Why Should You Start Investing Now?

Exits MENA Exits MENA on October 3, 2022

Why Should You Start Investing Now?

Amid the current global economic situation and the impact it’s currently having on inflation, declining purchase capacity against rising prices, and our lives, you usually tend to ask yourself one question; Should I continue spending, or should I save? Of course, if you ask economists, they would tell you to be safe at this troubled time and deposit your excess cash in a bank rather than spending it on overpriced commodities.

Investing is an effective way to put your money to work and potentially build wealth. Depositing your money in a bank is a minimal-risk investment that ensures your capital maintains its value against inflation. Yet, with the current crazy inflation rates, it’s becoming, to a certain extent, ineffectual, with inflation growing at a faster pace against bank interest.

So, bank deposits are only part of the story. Savvy savers start by building sufficient emergency savings within a savings account or investing in a money market account. But after building three to six months of easy-to-access savings, investing in the financial markets, startups, real estate, and similar investment vehicles offer many potential advantages.

Smart investing may allow your money to outpace inflation and increase in value. The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff. In simpler words, a higher-risk investment usually yields a higher return.

Taking a step back, there are two ways to make money in our modern world. The first way is to earn an income by working for yourself or someone else. The other way to grow your fortune is to invest your assets so that they increase in value over time, depending on the risk grade of your investment and the promised return.

Whether you invest in stocks, bonds, mutual funds, options, futures, precious metals, real estate, startups, small businesses, or all of the above, the objective is to generate cash. This can come in the form of increased value to the investment, dividend income, the sale of a business, or some other liquidity event.

Brown Dog Financial Planning lays down four main reasons, which we find to be straight to the point, as to why you should start investing:

1- Investing Makes Your Money Work for You

To earn more income, there are two ways to make money. Either you work for your money, or your money works for you. For example, you could watch it grow by investing wisely instead of keeping it in a bank account, offering minimal interest rates.

Investing doesn’t typically bring significant returns overnight, but if you are prepared to play the long game, there are rewards in store. It is better than your money decreasing in value over time, or worse still – being spent.

2- Invest to Beat Inflation

Due to inflation, it is an economic certainty that the money you made yesterday will buy you less tomorrow. For that reason, you must make your money grow and save it from being devoured by rising inflation.

3- Plant a Seed and Let It Grow

Intelligent people use their capital (however small) as a solid foundation to earn more money. You can do the same by investing and using your money as a tool to build wealth rather than earn it and then spend it. The power of compounding on that small starting amount can be incredible.

4- Plan Your Retirement

Retirement is a time to enjoy the fruits of your hard work, not to scrimp and save, and it starts with investing now. For this reason, it is wise to allow your money to grow so that when you retire, you have a good pot of money to enjoy your later years.

The bottom line, it’s never too late to become an investor. You may be well into middle age before realizing that life is moving quickly, requiring a plan to deal with old age and retirement. Fear can take control if waiting too long to set investment goals, but that should go away once you put the plan into motion. Remember that all investments start with the first dollar, whatever your age, income, or outlook. That said, those investing for decades have the advantage, with growing wealth allowing them to enjoy the lifestyle that others cannot afford.

The different methods for valuation of your business

Exits MENA Exits MENA on August 15, 2022

The different methods for valuation of your business

Valuing a business is anything but a precise science. A company is ultimately worth what someone is willing to pay. Even that will vary over time depending on liquidity availability and prospects for the future as viewed by potential buyers. Business valuations have been rising over the last 10 to 15 years, for example, US businesses under $1bn in revenue have increased sales prices by nearly 50% over the previous 10 years. European businesses have also increased their achieved prices by a more modest 10 to 20%. This reflects corporate and private equity’s ‘dry powder’ or cash waiting to be spent and the ease with which funds can be raised. In both cases, this has increased substantially over the period discussed.

Potential buyers’ value depends on what you can do with a business to increase cash production. This may involve merging with current operations to create economies of scope and scale, investing in new products, accessing new market segments, or using technology or patents acquired with the business. Hence the valuation depends on assumptions about the exploitation of future opportunities.

In that context, Buyers often apply several valuation techniques to help capture the business’s fair market value. Such strategies revolve around four main approaches; the intrinsic value approach, the market approach, the cost approach, and the asset-based approach.

  1. Intrinsic Value Approach (Discounted Cash Flow Analysis “DCF”): This is the most thorough way to calculate the value of a company. When assessing the value of a potential target, virtually all potential acquirers build a discounted future cash flow model of the business, which evaluates and makes assumptions about cash needs and production in coming years. This will reflect future investments, cost savings, increased sales, potential disposal value, and initial purchase consideration. 
    A DCF analysis is performed by building a financial model in Excel and requires extensive detail and analysis.  It is the most detailed of the three approaches and requires the most estimates and assumptions. However, the effort needed for preparing a DCF model will also often result in the most accurate valuation. A DCF model allows the buyer to forecast value based on different scenarios and perform a sensitivity analysis. The discount rate is the cost of capital for the buyer or the Weighted Average Cost of Capital (WACC) to make this investment.
  1. Market Approach (Multiples & Comparable): The market approach is the most common valuation approach if comparable data is available. It has two main methods, comparative analysis & precedent transactions. Comparative company analysis (also known as “trading multiples” or “peer group analysis” or “equity comps” or “public market multiples”) is a relative valuation method in which you compare the current value of a business to other similar companies by looking at trading multiples like P/E, EV/EBITDA.  A widespread means of establishing a ‘ballpark’ valuation used by private equity and corporates is the EBITDA multiple (that is, earnings before interest, tax, depreciation and amortisation multiplied by a figure commonly used for that industry or firms with similar ‘value characteristics’ and typical of recent past transactions) that could be taken to mean similar risk levels and growth rates.
    Another type of valuation that relies to a certain extent on multiples is the comparable transaction methods. To use this method, you look at comparable transactions in that industry to a business with a similar model. You then compare them with relevant ratios and multiples such as Enterprise Value-to-EBITDA. With the precedent transactions method, you are looking for a critical factor that helps to determine the valuation. To do this, you compare the financials of similar companies and try to find a multiple that closely predicts the valuation. Once you know that, you can use that multiple to value the company being considered.
    Another prominent application of the intrinsic approach is the dividend discount model (DDM). DDM is a quantitative method used for predicting the price of a company’s stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to its present value. It attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and considers the dividend payout factors and the market expected returns. If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued and qualifies for a buy, and vice versa.
  1. Cost Approach: The cost approach, which is not common in corporate finance, looks at what it costs to rebuild the business. This approach ignores any value creation or cash flow generation and only looks at things through the lens of “cost = value.” Another valuation method concerned is the ability to pay analysis. This approach looks at the maximum price an acquirer can pay for a business.  
    For example, if a private equity firm needs to hit a hurdle rate of 30%, what is the maximum price it can pay for the business? If the company does not continue to operate, a liquidation value will be estimated based on breaking up and selling the company’s assets. This value is usually significantly discounted as it assumes the assets will be sold as quickly as possible to any buyer.
  1. Asset-Based Approach: An asset-based approach focuses on a company’s net asset value. The net asset value (NAV) is identified by subtracting total liabilities from total assets. There is some room for interpretation in the valuation and how to measure the weight. Many stakeholders will also calculate the asset-based value and use it comprehensively in valuation comparisons. 
    The asset-based value may also be required for private companies in certain types of analysis as added due diligence. Furthermore, the asset-based value can also be an essential ratio when a company plans a sale or liquidation. However, this approach may not apply to tech startups with a light asset base and rely mainly on the productivity of their tech assets as the primary source of value.

References:

  1. https://www.ulton.net/blog/8-essential-ma-valuation-methods
  2. https://corporatefinanceinstitute.com/resources/knowledge/valuation/valuation-methods/
  3. https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/equity-valuation-concepts-basic-tools#:~:text=Three%20major%20categories%20of%20equity,multiple%20of%20some%20fundamental%20variable.
  4. https://www.investopedia.com/terms/a/asset-based-approach.asp
  5. https://blog.udemy.com/business-valuation-methods/

What are the different types of Exits?

Exits MENA Exits MENA on August 2, 2022

What are the different types of Exits?

So you have reached a point where you want to reap some of the hard-earned efforts you have put into what has been your dream as a business founder, and you’re deciding to Exit. Regardless of the type of Exit you are looking to go through; you probably have a lot going on your mind. From deciding on the right buyer, the ideal deal, the timing, the legal & financial jargon, the expenses you may have to incur and not to mention the changes that will most likely impact your team during this transition. So what exactly is an “Exit Strategy”, and what are the different Exit strategies available to you as a business owner or founder?

An Exit strategy for a business “is an entrepreneur’s strategic plan to sell their ownership in a company to investors or another company”. Exit strategies allow business owners to reduce or liquidate their stake in their business and make a hefty profit if the company is successful. In simpler terms, an Exit strategy is your plan for what will happen when you want to leave your business. The strategy explains how you want to transition and outlines a guide similar to how your business plan is written for when you started the business. Your decision to Exit does not mean your business is losing or there is an imminent threat or disaster at bay; the opposite is, in fact, true- some business owners enter a business with a plan to Exist after a certain period and reap the benefits.

Exit strategies should be implemented at the very start of your business planning process, and a forecasted scheme should be outlined for all possible outcomes. There are 8 types of Exit strategies that a business owner can look to choose from depending on their financial situation and their needs from the Exit.

1.Merger and acquisition (M&A deals)
Considered the most popular strategy, M&As are specifically more attractive for startups & entrepreneurs. In this strategy, your business is either purchased by another business/investor or merged (becomes part of) with another company that shares similar goals and values. It can be processed through cash, equity swap or a mix of both. There are many reasons behind using this option, such as geographic expansion, gaining new talent, acquiring new product line or infrastructure or ridding yourself of competition. One of the significant advantages of M&As is room for negotiable pricing of the sale, which cannot be found in an IPO; for example, which valuates your business based on the industry. Still, the process can take a long time and easily fall out.

2. Initial Public Offering (IPO)
An IPO exit entails that you will be taking your business public and selling shares as stocks to shareholders. IPOs are the dream for many entrepreneurs to one day sell their business for a considerable profit to the public; however, within the world of small companies and startups, especially in our region), this method is not suitable for everyone as it requires multiple conditions. In addition, the high regulatory burdens and massive pressure from shareholders make staying private much more enticing. There is also the danger of evaluating your business if it is not found appealing to the public. Yet if you meet the conditions for an IPO, the skies are the limit in terms of gains.

3. Family succession
If you want to keep the business “in the family,” this is the ideal exit strategy for you. It can mean transitioning the company to a sibling, spouse, child or relative. It can be an attractive option for many because it allows you to take time to groom the next leader and avoid outside interference. Still, as a business owner, you need to remember who would be the best person for the job, not just who is next in line.

4. Liquidation
This option is usually chosen for a business taking a massive fall. You are choosing to close your business and sell all assets in this option. The cash earned from the sale of the business must be used to pay off outstanding debts. It may seem grim, but for some, it is the start of a new journey.

Selling your stake to a partner or investor
This option is only viable if you are not the sole owner of your business. In this case, you sell off your stake in the business to another partner or investor. The term ‘business as usual” is often used to describe this strategy.

6. Management and employee buyouts (MBO)
In this strategy, the people who are already working for you may be able to buy your company from you and transition from senior roles to leadership. Since they are already familiar with your business, they will be highly capable of running it when it’s sold to them. This strategy can result in a smoother and more loyal transition, in addition to having more flexibility in your involvement post-sale

7. Take part in an Acquihires.
In this strategy, a company is bought mainly to gain human talent. This can highly benefit skilled employees because they will be favourably looked after the business is sold. It differs from a typical acquisition because it’s based on the business talent at its core.

8. Declaring Bankruptcy
This is the only strategy that does not need a plan. If you are a small business or startup, you cannot plan for this type of exit strategy; you would have to be forced upon it when things go wrong. Like with all businesses, there is always a risk of bankruptcy when things take a terrible turn, but it does not mean the end of the journey for you as a business owner; it is a way to help relieve you of your business debts. With bankruptcy, your assets are seized, which would impact your credit, and you will need to understand fully, based on the market you are in, what other penalties may be at risk.

While this list outlines the basic well-known types of exits there more sophisttecated formats of exits stratgies such as SPAC (Special Purpose Acquisition Company) a relatively new exit strategy. SPAC is a company created to raise funds through an IPO to acquire another company and take it public. A group of investors forms a SPAC called sponsors, and it has a specific period of time to find a target company to acquire, while the funds are placed in an inters-bearing trust account. SPAC must also be registered within the relative Securities and Exchange Commission (SEC), based on its operating market. Currently, it’s more popular in the United States. If a target company for acquisition is not found within the set time period, the SPAC has to be liquidated, and the funds returned to investors. Thereare also LBO models ( leveraged buyout), this includes an acuqstion of another company using a loan. The axquring company takes the loan to meet the cost of acquisition for the company being acquiered. The assets of both the acquiring company and the company being acquierd are used as collaterals for the loan.

Regardless of your chosen strategy, there is no one-size-fits-all model, and you cannot look at success stories and then match them to yوour own when it comes to exit strategies. It would help if you decided which strategy is best for you, which will be determined by several factors which may change over time. The best you can do is to start planning early on which strategy is best for you at different stages of your business life cycle.

Look for our next article to help you decide on which strategy to choose based on specific questions you need to be asking yourself before choosing a strategy:

  1. Why are you pursuing the Exit (what is your goal from the exit strategy)?
  2. Who will be impacted by the exit strategy?
  3. How involved do you want to be after the exit strategy?
  4. What are your financial goals?
  5. Do you know what you are doing or need a sell-side advisory?
  1.  Investopedia, Adam Hayes, March 2020
  2.  Anasandra.com, Types of Exit Stratgies 

SaaS Valuation Calculation

Exits MENA Exits MENA on August 16, 2021

Valuation multiples for SaaS companies are at an all-time high, which is largely based on public company valuations and M&A transactions. When it comes to estimating private SaaS valuations, tools like profit and revenue-multiples can be useful.

5 benefits from a successful acquisition

Exits MENA Exits MENA on August 9, 2021

Compared to organic growth, acquisition is a fast way to scale up a business. You have instant access to new resources and competencies that your business alone may be lacking. And the new product lines, new markets, and new customers are yours right away.