cases, lead to the resignation of the seller, which could have a destabilising effect on the business.

3. Cash flow and the funding earn-out payments

For businesses sold prior to Covid-19, and where earn out payments are now falling due, if the Purchaser is experiencing cash flow issues arising from the pandemic they may be unable to pay the earn-out payments on time.

An extension to the timeframe for payment, additional interest charges, or the use of alternative forms of consideration such as equity or loan notes may need to be considered.

The solutions to the above issues all involve discussion and negotiation between the parties and their advisers. Most share purchase agreements can only be varied in writing, and therefore any changes to the earn-out structure or payment terms would need to be properly documented. However in most cases it will be in the interests of both parties to swiftly reach a suitable compromise.

The Corporate Finance team at MHA Moore and Smalley have extensive experience advising business owners on transaction structures including earn-outs. If you would like to discuss any of the issues raised in this article, please do not hesitate to contact a member of the Corporate Finance team.

Criteria from the banks for the Coronavirus Business Interruption Loan Scheme (CBILS)

The Coronavirus Business Interruption Loan Scheme (CBILS) aims to support long-term viable businesses who may need to respond to cashflow pressures by seeking additional finance. The loan will be provided by the British Business Bank through participating providers during the Covid-19 outbreak.

The CBILS supports a wide range of business finance products, such as term facilities, overdrafts, invoice finance facilities and asset finance facilities. All loans will require cash flow forecasts and projections.

We have created a specific factsheet detailing:

  • The key features of CBILS
  • How CBILS can be accessed
  • The eligibility criteria of CBILS
  • What information will be required from you

In addition, we have conducted a review of local high street bank providers and created a matrix of information setting out what they are currently offering.