At Hornblower, helping businesses secure a successful exit, based on a clear valuation and an established network of willing buyers is our stock-in-trade. The majority of businesses we work with are at the mature stage, having traded for several years before reaching the point of realising the full investment of time and effort put into growing and sustaining the business.
Given our general experience in these matters, it is tempting to assume that building a business to a multi-million-pound valuation is an endeavour achieved over years, or even decades of negotiating the essential building blocks to reach the point of exit with a substantial return. However, assumptions are always subject to challenge, as demonstrated by a dynamic entrepreneur, who had achieved her aim to build a multi-million-pound business - in just 3 years.
We first met Sue Nelson at a networking event in October 2016 when she suggested that her business, Breakthrough Funding (BTF) was about a year away from selling. When asked for her three years of trading accounts plus management accounts for us to provide an Indicative Valuation, she informed us that her business hadn’t been trading for 3 years yet.
That’s right - the business was two full years old and really in its infancy and Sue was already thinking about what needed to be put in place in order to sell. Sue had a clear plan in place to ‘tee’ everything up ready for an exit. Although the business had generated a 2015 turnover of £580k, Sue had in mind a sales valuation of over £1m to make it worth her while. In 2015, a top end valuation of circa £70k meant we were a long way from that mark.
A Mindset focused on Clear Actions
From the offset, Sue demonstrated a remarkable character, driven by a determined sense of single-mindedness. She also turned out to be a well-networked individual – where it was impossible to walk down the street with her in the City without her stopping several times to catch up with someone.
Gifted with a relentless energy and a low boredom threshold, Sue is the kind of person you have to keep up with or be left behind. Sue channelled her energy and focus into BTF, seizing a gap in the market and jumping straight on it – leaving behind an organisation that had its brakes on over this opportunity – and turned this opportunity into a fantastic, enviable business.
Sue broke the mould in many ways. The business of claiming tax relief on R&D spending sounds like a minefield to most business owners when they are busy running the day to day. Sue offered them a ‘no win no fee’ way to do this. The problem was that the offer just sounded too good to be true and building credibility in a market so damaged by ‘ambulance chasers’ was hard.
To achieve this without a network of expensive sales and business development people, Sue re-wrote the marketing rule book and turned herself into both print and radio journalist and created Breakthrough magazine and Food Talk radio. She used these as vehicles to get to meet and interview target clients, provide them with positive media coverage and, at the same time, prevail herself of the opportunity to have a very quick discussion about R&D tax relief, turning each and every interviewee into a client.
Every single client was delighted when their R&D report was successfully approved by HMRC and a large chunk of tax returned to their bottom-line profit and more importantly into their bank account - very happy clients who had proved that there is after-all such a thing as a ‘free lunch’.
Sue’s business model was also lean – she didn’t employ tax experts or R&D experts but just extremely good report writers and based herself on an inexpensive business park in Ashford. By doing so she kept her profit margin high. The expression ‘turnover is vanity and profit it sanity’ is a very appropriate truism. Large corporates routinely boast their size in terms of turnover values but business success and return on your enterprise has to be measured by profit. If turnover is huge but profit is negative, you are paying your clients to let you work for them and your business set up is not delivering return on investment.
BTF’s gross profit was 88% with operating profit around 40% - another area where Sue broke the mould. A good, highly sellable business would have an operating profit of between 20% and 25%., which we value based on multipliers of 3 to 6 times EBITDA depending on sector and scale. Another rule of thumb assessment of value will be a multiple of turnover. We often say that achieving more than 1 times turnover for a sale value is ambitious but with the profit figures of BTF, we achieved a sales value far in excess of this turnover measure.
So how did she move to that point?
Key Attributes of a Multi-Million Valued Business
When our Business Sales and Acquisitions Consultant, Sian Murray met Sue in October 2016, Sue asked Sian for the key attributes to make a business sell and for a good value. At the time, although Sian was unsure whether Sue was really going to transform BTF from a £70k value to a multi-million value in the space of 1 – 3 years, Sian gave the following advice:
Guided by this advice, Sue turned a business that in October 2016 would have been valued at £70k into one that achieved a multi-million-pound sale to a major blue-chip multinational, Ernst & Young, that we would barely have hoped to engage with at the start of the process.
Upon acquiring BTF, Ernst & Young issued a Press Release, in which they observed:
“Sue made sure that she did not own client relationships and ensured from the start that she had a capable MD who fronts the business and would transfer with it for the sake of continuity.
She kept her client base broad and her profitability high.
She had a management reporting system in place which meant she had every possible business metric at her fingertips at every moment. Every other business process was documented fully including the process of training the non-specialist staff that helped secure her profitability through her unique business model.
Her dataroom was organised and meticulous; the buyer and their extended team had everything available to them and they closed their DD in record time because everything was on hand.
As with everything in life, nothing is painless or easy but this level of preparation certainly enabled Sue to achieve optimum deal value when the deal completed on 1st April 2020. Sue has been retained as a consultant to the new business, EY Incentives, and the Managing Director, who Sue had recruited and trained, remains at the helm of this new organisation and has become an Associate Partner at EY. The Breakthrough Funding team remain in place and are looking forward to a future that offers them all very solid and bright career opportunities and prospects”.