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“How did Nick Jenkins sell Moonpig for £120m and achieve a 10x multiple in the process?”

Valuing a business is a complex process, this article introduces concepts that impact company valuation and explores why some businesses appear to sell for more than they are worth.

Before we begin….

What is your business actually worth?

We all know the easy answer to this……whatever someone is willing to pay.

However, this is not massively helpful when planning the strategic direction of a company and how you – as the owner or leadership team – may one day sell it for a life changing sum of money.

To provide a guide value we can use the following formula:

Value = Profit x Multiple

When most of us think about growth and increasing value, we think about making more profit. If we make more profit, the business is worth more. This is easy to understand and not necessarily a bad strategy in the right situation.

The profit calculation is straightforward: revenue minus costs

If we increase revenue or decrease costs, then profit increases. The problem is, for most businesses, growing profitability isn’t as easy as clicking your fingers. It is also a short-term strategy; increasing revenue by 10% once could be achievable. However, doing it repeatably is not sustainable and requires platforms to support this revenue growth.

Without these platforms we are pushing resources to their maximum and businesses simply cannot run at 100% capacity because something will break. However, you will by now have realised that we can also increase value by making the multiple a bigger number.

What is the multiple?

The multiple can be defined as the ‘net present value of future income streams’.

In other words, when someone buys your business, they are paying you for a number of years expected profit in advance. The multiple being the key to just how many years.

Most business owners and directors have heard of the multiple and understand what it is; the majority do not know what to do with it.

Increasing the multiple is a huge subject; there is an entire industry built around it. Unfortunately, one article cannot demystify the whole topic. Hopefully though, it will be enough to provide some examples of just how important it can be.

What impacts the multiple?

The platforms that can deliver a sustained increase in profits are the very ones that will also impact the multiple. The diagram below is one of the valuation frameworks we use; below the line in red are factors that reduce the multiple, those above the line enhance it.

The benchmark line represents the average multiple; in many sectors the benchmark can be gauged from historical data. For example, if you make office furniture, the benchmark average will probably be around 5. If you’re in Silicon Valley running a tech outfit, it could be much higher.

For the sake of simplicity, let’s assume your industry benchmark multiple is 5 and your profitability is £1m. Your business at benchmark is therefore worth approximately £5m.

Now, consider that you have invested in building a strong culture in your business; making it a place where the best talent wants to join and stays to work. Depending on your business, you may have a few ideas that would help make this a reality. If realised, you could potentially increase your multiple from 5 to 7; adding £2 million onto the value of your business.

Why does this action impact the multiple?

A business that has a reputation for engaging and retaining the best talent will begin to outperform the competition. In time this becomes a competitive advantage – one that people will pay more money for.

For the majority of businesses, it is much easier, quicker and less expensive to improve the culture than say, finding another £400k of annual profit from new market share. And they both have the same net effect on the value of the company.

Conversely, a business reliant on 1 large customer with an annual rolling contract has a uncertain future trading position. As such a potential buyer will be willing to pay less because the return on investment is more unpredictable.

What did Moonpig do so well?

It took 7 years for Moonpig to become profitable, during this time the business went through several funding rounds to attract the investment required to grow. The business turned profitable as e-commerce grew and it was then positioned for sale.

Two of factors that influenced the sale price were innovation and technology:

Product innovation – no other company was offering the complete personalisation of greetings cards. Moonpig created the market and leveraged first mover advantage to build a loyal customer base.

Technology and systems – the company developed unique IT systems that enabled it to deliver their product. At the time e-commerce was in its infancy and businesses who recognised and developed technology that could not be copied created a unique competitive advantage.

These two factors boosted the multiple and enabled a company with EBITDA of £11m to be valued at £120m, achieving a 10x multiple. To put this into context, the UK average multiple is 5.

In summary

  • A business is worth what someone is willing to pay.
  • A company with assured future profitability is worth more today to an investor.
  • Future profitability isn’t necessarily affected by how much money you’re making now, instead it is the assets that will enable it to make money in the future.
  • We can proactively impact these factors and positively influence the multiple.
  • Creating these assets will likely increase profit as a result.

Therefore, we know that can we predictably increase business value.

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