All t/o no profit - powerfully built director types explain?

[Tasteful_Bling]

Hi all,

Have changed my username as didn't want to associate this post with my other postings. Apologies for the length.

My background is in wholesale in the jewellery industry, predominantly sterling silver products. In the last 15 years, the market has moved strongly towards branded offerings with companies such as Monica Vinader, Links of London, and Astley Clarke being seen as symbols of success. To get things to that level, you need a mixture of luck, clever marketing, and no shortage of cold hard cash.

So, a decision needs to be made as to whether it's worth trying to establish and build a e-commerce plus concession/retail brand (eventually you'll need some kind of physical presence at least for that type of product). This simpleton decided to have a look at Companies House. Not being an accountant doesn't help, but from what it looked like, these guys were generally making losses, and had carried forward losses to boot.

At the same time, at least for Monica Vinader, they were attracting investment at a premium of what seemed to be just over double turnover. The only explanations I could think of were either I was missing some clever accounting tricks so no-one pays corp. tax, or, maybe this is about "brand building" and the brand value is what commands the premium.

If it's brand building, and it comes to exit, do you market your company as a break even/loss making business with £25m+ turnover and somehow get paid a premium for it? Alternatively, is this just being naiive again, and in reality once the growth/expansion phase is over the company will be raking it in?

A friend keeps telling me this is how business is done nowadays - can the powerfully built director types help explain what is going on?!

Thanks.

[anonymous-user]

I don't know the dynamics of your sector but in general turnover is worth paying a premium for if you are

a) a competitor and you have improved margin or the deal will improve your margin
b) you are a supplier who can replace the current supplier
b) you are a significant customer who wants to control there supply chain.


I am involved in a company at the moment that more or less breaks even on a gross profit of a million pounds.

I would expect to achieve between 2 and 3 times turnover in the event of a sale, with a few businesses bidding.

[insurance_jon]

businesses tend to be bought on EBITDA which is your true profit before accountants work their magic

[anonymous-user]

insurance_jon said:

businesses tend to be bought on EBITDA which is your true profit before accountants work their magic

I have bought a few insurance businesses based on their turnover.
It's about the EBITDA you can generate post sale, rather than what they generate pre sale.
I wouldn't necessarily disclose that to the vendor though.

[insurance_jon]

looking at the company you mentioned it has:

£8.5m of assets
£8m in the bank
£17m plus gross profit
An EBITDA of £791k. That's profit before deprecation etc. some businesses are changing hands for 8-10 times that

it seems to be in a massive growth mode, which costs money

I've downloaded the accs which gives loads of detail. pm me your email if you want them sending over

[markcoznottz]

Just do what Tesco do and don't pay your suppliers .......

[Wacky Racer]

markcoznottz said:

Just do what Tesco do and don't pay your suppliers .......

Every little helps......

[technodup]

desolate said:

I am involved in a company at the moment that more or less breaks even on a gross profit of a million pounds.

I would expect to achieve between 2 and 3 times turnover in the event of a sale, with a few businesses bidding.

This is something which has been discussed around me recently, for various reasons. Any idea what a ballpark multiple would be if a business was doing say £600k net on £1m T/O, or something of that order?

And would the multiple change if say the figures were halved, or doubled?

[anonymous-user]

technodup said:

his is something which has been discussed around me recently, for various reasons. Any idea what a ballpark multiple would be if a business was doing say £600k net on £1m T/O, or something of that order?

And would the multiple change if say the figures were halved, or doubled?

What business?

Edit; it really is 'how long is a piece of string'
Tech stuff is generally 'worth' more than non-tech, but a lot depends on scalability and also whether the buyer can turn your 600k into say a million by increasing margin and/or turnover or saving costs (or both)

I once bought a business where I was able to increase the commission on a line of business from 20% to 38%, despite the target being bigger than us.

I was therefore able to pay what seemed like a very high price for his business, but one that was low based on the new margin.

Edited by anonymous-user on Tuesday 1st August 17:56

Edited by anonymous-user on Tuesday 1st August 17:59

[technodup]

desolate said:

What business?

Can I PM you?

[anonymous-user]

technodup said:

an I PM you?

Of course.

[technodup]

Sent

[Yipper]

Links of London makes a healthy +20% operating profit. Copy them.

[markcoznottz]

desolate said:

technodup said:

his is something which has been discussed around me recently, for various reasons. Any idea what a ballpark multiple would be if a business was doing say £600k net on £1m T/O, or something of that order?

And would the multiple change if say the figures were halved, or doubled?

What business?

Edit; it really is 'how long is a piece of string'
Tech stuff is generally 'worth' more than non-tech, but a lot depends on scalability and also whether the buyer can turn your 600k into say a million by increasing margin and/or turnover or saving costs (or both)

I once bought a business where I was able to increase the commission on a line of business from 20% to 38%, despite the target being bigger than us.

I was therefore able to pay what seemed like a very high price for his business, but one that was low based on the new margin.

Edited by desolate on Tuesday 1st August 17:56

Edited by desolate on Tuesday 1st August 17:59

Depends what type of string it is 🙂.

[technodup]

desolate said:

Tech stuff is generally 'worth' more than non-tech, but a lot depends on scalability and also whether the buyer can turn your 600k into say a million by increasing margin and/or turnover or saving costs (or both)

I wouldn't like to be the guy tasked with saving costs. He'd spend his first quarter wondering how they're so low in the first place.

The scale is there, but the growth would be t/o. Margin possibly with a bigger name behind it, but not on costs. Us Scots have that bit covered.