Resilience focuses on the factors that are needed to maintain a business’s performance, and includes the quality and stability of your earnings (for example do you have recurring or reoccurring revenue), whether your service is discretionary or non-discretionary (eg regulatory driven), the nature of your customer base and your retention levels, the level of your differentiation and barriers to entry for new entrants, and the strength and depth team, amongst other factors. A resilient business means new customers won will be largely incremental to what you have.
Growth focuses in on an assessment of the opportunity for growth and the company’s ability to realise it. PE investors will be looking closely at this, as they are typically looking to double the earnings of the business over a 4-year period to realise their target return on their investment. This is assessed with reference to the rate of historical and future organic growth, including how clear and achievable it appears, the inherent growth in and the size of the markets in which you operate, the potential for you to undertake M&A to accelerate growth, and your general scalability (operationally and cash conversion).
The second part of the equation is earnings - being a measure of the sustainable cash flow generated by your business, usually based on revenue, EBITDA, or EBIT. Revenue multiples are generally used where revenue is recurring in nature (and therefore secure and predictable), with a low cost to serve, and where the business’ profit may be being suppressed by sustained investment to drive future growth. Revenue multiples are most typically associated with the technology sector. EBITDA is the most widely used measure in the M&A market, whereby it’s applied as a proxy for cash generated from trading. EBIT, meanwhile, is used for those businesses that are more capital intensive, where the assets of the business are required as part of delivering the service.
The earnings are based on the historical and projected performance of your business, enhanced by any developments in the business (e.g.. new customers or markets) which are not yet fully reflected in your trading and adjusted for any one-off or non-underlying items that may distort the true picture of your profitability. There are a number of ways to present earnings, which your advisor will support you on. Whatever the approach you will need to ensure it can withstand the scrutiny of independent due diligence to avoid any price reductions.
