Corporate vanity can often inflate the amount that is paid in a takeover

A number of views on the subject of company valuation have recently been advanced in Design Week (VoxPop, DW 29 September), prompted by the acquisition of Nucleus by Adera.

As with selling a house, the price finally agreed in a sale will be whatever is acceptable between a willing buyer and a willing seller. But do not be misled by figures mentioned in the press. The figure most commonly quoted, since for reasons of corporate virility it suits both parties, is the maximum amount that the deal could possibly be worth. Which is not at all the same as the price that was actually paid.

Design consultancies have little in the way of assets, apart from depreciating Macs and company cars. What is being paid for, therefore, is ‘goodwill’, not assets. Goodwill is represented by the expectation of future profits. This expectation is based upon many factors, but greatest among these are the nature and quality of both client and staff relationships.

Future profits determine the amount earned in an ‘earn-out’ period. These days (unlike the feverish takeover times of the mid- to late-1980s), earn-outs are capped. The top capped price will only be paid if very aggressive compound profit growth rates are achieved. Yet this ‘maximum possible’ figure always seems to be the one quoted, not the payment made on signing, which will be significantly less. For sure, buyers with special needs will invariably pay top dollar; so too will buyers for whom the opportunity cost of not doing the deal is great. The reported Nucleus deal of up to £10m for a company with a last reported turnover (not revenue, note) of £2.6m suggests a price of approximately four times turnover. In today’s marketplace this is unlikely. Three to four times income might have been possible earlier in the year, since digital businesses were highly valued. But, as Ian Cochrane correctly observed, prices have plummeted in recent months and two to three times income, assuming there is an underlying profit, is now much closer to the norm. The exception is where the digital business is also incubating and this is not uncommon.

We at Results know of design consultancies where the share of the potential value of the business being incubated is greater than the value of the core business.

Which only goes to prove that things are seldom what they seem, particularly when money is being discussed.

Jim Surguy

Managing director

Results Business Consulting

Valuations in the Design Industry

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