MBO at 4Projects (3)

So how much did the August-backed management team at 4Projects pay for the business (see previous post)? No figure was quoted in the release, and there are no hard and fast rules that we can apply.

Business valuation is something of a mixture of art and science, with several ways to estimate a fair price. For example, businesses might be valued based on:

• a multiple of their earnings (EBIT)
• enterprise value (net debt plus equity value)/sales (EV/sales)
• assessments of their future cash flow
• what it might cost to start-up an equivalent company from scratch
• what it would cost to fund an acquisition through debt
• the liquidation value of a business’s assets
• by industry ‘rules of thumb’
• precedent (ie: valuations applied to other companies operating in the same market)

If we apply the last approach, we could look back to when Business Collaborator was acquired by CODASciSys from Enviros Ltd in April 2003; the total consideration then was £2.82m cash. This was the value perceived for a business which at 31 December 2002, had a turnover of £1.3 million, an operating profit of £360,000, and net assets of approximately £100,000. In other words, its valuation represented approximately 2.2 times annual turnover (or 7.8 times its operating profit).

We could adopt a similar approach for 4Projects, based on what little has previously been revealed about its financial performance. I previously guess-timated 4Projects 2006 turnover as around £2.7m, while its 2007 turnover was quoted at £3.4m. Applying the BC precedent, based on turnover 4Projects could be valued at 2.2 x £2.7m (£5.94m) or 2.2 x £3.4m (£7.48m): let’s say in a range between £6m and £7.5m.

Of course, this is just one method; I expect most financial wizards would try several approaches, and there would then be further negotiation between the seller and buyer. Also, Business Collaborator is a subtly different business to 4Projects, not least insofar as 4Projects is more focused on delivering its products on a Software-as-a-Service (SaaS) or on-demand subscription basis, while BC provides customers with the option of self-hosting, paid by up-front licences – giving 4Projects greater visibility of a higher proportion of future revenues from ongoing client engagements. Adjusting our valuation to take account of this might nudge the £6-7.5m figure up a little further.