Well, my heart has begun to stop racing gentle readers after the emotional three-way roller coaster that was the QIP/XIP/IPH merger saga. It’s time for some more thoughtful posts…
In a previous post I mentioned that there might be circumstances in which one of the bigger unlisted patent attorney firms in Australia (ie Wrays, FB Rice and Phillip Ormonde Fitzpatrick) would have a change of heart and agree to be acquired by a listed firm and/or list themselves (the latter being less likely).
There are a number of aspects to making that decision. This post is about calculating the price for a patent attorney business. The arrangements and details around selling or listing a firm have become pretty well established and stem from the initial listing of IPH (ie Spruson & Ferguson).
Essentially the price is based on the profitability of the business, which is given by the NPAT (net profit after tax) or EBITDA (earnings before interest, tax, deductions and amortisation). However, in that calculation, it is assumed that the partners each receive a salary of $250,000. So you have six partners, the profitability of the business is calculated as being $1.5 million less than is in fact the case. This adjustment is made because, in a partnership, equity partners are paid from profit rather than being paid a salary.
The amount that the business is to be sold for is then taken as a multiple of NPAT or EBITDA. The multiple varies depending on the perceived quality of the firm, the market at the time, and how valuable the acquisition would be to the acquirer – for example it might be a strategic acquisition or you might be competing with another firm for the acquisition. Usually the multiple will be in the order of 10 or so times – although this could vary substantially.
The amount is usually paid as a mix of cash and shares – the shares help ensure that the partners has an incentive to stay with the listed entity and to continue to increase the value of the business and hence its shares.
The mix might be 50:50, or it may deviate from that amount, usually in the direction of the cash component. For example, the Shelston IP partners listed their firm for 60% cash and 40% equity.
Once the firm has been acquired/listed, each partner is put on a long term contract (eg 3 years) at $250,000 a year.
What does this mean for the partners? – well, if their average drawings are close to $250,000 a year, then being acquired or listing doesn’t make as much sense as it does for partnerships with much higher drawings.
For example, partnerships that average $400k average drawings (rumour has it that this is the average drawings for one non-listed partnership) would have an average purchase price of about $1.5 million a partner at a 10x multiple. However, a partnership with $700k average drawings (again a rumoured amount for another firm) would have an average purchase price of say $4.5 million a partner at a 10x multiple. At a 13x multiple you are looking at $1.95 million and $5.85 million respectively.
Although this is average prices per partner, the split of the price internally within the partnership may vary considerably from partner to partner – which can be the source of some consternation!
Hope this makes sense. Later peeps!