26 FINANCE 01732 759725 How to maximise the value of your business Technology Reseller (TR): How have the geopolitical events and macro-economic factors of the last two years affected the technology market? Nigel Cook (NC): Two years ago we were just coming out of the second crisis in ten years, the first one being in 2008 with the banking crisis and then the effects of the pandemic. Supply chains were being disrupted and logistics teams were having problems with delivery and distribution. In our own space, 12 months ago, businesses were finding it hard to get routers and other equipment to complete installations. The other big thing in that period was wage inflation. People had become dislodged from their work and many firms trying to get back to full capacity found they were short of skills. In our space there was a fair bit of head-hunting to recruit people to fill jobs. It was the very first time that we had seen buyers saying they were buying a business for its people and skills. Then, in February last year, the Ukraine war started and that exacerbated the challenges we faced. As well as an emerging world food crisis, we had shortages of fuel which created inflation at a rate we hadn't seen since the ’70s. In the last six months, people have been concerned about whether we are going into another recession and whether there would be a really hard landing? In actual fact, what we have seen is energy prices come off the highs they had reached and inflation not rise at the same rate as before. Generally, growth has held up and we haven’t gone into a recession. TR: Inflation and the interest rate rises that followed briefly raised the spectre of a banking crisis with the collapse of Silicon Bank and Credit Suisse. What impact are these events having on the technology market? NC: When there are problems in banking, particularly in relation to the technology space, it will create a squeeze. For shareholders of businesses that are highly leveraged and have large loans, it can be challenging to meet interest payments and things associated with that. Buyers that are taking loans to fund their acquisitions can end up paying more because they're paying a higher level of interest and somebody has to swallow that. The question is, is that taken up in the price or is that taken up in reduced profits? Overall, buyers may have to accept lower leveraging as the amount of a loan will be based around a multiple of their profits and banks will probably be looking to move a point or a half point down depending on the company. Banks will also be looking for increased headroom, contingency if you like, so if things don’t work out in the next 12 months they've got more space to manoeuvre. Overall, will it impact the market? Clearly it will. That said, our clients tend to be high performing, highly valuable, mid-market businesses and, if presented in the proper way, I don’t expect to see any change in the values that they can achieve. TR: What advice would you give shareholders preparing their business for sale in this period? NC: The method and the extent of the preparation that we recommend hasn't changed in the current climate. During the pandemic subscription income became highly valuable and highly sustainable. Businesses with 50%, 60%, 70% recurring revenue performed so much better than those with 10% or 20%. That's obviously true. So, buyers and investors are clearly focused on getting to the bottom of what the recurring revenues are in a business – and not just the revenues but the gross profits associated with those long-term revenues. Sustainability remains key and businesses looking to sell really need to focus on explaining the level of sustainability and the quality of earnings associated with their activities. TR: How should shareholders go about achieving maximum value? NC: There are three points to make here. First, shareholders need to consider that the value they could lose in the last phase of the process, the transaction phase, is far greater than what they may achieve through skillful negotiation. Second, the complexity of the data and the detail that the investigation will get into needs careful preparation. Lastly, the volume and complexity of Technology Reseller recently travelled down to Chichester to meet up with Nigel Cook, CEO of Evolution Capital, a boutique corporate finance firm specialising in the ICT sector. We met up to discuss how the buying and selling of technology businesses has changed in the 20 years since Cook set up Evolution Capital and what shareholders should be doing to maximise their chances of a successful and profitable sale. At the time of our meeting, the UK was being buffeted by severe economic headwinds, so we started out by asking Cook about the impact these might have on business valuations. Evolution in motion Nigel Cook
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