P/E Ratios: Mind the Gap!
If your business exit plan is a trade sale, then you will be interested in taking advantage of differential Price Earnings (P/E) ratios. A P/E ratio is the multiple of future maintainable earnings (profits) used to value a business. The P/E ratio appropriate for valuing your tech business will depend upon the quality, stage, size and share marketability of both your business and the acquirer business, eg:
- SME private company 3 – 7
- Larger private company 8 – 14 (Source: BDO PCPI Index)
- AIM public listing 10 – 126 (FTSE AIM Tech)
- Full LSE public listing 8 – 95 (FTSE techMARK All-Share)
The best business acquisition for an acquirer is where their own business is valued using a higher P/E ratio than they pay you for your business – exploiting this P/E ratio ‘gap’ creates shareholder value, eg: If an SME business with annual profits of £250k were sold to a large private company for 6 x earnings, this will cost the acquirer £1.5m + fees and stamp duty (say, £60k). If the acquirer is itself valued at 10 x earnings, this transaction will almost magically create shareholder value of £940k ((£250k x 10) – (£1.5m + £60k)). Understanding and exploiting this ‘gap’ will assist you in valuing the worth of your business to different potential acquirers.