Ashley Bancroft, a founding Partner of H&Hendricks LLP, discusses how to maximise business value in uncertain times and ensure you keep more of what you make when planning your exit.
With the 20th annual Infologue Top 100 Security Companies by Revenue due to be published this week, the question whether bigger really does mean better will once again be subject for debate. Rivalry remains fierce across the security industry and the annual rankings are the quickest way to gauge how well you’re performing against your peers.
If you have read my previous articles on this topic Is Bigger Better? and Vanity or Value? you will know that while revenue can be a good measure of prosperity, focus must always be on profitability and cash flow if you really want to build a more valuable company and earn real bragging rights over the competition.
Choppy waters lie ahead
2024 has been a damp squid. Optimism quickly dwindled in the second half of the year in the face of plummeting business confidence, hefty tax increases and negligible economic growth. Add to this a shifting geo-political landscape and the fact the world is seeing the highest number of countries in conflict since World War II, it is no wonder that everyone is a little anxious about what the future will bring.
With uncertainty comes risk, and typically with risk comes higher revenues and profits for the security industry, however, this doesn’t appear to have been the case in 2024. The UK security industry stands to generate £8.8bn in revenues this year of which £6.6bn relates to security guarding. Whilst this is the same as 2023, in real terms total industry revenues have actually declined.
This is surprising given the inflationary pressures the security industry has had to grapple with, particularly around labour costs. On face value, it seems that security budgets may have reduced and/or cost increases not fully passed on to customers resulting in squeezed margins, reduced cash flow and lower company valuations.
2024 M&A activity
UK M&A activity saw a notable shift over the first half of 2024 as deal volumes across all industries dropped around 20% compared to the same period last year. Continued uncertainty resulting from global political tensions and high interest rates served to subdue activity, however, notably there was a surge in deals following the general election in anticipation of the changes to Capital Gains Tax rates which were announced in the October budget.
At an aggregate level, EBITDA multiples across Business Support Services – which includes the security industry – has fallen closer to at 5.0x over 2024 (2023: 5.3x). Generally, larger companies or those that are strategically significant have tended to achieve higher valuations. Corporate buyers have been the most active this year as private equity remain preoccupied with disposing of portfolio companies that have overstayed their welcome post pandemic.
M&A activity across the UK security industry has been unremarkable over the last 12 months with the only notable deal being the acquisition of Profile Security Services by OCS last December. A few smaller deals have taken place mostly involving specialist security companies being acquired by larger peers to support a wider strategic purpose.
Further consolidation across the security industry looks likely in the short to medium term and no doubt the top 5 players will have their chequebooks ready as they continue to battle for the top spot.
Time to gracefully bow out?
Exit planning has been brought sharply into focus following October’s budget announcement concerning changes to Capital Gains Tax and relevant reliefs. With the prospect of the Taxman taking an even greater share of any proceeds, making sure you are thoroughly prepared to realise the true value of your company – and keep as much of the proceeds as possible in your bank – is more important than ever.
Selling a business is rather like selling your home. If you want to achieve the maximum value, you need to get your house in order and prepare well in advance before putting up the for-sale-sign.
To get the best price, you need to think strategically. Understanding your potential buyers and choosing the right time to sell are equally important. This process can take up to 2-years and should ideally be completed prior to appointing a business broker or M&A advisor.
If you are ready to ride the wave and are still considering an exit in these uncertain times, here are a few tips to help you to prepare for sale successfully:
1.) Know the price of everything, and the value of… well, everything!
As a starting point it is worthwhile obtaining an indicative open market valuation to better understand how a potential buyer will value your business. This will help you to focus on the aspects that are most important in determining the eventual sales price.
2.) Get your house in order first before appointing a business broker or M&A advisor
Give any skeletons a proper burial before any due diligence exercises. It is usually far cheaper for you as the seller to fix any problems ahead of a sale rather than the buyer to deal with them after a purchase. Red flags make buyers nervous, and nervous buyers don’t like signing cheques. This is especially true if they identify a problem that you were previously unaware of!
3.)Identify your target market – Who will potentially buy your company and why?
Not all buyers are the same. Strategic, financial and individual buyers all have different motivations and objectives in mind when purchasing your business. Identifying buyers and possible synergies will potentially increase your negotiation position and help bid up the value of your company.
4.) Get your timing right
It’s all in the timing. Sometimes it’s a sellers’ market, and sometimes the buyer will be holding all the cards. Trying to rush through a sale will only ever result a lower multiple being achieved. By understanding current M&A trends you can potentially time your exit to perfection.
5.) Don’t forget the Taxman
As a rule of thumb more time should be spent speaking with a tax advisor than with H.R Owen! You can significantly reduce your potential tax liability by undertaking some basic tax planning beforehand. Capital Gains Tax isn’t the only charge you need to worry about. Depending on the size of your proceeds, Inheritance Tax might be the biggest headache if you plan to transfer wealth to the next generation.
Whether you are selling a product, service or even your company always remember that “it’s not what you make, it’s what you keep” that is the real measure of achievement.
Ashley Bancroft
Partner & Co-Founder, H&Hendricks LLP
__________________________________________________________________________________
Ashley Bancroft is a founding Partner of H&Hendricks LLP, a boutique firm of Chartered Accountants and Business Advisors that specialise in helping companies to transform in the ways that matter most to their value. The firm works with business owners to ensure they are best positioned to realise the maximum value for what they have built whenever that time may arise. Crucially, it is not a business broker.
A qualified Chartered Accountant, Ashley has considerable experience of successfully leading and transforming both small and large organisations, including as managing director of a UK top 10 security company. He holds an MBA from a world-renowned business school and specialises in finance, strategy and entrepreneurship, with particular expertise in value creation.