As usual our posts on this blog are reflecting our efforts to satisfy all of our clients in the most appropriate way despite what seems to be going on around us.  This one was prompted by a comment from an architect at a breakfast meeting I was at today when he mentioned the number of single house building developments he is working on have soared.

We are often asked via our introducers and indeed via the enquiries on our website to help arrange funding for residential development projects and the first question we always ask is ”where is the project located?” – The answer often determines the level of support that the UK lenders are prepared to give.

The title says it all, there is indeed a huge portion of the UK that is north of Watford, but to the vast majority of the lenders that have set their stall out to support the UK development finance market, it might as well be another planet.  Admittedly, the money seems to emanate from the South East and inside the M25 it appears that nothing can go wrong, are they being short sighted or just prudent?

On a recent exercise on a fairly chunky development proposition in the West Midlands, which is not quite the end of the world, we used the details of those current lenders in the UK, that have said they support development funding, gleaned from the latest copy of ‘The finance Book’ to find out whether they would even consider the application.  The result – out of 28 lenders approached, only 2 were willing to quote anything near reasonable terms for the business with the high street lenders being particularly unwilling.  The main response was “it is too far away”.

I don’t know the numbers but it wouldn’t surprise me if more people lived and worked ‘North of Watford’ than south of there, and they all have to live somewhere, so come on folks, the numbers might not be so big, but the market is, and the argument is always there that a range of smaller development projects across a wider series of locations does mean that the lenders are not putting all their eggs in one Country (Greece) basket.

If you do have a small residential development (Up to say 10 houses) ‘North of Watford’ do get in touch, because we now know who wants to play.  You can contact us here.

The content of the following post came about because as more and more lenders seem to ignore any business element involved when valuing their prospective security, often on a bricks and mortar basis or as an investment proposition taking into account either the lease that is in place or assuming that one is set up.

Businesses are changing hands very regularly and some lenders are now at least valuing the business as a ‘going concern’ as opposed to the two methods mentioned above which does allow some flexibility, but how is a business valued especially if it is up for sale?

Well the following information was kindly provided by one of our associate companies (we aren’t called ‘Corporate Finance Associates’ for nothing).

Thanks here go to Roger Smith of Stirling Business Transfer Specialists because this company really understands this sector and maximising the value when a business is put up for sale, we just pick up the other side and work with the prospective purchaser.  Do follow the link to Stirling at the foot of this post for further information.

Valuing a Business

When it comes to valuing a business, we need to realise that businesses are all as different as the people who run them. They each have their own peculiarities and way of doing things. This makes it very difficult to compare any two businesses.

What we can do is consider how much each business is worth, or what someone might be prepared to pay for it. There are a number of reasons why business valuations need to be carried out; it might be that someone is considering selling part or all of it, or that someone is interested in purchasing the business. It might be for matrimonial purposes, the drawing up a will, or it might just be because the owner wants to know what he or she is worth. There are almost as many reasons for wanting to know the value of a business, as there are businesses.

Valuing a business is not always a straight forward process as it will depend on the type and size of the business and there are at least 5 difference valuation methods. On occasions, it may be necessary to use more than one method in order to arrive at a realistic figure. The most common methods are as follows:-

1.         Total Assets
This method is more appropriate for established companies with large amounts of tangible assets. 

2.         Earnings Multiples or Price/Earnings Ratio
P/E ratios are used to value companies with an established profitable history. Quoted companies generally have a higher P/E ratio. A typical P/E ratio for a large growing quoted company with excellent prospects might be in the region of 15 to 20. Quoted company shares are much easier to buy and sell which makes them more attractive to investors than shares in comparable unquoted companies. Typically, the P/E ratio of a small unquoted company is up to 50% lower than that of a comparable quoted company in the same sector. But valuable intangible assets can improve the ratio somewhat.

3.         Entry Cost
This is the predicted cost to set up a similar business to the one being valued. This method of valuing the business would include the cost of developing a customer base and reputation, recruiting and training specialized staff, purchasing assets and licences and developing products and services.

4.         Discounted Cashflow
This method uses an estimate of the company’s cash-flow over say a five year period. The terminal value of the company is also calculated after this period of time has expired. The value of the predicted cash-flow, plus terminal value, is then discounted to provide a current business valuation. It may be hard to establish the terminal value as it relies so heavily on the cash-flow estimates. This method of valuing the business could be relevant for businesses with lots of potential, but few assets.   A discounted cash-flow calculation is a complex valuation that requires a great deal of information to reach a reasonable valuation.

5.         Industrial Sector Rule of Thumb
In certain industries, when company’s change hands on a regular basis, industry wide rules of thumb are sometimes used to value a business. These include accountancy firms and solicitors, (who like to have their own way of doing things!), recruitment agencies etc

To visit Stirling’s website if you have a business to sell follow this link.

And if you are looking to buy one contact us here.

With more and more big name lenders failing to deliver the funding solutions that they tell the media they are, project Merlin for example is running significantly behind the government’s set target, they can be accused of being guilty of one major thing, namely NOT feeding back the reason why they cannot help.

One of the factors is what we often describe as an ‘Exit Strategy’, with some lenders being solely focussed on the ‘Exit’ to the borrowing, and nowhere is this more apparent than the secondary and tertiary lenders that have swept in to fill some of the void left by the High Street.  They are looking at the ….what if it goes wrong …. Scenario and more often than not relying on their valuers to produce a 90 day valuation report, having no regard to current Market Values.  The 90 day figure can best be compared to the old ‘Forced Sale Value’ and that illustrates exactly what it is.

Many of the enquiries we receive however have not grasped the concept that even if the Loan to Value is low, if the business doesn’t have an ‘Exit Strategy’ in mind why should a short term funder put their money in if the future for repayment is woolly.

Short term funding is in a lot of cases the most appropriate way forward in the absence of High Street support, perhaps for 1-3 years with the aim of refinancing after that time when hopefully the current credit conditions have eased.  These lenders want to know their way out though.

Now there is essentially only two exits, a sale of the asset, or a refinance, so short term funders are going into greater background detail to satisfy themselves that the borrower will have the wherewithal at the end of the term to refinance, or that the marketing to sell is realistically being approached.

So in the absence of the High Street changing their approach any time soon, they always were ‘Glass Half Empty’ institutions anyway, prospective borrowers need to think long and hard about how they can get out of a loan, even before the new lenders will let them get in.

So it is always about showing these new lenders the door (your exit) and hopefully they won’t be showing you theirs.