Valuation Game-Changers: Strategies to Maximise Business Value with Joe Hine

Joe Hine, a partner at SI Partners, joins Darryl Bates-Brownsword on Exit Insights to share his expertise in helping entrepreneurs build and realise value in their professional service businesses. With over 25 years of experience in M&A, Joe brings a wealth of knowledge to the table. Having started his career at PwC and worked in various industries, including Virgin Mobile, Joe understands the intricacies involved in maximising business valuation and preparing for a successful exit. He emphasises the importance of strong financials, ensuring profit and growth, as well as being in a sector that attracts investors. Joe also highlights the significance of securing the people behind the business through share incentives and creating a cohesive growth plan. With his insights and guidance, business owners can increase their business valuation and successfully navigate the exit process.

Welcome to the podcast that’s dedicated to helping business owners prepare for exit so you can maximise value and exit on your terms. This is the Exit Insights podcast presented by Succession Plus and I’m Daryl Bates-Brownsword. Today I’m talking to Joe from SI Partners. Welcome, Joe. Thanks for joining us.

Thanks for being here, Darryl.

Brilliant. Now, Joe SI Partners. You’re M&A Consultants. You work with primarily professional service type businesses to help them find buyers and help the business owners exit. And we explored about today’s conversation going. What is it specific or peculiar about professional and service-based businesses in general that makes them different or unique and the things that influence their valuation and how business owners can prepare them and get ready so that ultimately, when they come and have a chat to you, they’re ready to go. And we’ve removed all the frictioners or they’ve removed all the friction as much as possible. So, why don’t you give us just before we jump in a little bit about, I guess, yourself and what I guess is attractive to you when it comes to working with a potential client.

Sure. Great. So, look, yeah, as you said, my name is Joe Hine. I’m one of the partners at SI Partners. We have five partners across the world and we trade with clients from the USA through Europe, the Middle East and all the way out Asia and Australia and up to Japan. As you said, we’re specialists. We mainly work in the professional services sector and our focus is working with entrepreneurs to help them build and realise value in their businesses. Personally, my background, I spent my entire career in and around M&A, so about 25 years now, originally at PwC and then through various different industry gigs at a lot in Mobile, so Virgin Mobile and various other corporations before I joined SI Partners ten years ago as a partner and haven’t looked back since.

Brilliant. So, Joe. Thanks for sharing. So I think it’s fair to say. That you’ve got a little bit of. Experience in the topic we’re talking about today and global experience to boot. So that suits the audience of as SME business owners that we’re talking to primarily in Australia, UK and the US. And a few in Singapore and Asia as well. So really good to have you on the show. Why don’t we jump straight in and go straight for the jugular and go look, when a business owner approaches you and they say, hey, Joe, look, I’ve built my business thus far, I now want to exit my business, I want to sell the business. I’ve thought about the various options. What is it you look at? What do you look for to go, yes, I can sell this business?

Sure. The most obvious start place is the financials of the business. So have you got profit in there? Are you growing as a business? These things make huge differences. When we come to sort of thinking about valuations and the ability to buy and sell the business. One of the most important things is somebody’s going to want value for what they’ve got. And so actually, are they going to realize what the value they want if they’re going to invest in a process and kind of go on a journey with somebody like us? So you absolutely start with the financials, ensuring there’s profit, ensuring there’s growth within that business, because that will make it much more appealing to the market. Then second thing is making sure it’s in an area or a sector that people are interested in and that it’s an area that businesses are investing in, because great businesses aren’t always scalable. So you’ve just got to be quite considerate about the market dynamics as well.

So when a business owner comes to you, you’ve mentioned about, I guess, their valuation or their expectation in your experience, how well informed, I guess, or educated are business owners? By the time they get to you, have they got a realistic appreciation of what their business could be worth to an acquirer? Or is there, I guess, a magnitude shift in what they want for the business and what the business is potentially worth to an acquirer?

Yeah, I’d say it falls into a few camps. You’ll get a lot of people that just it’s completely new to them. They don’t have any understanding of the market and how it might work. They might have spoken to some friends, but don’t really understand the layers beneath and the complexity that might be involved. You get some people that have maybe had some approaches and their businesses are in quite an in demand space. They’ve probably got over inflated valuation expectations that sometimes have to be the market will always decide, but you kind of can tell them just about the realities behind what deals are being done at this point in time. And then there’s a lot of people that kind of sit in between that have a little bit of experience but still need that help just to kind of go beneath what is a headline valuation and kind of what’s the risk profile on that and what have they read about versus kind of what’s the reality?

Yeah, so I guess stage one, or step one is to go, let’s see how exitable the business is. Like, how dependent is the business on the owner or the founders being involved on a daily basis? Step two is, well, this is what we find, and I guess it’s similar to you, is that some owners go, hey, look, the business owes me this much, so therefore that’s the value. And some will go, hey, look, I just want to sell it for X amount. And they’ve just picked a nominal amount that they want to sell it for. And it’s up to advisors like yourself to go either manage expectations and go, no, you’re dreaming, or that’s way too low or yeah, that’s about right. And then sometimes there’s a gap and your job, or our job is to go, how do we close that gap for you, Mr. business owner? How do we put some things in place so that we can get the actual value of the business and represent it so it is closer to your expectation of what a buyer is going to pay for your business and there’s some work that can be done there. What are some of the easy wins that you see for business owners? So we’re talking service based businesses. What are some of the quick wins that you can suggest to a business owner that will really have an influence on the valuation before you take it to market?

Yeah, I mean, look, quick wins, it’s not always easy. Well, there’s not always many of them, right? Because if they were all quick and easy, then everyone would do them. But there are a couple of things you can think about. I think the biggest thing is in a service business, the majority of the assets, if not all the assets, will be the people. So I think thinking about how you secure the asset for the buyer, how you secure the people for the buyer, is one of the most common elements that we help people with and embark on at kind of an early stage. And that’s easiest, most easily done with some kind of share incentives. And just thinking about sharing the value slightly beyond the founder, the founders of a business, you could do that in a way that protects your value and ensures you’re not giving away too much, but actually makes it interesting. And buyers always very encouraged to see this and in fact, if they don’t see it, they normally restructure it into the deal anyway. They want value to going to the people that are working in the business. The second thing you can do is really create a really cohesive growth plan. And that’s not just about a spreadsheet with some numbers about what the future might look like, but it’s about how you’re going to achieve those numbers. So what sits beneath them, what are the initiatives that you’re going to do? What are the practical steps and what evidence do you have of those practical steps to make that coherent? And because in any service deal, or the majority of the service deals, you’ll have some value up front and some value that is deferred and paid in the future. The stronger your growth plan, the better put together it is and the more the buyer believes in it, then the more value you can create in that future payment.

Okay, so more than just a budget, which says here’s the revenue projection year on year, it’s an actual business plan that says, hey, look, it’s not just doing more of the same every year. Here’s specifically what we’re going to do. And if we forecast some step jumps. Here’s why we expect them to happen because we’re going to be doing this or we’re expecting this new product or this new process to kick in. And the other thing I think is you said lock people in. So how do you secure and give confidence to the new buyers that you’re not going to get a mass exit when people go? And perhaps this is checking in on with you, is it fair to say that in service-based businesses generally that the owners are very keen to acknowledge the input and the effort and the contribution that the employees have made to the business so that when they do exit that the employees benefit somehow or some contribution there?

I think it’s a mixed bag and it depends upon the nature of the business. I would say that the majority of the deals that we do will have sharing amongst wider than the founders in the business, the original shareholders. I’d say I think that is probably 95% plus of the deals that we’ve done will be under that scenario.

Okay, so given that we hear a lot about when it’s preparing your business to exit, it’s a really sensitive time. You don’t want to tell the employees too soon. You don’t want to put the deal at risk because we all know that a deal can fall over right at the last minute. So you don’t want to tell people and put fear in them. If you’re incentivizing the people to stay, at what time do you let them know that, hey, you’re thinking of exiting the business or do you just put these share incentives in and go, hey, look, for one day maybe we’re thinking of going at some point we’re going to exit the business. People look at owners and they see them getting older and they start to put one and two together. So if business owners go, hey, look, let’s have some incentive plan so that you all benefit at some point when we do exit the business. We’ve got no specific plans, but we just want to let you know this is the culture of the business that we want to incentivise you. Or if it’s just the key management team or the key people, the key influences in the business, do they let them know ahead of time or do they put something in place when the deal is being negotiated to lock them in? What do you see happening there?

Yeah, if you’re doing it when the deal has been negotiated, it’s too late.

Right

For the majority of occasions. Because for many of these schemes you have to get capital treatment, which is obviously what we want because it tends to be favorable in the majority of tax jurisdictions. But to do that you have to have a low price for any kind of share options that you give people to ensure that they get a capital gain, a capital uplift. And the deeper you are into a deal, then the harder it is to argue the value of the business is very low. So to actually trigger and to create a gain, you kind of have to do it a while out. And for me, there is three potential touch points with your team. I mean, clearly the first one is instilling these share options with someone or putting them in for your senior management team or whomever it is within the business. It’s a moment of sensitivity because if you say, here’s some options, and I’ve got no plans to sell the business, then it’s hard for someone to attribute any value to that. So therefore it’s a waste of your time and your effort, right? You’re really trying to kind of create an incentive for people to stay. So you kind of need to help them realise that it’s something that may happen in the future, that the timing on it is uncertain, but actually kind of I want to make sure that you are there and kind of participate on it, but also help them understand the value that they might attribute to that. And that’s critical because if you say you’ve got 1% of a company, that’s great, but what does that mean to me? And you’ve really got to think that through quite carefully. The second touch point is just as you’re going along the journey and I would not advise sharing any details of conversations or transactions you’re doing. I would advise though, that business owners are candid about their desire to grow the business and their desire to look at all avenues and opportunities to do that. So I M&A is not off the table, but it’s not necessarily on the table. But I’m open minded to it if that’s something that you believe in and the journey that you want your company to eventually take, because you’re taking that kind of surprise element out of it. And for all the deals that we do, in fact, the importance of them is always to look at growth and to look at the reason why you’d bring a partner into the organisation, someone to buy the business, is really to facilitate growth. And that’s where the strongest deals come from, the strongest valuation. And then sort of, let’s say the third touch point is absolutely at the last minute of when you have somebody at the table. They’re destabilising in the business. They take people bizarre off the ball. The thing that will kill a deal, well, it’s two things that kill deals. One is time just takes too long. For whatever reason, people aren’t moving quickly enough. The second reason is the performance of one of your businesses goes south. And it’s normally the performance of the business that’s being acquired is most likely because then the buyer will say, I can’t justify the price because your performance is not what you said it was going to be and we’ve lost some trust. The people that deliver that performance are the people in the business. So you’ve got to keep very focused on what you’re doing and keep the group very tight.

Okay. And just going back to, I guess those first earlier points you’re making when you’re talking about incentives, I think you were alluding to the fact that in the UK, there’s some pretty attractive tax advantages if you create some incentives upfront for your key employees that can be lucrative upon exit.

Yeah, that’s correct. I mean, in the UK, it’s perhaps the most tax advantageous regime that you can get very favorable options. The government likes share ownership amongst employees, so they encourage it. However, it’s not just in the UK. You get them in other jurisdictions as well. They’re probably not quite as favorable, but they’re definitely very favorable. But the earlier it’s a real balance because the earlier you put it in, the better. But they’re imperfect, right? Whenever you put share options in, they’re going to be wrong. You’re just trying to get them as the least amount, least wrong. You can basically wrong as possible. Yeah, because they’re inflexible inflexible instruments. But certainly in the UK, you’re talking about a tax rate of 20% on any gain, potentially 10% on any gain, versus 50% to 60% once you load in all of the taxes on the business, if you want to do something through a bonus mechanism.

Okay, so part of it is, hey, look, we’ve got some, I guess, commercial tools, regardless of where you are in the world, that the sooner we get them into the business, it sends a message to the employees that, hey, look, we’re all in this together. We all have a role in increasing the value of the business. And the name of the game here is to build a sustainable business that is growing, and we’re building the asset value. And we’ve got an open mind and we’re always looking at ideas to increase the value of the business, which in itself is suggesting that we’re valuable to our client base. If we’re valuable, we’re doing a good service in the marketplace and clients are coming to us. So we’re growing. If we do that with a strategic perspective, we’re also growing the valuation as well as the revenue and or profit. So we want to be thinking, how do we grow the valuation? And that could include M&A’s or acquisitions, acquiring, starting new products and what have you. If you’re halfway through a deal, you can put something in place, but it’s a bit harder to get a really nice tax attractive uplift for employees, but we might get some recognition for them that they’ll get some gain. So long game here is the best. And it sounds like we’re coming back to what a lot of advisors tell us in different areas of support to business owners, that you really need to start thinking about this three or more years in advance to get a nice uplift or nice benefit to everyone. The next piece is around the valuation. So we know that the way a business is valued, or some of the business owners out there might not know this, but the way typically businesses are valued is there’s a profit component out there. And there’s also a multiplier of that profit component. And depending on different businesses and different markets and industries they’re in, that profit multiplier will vary. So Joe, when we’re talking about service- based businesses specifically, how does that multiplier change? Does it change with size? Does it change with industry? Does it change with territory? What insights can you provide there?

Yeah, this is a real kind of piece of string kind of question because you can answer it incredibly simply, but actually that will hide and mask the kind of reality behind it. So a lot of people will have numbers of somewhere between five and ten times EBITDA or profit, as you said, EBITDA is sort of a slightly kinder version of your profit and kind of think that that’s what they might receive. And they’re probably right in most scenarios, that’s kind of where you’d end up. But there’s quite a lot else behind that. And such a big part of it is the risk and reward. So the more value you receive up front, the likely that you have a lower overall valuation. But the more risk and uncertainty you’re likely to take on, then the higher valuation, the more value you might receive, which is kind of obvious at one level and it would depend upon your appetite as an individual and the type of buyer that you want to buy. I guess the most important thing to consider when you’re talking to a buyer about selling your business to them is how are they valued as a business? Because they’re never going to be able to buy your business for very rarely, I’d say, but almost never will they buy a business that’s valued a valuation that’s greater than narrow, because otherwise it’s just dilutive to their shareholders and to their value as business. So most likely that is going to dictate the overall value that you’re going to get, the multiple that you’ll get paid upon the business. But if you also look at kind of the shared types of consideration that you’re likely to get and the types of buyers so kind of some of the more traditional buyers in the marketplace perhaps listed businesses that have been around for a long time. They tend to have fairly conservative deal models with sort of maybe 30% to 40% of the value up front, but actually more value opportunity overall because you’re taking risk. And if you’re prepared to share the risk, then kind of there’s more value opportunity. There a lot of the consultancies or particular and US style businesses, US style deals, sorry, they’ll sort of fix the value so there’s less opportunity for upside. But you might get 40% 50%, maybe 60% of the value up front, potentially higher in that kind of deal. But the remainder of the value is much smaller and perhaps much shorter in terms of the period of time you have to wait to get the money and perhaps less onerous in the things that you have to do to receive that money as well. Or the third type of deal that we’re seeing at the moment is where you’re selling to a business that is on a journey themselves, a buy and build strategy. And they will offer you part cash and part shares in their business. And that may be because they’re listed, it may be because they’re private equity, or it may be because they’re a private individual. The first two are more favorable than the last one because you have greater certainty of liquidity over those shares. And the private equity one is perhaps one of the most common in the marketplace at the moment, where people will offer you shares in their vehicle to go on that journey with them to allow you to kind of benefit from value at the secondary sale.

Yeah, so you get two bites of the cherry. You get to sell your business twice in that scenario.

Yeah or arguably even more. Three times of each value kind of going up and up and up. But yeah, absolutely. But it creates a longer timetable and it creates more risk. So it’s not for everybody, but it is quite appealing to some.

But it creates more risk but it also allows them to derisk to some perspective because they’ve sold a portion of the business, they’re now no longer all of their asset. A lot of their personal wealth is tied up in their business. They can extract some, derisk it out that re energises them to go right, let’s go again. If it’s a PE, they go, well, we want you involved in the journey going forward. It’s a great sign of faith. We want to do this with you to take the business to the next stage. And then you hear stories out there in the marketplace where they sell the second half of the business and they get significantly more than the first half, which is what the PE is more interested in anyway.

Yeah, absolutely. I think one of the biggest decisions for any seller or entrepreneur would be the time that they want and how much energy do they want to expend and how long do they want to expend it for. Kind of if you’re taking shares, you have less certainty over how much longer you might want to be there. So longer as an employee rather than kind of found their owner or having definitely an owner versus perhaps a deal structure, which gives you certainty over when you may kind of be free from the deal structure, albeit you might want to hang around and stay within the business, but you’re no longer compelled to be there because of the financial incentive or significant financial incentive that’s available to you.

So what we’re hearing is, look, there is a ton of different variations and options available when it comes to exiting your service business. You can take a chunk out and then go on the ride with a PE. If you’re big enough and attractive enough to be acquired by some sort of financial investor, you may merge or become part of another organisation and end up as an employee. You can take your money all out and then exit the business. So it’s really important to know what you want as a business owner and where you are in your stage of life and employment and working and your journey there. It’s important to know where you are financially in your personal financial circumstances and what you want out of your business and then just where your energy is like, what do you want moving next? Are you ready to keep working? Do you want to stop? Do you want to do something else? It’s understanding, energetically where you are and what you want from your business. And so what you’ve shared with us, Joe, is a lot of different options of what’s available. What do you see if business owners are listening to this and they’re aspirational and they go, look, I’d love to get my business acquired by some sort of financial institution who wants to put a lot of money in, take my business there, PE company, take my business to the next level. How big do they have to be to be attractive to someone like that?

Yeah. So private equity or any investment house and professionalised investment house is basically dictated by the size of check they want to write because they’ll have an investment thesis. And part of that would be I’m going to write checks of X. And hence when they raise their money, they’ll raise the amount of money that allows them to distribute that across however many deals they want to do. So if you’re talking about private equity houses, the sort of lower mid market, the minimum they want to invest is 10 million. But a lot of them will like to have minimum ticket of around 20 million in size. So if you kind of work that back and you say, all right, so they’re going to value your business, let’s be conservative and say seven times and they want to buy 51% of the business, then you’re going to need minimum of two, 3 million of EBITDA to kind of get you there to enable the deal to be facilitated. So you’ve got to be in the high million of EBITDA 1.9 or getting into two to three really to have a meaningful conversation with a number of houses to get a competitive process going. The exception to that is if you are in very, very in demand and desirable spaces, AI being the obvious one at the moment, that people might value businesses give a much higher valuation to businesses and therefore allow them to write that check, or they may reduce their check size to get into that market.

And you’ve touched on something that we’ve heard perhaps mythical stories about in the past, whereas once you get to about a 2 million EBITDA, your valuation multiple steps up by a notch. Is that what you see?

Yeah, I think that’s absolutely right. So the larger you get, the more rarer a beast you become. So therefore, as long as there’s high demand, what changes multiples is competition. Quite frankly, that’s the only thing that really drives a significant amount of value. So you’re rarer, you’re more in demand, there’s less opportunity, so there’d be more people who want to come and come and have to try and acquire you and hence drive your multiple up. So it’s absolutely correct.

Okay, so if someone’s got, let’s say, less than a two mil EBITDA, what are the options available to them? The most common options for someone who’s half a mil to two mil sort of range?

Yeah, there’s still loads of options available to people. I think if you’re getting close to a million or beyond a million, it really puts you on the radar of a lot of businesses that are out there. And you can go through those groups, kind of whether it’s traditional listed businesses that might be looking whether it’s consultancies that are looking to add to their technology, consulting businesses that are looking to add into their capabilities or geographies into their portfolios. You might not be ready to go to private equity as an initial investment, but actually the private equity and service-based businesses, the only real justification, as far as I can see, or the 90% of the time, will be for a buy and build strategy. So there will be private equity backed businesses that want to come and buy you. And there’s also options around just doing it yourself, like management buyouts. And in the UK, again, there’s a tax efficient ways of doing that, but we’ve done two or three of those over the last kind of couple of years because they’re quite appealing for people to sort of retain control of the process. So it’s almost, at the moment, nothing’s off the table because it’s a very dynamic market and it remains so. In fact, we’ve got more buyers and sellers in the marketplace at the moment. So I’d say you kind of never had more options.

Yeah. And it relates back to, as you were saying earlier, about your risk profile, because you can get to a certain size, then start acquiring a few of your competitors or the other players in the market. You can increase your business size that way, acquisition it up. You may end up with more shareholders in your business, but you then become more attractive because you’re a larger player yourself.

Yeah, absolutely. I think buy and build strategy is something that we’ve. Seen over the last two, three years of increasingly common, much more ambitious entrepreneurs. And it’s a great way of driving more value through your organisation. It’s got to be done very carefully. If you’re embarking on an M&A strategy today, it’s going to add 24 months to your ability to sell from just standing stock. So it’ll take you twelve months to do the deal in normal circumstances and it’ll take you twelve months to integrate it before you can really go to market. So it definitely kicks things down the road. But in terms of accelerating it, it’s there if it’s strategic. And don’t forget the opportunity cost of doing it. It’s going to cost you even a small deal of, I don’t know, a million pounds of revenue is going to cost you 50 hundred or 50 grand of management time, advisor fees to kind of get it right. So you’ve got to get quite an uplift on that to make sure you’re getting return on investment and your time and money is not better spent elsewhere. Yeah.

Okay and let’s just go for one last question for businesses, say under the half a mil of EBITDA, in your experience, what are the options, what words of wisdom can you share with business owners in that category?

Yeah, I think you can still sell at that level, but you’re very much in the sort of bolt on territory. I think you’ve got to perhaps prepare a lot more consideration to packaging yourself nicely for an acquirer. So you got to keep your business very simple. Your process is very simple. Ensure you’ve got sort of robust client relationships so that they’re kind of far less of a concern. And similarly with your kind of kind of clients, the way you’re most likely to sell your business then is actually by making relationships as early as possible because people are going to need to trust you. So building strong ties with other organisations or kind of just even networking, getting out into the market is going to be essential so that if you want to sell your business, people already know who you are and know what you do and trust you.

Brilliant. So the scales or the options and the attractiveness changes the bigger you get. But every business owner starts somewhere and everyone started at a small business and it can be quite lucrative if you prepare properly and you prepare two or three years in advance by the sounds of things.

Correct.

Brilliant. Hey, Joe, I really appreciate you sharing your exit insights with us. I’ve got one last question for you, if you don’t mind. So I asked this to everyone who joins us on the podcast and that is, look, we’ve covered a lot of territory today. What’s the one key message you want people, listeners to take away from the wisdom that you’ve shared with them today?

I think if someone is starting to go on this journey or thinks that they want to realise value at some point. I think so much of it’s about the time at which you start to switch your attention to it. You kind of switch yourself too quickly and it can be quite disastrous on the business. Switch yourself too slowly to it and you might miss out on opportunity. And so I think you’ve got to start gearing up with one to 5% of your time just considering this and building up your understanding, potentially working with somebody else that can help you with that so that you’re getting to 10, 20 percent kind of a year out. And then once you’re actually getting very close to it, you can switch to sort of kind of 100% if you like. So start early, but just start in the right way.

Brilliant. Joe, Hine. Thanks for sharing your exit insights with us today.

Brilliant. Thank you, Darryl. Pleasure to be here.