Share Marketability

13th January 2016

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.



 
Other items in Blogs
 
Lucy Bayliss
12th November 2019 Finance charges for landlords – The knock on effects

  Since 6 April 2017, changes are being gradually introduced to restrict the relief available to landlords in respect of their finance costs. Under the old rules, the interest element of the mortgage payments was 100% allowable for income tax purposes. However, this is gradually being replaced with a 20% tax reducer instead. The timetable…

Read More »

Barbara Nicholas
1st November 2019 Brexit halts Budget

With all the uncertainty over Brexit, we waited a long time to learn the date of Sajid Javid’s first Budget.   Finally we learnt this was to take place on 6th November, amid great excitement at muted suggestions about the possible abolition of Inheritance Tax and radical changes to stamp duty.   The bubble has…

Read More »

Vanessa Pearson
28th October 2019 Off-Payroll Worker Tax Rules: Be prepared!

Knowledge based contractors working in the private sector will hopefully now be well aware that, subject to any possible Government last minute change of heart, new tax rules are coming next April. For many, who are not currently following IR35 rules, this will mean a large increase in the tax they pay; perhaps tens of…

Read More »

Matilda Mawson
24th October 2019 I’ve got 99 Problems but my Tax Return isn’t 1!

There are now only 99 days before the tax return filing deadline of 31 January 2020. Do not delay – file it today! Not sure if you need to file a tax return? HMRC have a questionnaire that only takes a few minutes and will check whether any of your income or gains will require…

Read More »

Jeannette Hume
24th October 2019 R&D Tax Claims: HMRC finally go-digital.

In February 2019 HMRC introduced an online tool to submit Research & Development tax relief claims (both SME and RDEC claims). It is still necessary to make the claim on a company tax return (form CT600), but the accompanying detailed R&D project information can (but does not have to) now be submitted by completion of…

Read More »

Ruth Pearson
17th October 2019 Is it too early to talk about Christmas!

In December 2018 HMRC wrote to employers to advise of a temporary easement on reporting PAYE information in real time. This was for a number of reasons, one of which could be due to businesses closing over the Christmas period and therefore having to pay staff earlier than normal.   HMRC have received feedback from…

Read More »