Speaker 1
One of the major things that we focus on in The Harbour Club is how you create really big shareholder value, how you create a lot of shareholder value. If you think of running a business, try not to think of yourself as a business owner. Think of yourself as a shareholder.
Speaker 1
What you really want to do, is it’s not about owning 100% of a business. It’s about creating the maximum value from the shares that you do own. I don’t want to give too much away, because obviously we do a training course over two days where we share all of this stuff.
Speaker 1
But the four drivers that I’m going to talk about in this video, and we’ll break it into four parts are how you can drive shareholder value using scale, liquidity, redundancy, and financial engineering. The redundancy, by the way, is your redundancy, not any of your staff. So scale, liquidity, redundancy, and financial engineering.
Speaker 1
So let’s start on this video with scale. Basically, in valuation terms, big is beautiful, so the bigger you can make the business, the more it’s worth. This is actually really quite notable. A two-and-a-half million turnover company with 10% margin, so 250,000 of profit, might attract somewhere between four and five times its earnings when you come to sell it.
Speaker 1
This will all make a lot more sense when you’ve done the course, but let’s just say four or five times earnings for that size of a business. It’s a thousand moving parts in that valuation, but just for simplicity. If you think about it, that’s somewhere between a million to 1.25 million for that business.
Speaker 1
If the business was turning over 5,000,000, and had 500,000 of profit, so literally double the size, you’d think the valuation would double, but actually it goes up quite a bit more than double. You might attract somewhere around six or seven times earnings for that big a business. Instantly, you’re into the 3,000,000 starting range of valuation.
Speaker 1
There’s a number of reasons for this. Probably one of the biggest drivers is actually the attractiveness to trade buyers, so people who are in the same kind of business are more likely to try and buy you when you’re 5,000,000.
Speaker 1
For a start, you’re going to move the dial, so when they acquire you, you’re actually going to have a significant impact on their business in terms of their size. But the big one that’s been a driver really in the last 15, 20 years, the cost of due diligence, so the cost of looking into your business to see if it really is what you say it is has gone through the roof.
So whereas, it might have cost 20,000 to 100,000 pounds to do due diligence in the past, I’ve seen deals recently- Well, I saw one deal that was 13,000,000 in valuation where the due diligence was 750,000 pounds. So, 750,000 pounds of professional fees.
Speaker 1
Well, when you’re buying a 13,000,000 company, that just about stacks up, but if you’re buying a 1.25 million enterprise value, clearly, it’s way too big a percentage of the deal. By making it that little bit bigger, you increase the neck of your funnel effectively in terms of who can look at the transaction.
Speaker 1
So, how do you double a business? If you’re doing 2.5 million, how do you sell a 5,000,000 business? Well, I’m a big of a one trick pony. My one-size-fits-all solution to everything is to buy some of them. I’m very simply, the only way I can think of if you business could be double the size next week that it is this week, the only way I can think of is to acquire or merge with a competitor.
Speaker 1
Anything else that I can think of, the sales and marketing. In fact, if a sales and marketing person tells you they can double your business in a week, you’ve got to think they’re lying. I mean, it would just stand out as being blatant bullshit.
Speaker 1
But the idea of just putting your business alongside another business that’s also doing two-and-a-half million, is a really obvious way of getting that quick scale. If you use a merger, effectively you can merge both of your companies into a common holding company, so actually you don’t need to change anything in the businesses themselves.
Speaker 1
You don’t have to rinse out all of those synergies or try to integrate the businesses. I think too often people get too bogged down in trying to rinse out all of the synergies. I would much rather sell the business with the advantage of the next person being able to rinse out those synergies than actually trying to get them myself.
Speaker 1
That’s a quick comment. If you want to drive shareholder value, the quickest and simplest way is to create scale, so a bigger business is just worth more. Thank you.
Speaker 1
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