• 1
  Investment Committee Summary

  Value range, screening anchor, funding decision, deal structures
• 2
  Scope and Basis of Valuation

  Purpose, basis, methods, and limitations
• 3
  Company Overview

  Business description, markets, competitive position
• 4
  Historical Financial Performance

  P&L; earnings quality, balance sheet, working capital
• 5
  Key Ratios — Acquisition Interpretation

  Profitability, returns, liquidity, leverage, efficiency
• 6
  Forecast and Cash Flow

  Five-year projections, DCF methodology and sensitivity
• 7
  Market Multiple Valuation

  EV/Revenue, EV/EBITDA cross-check
• 8
  Buyer Conclusion, Offer Strategy & Next Steps

  Offer strategy, funding feasibility, deal structures, diligence checklist
• Glossary

  Key terms and definitions

1.1 What we did

We reviewed three years of historic financials (FY2023–FY2025), assessed normalised EBITDA via an EBITDA bridge, reviewed balance sheet and working capital dynamics, analysed a five-year forecast (FY2026F–FY2030F), and valued the business using a DCF (base case) and market multiples (EV/Revenue and EV/EBITDA). We then assessed funding capacity against UK lender criteria and compared five alternative deal structures (sources mix and 4-year affordability).

1.2 Value today (from the model)

• Enterprise value range: £24.2m (£24,195k) to £30.3m (£30,265k).
• Equity value range: £23.0m (£23,045k) to £29.1m (£29,115k) (after debt, leases and cash).
• Screening anchor (equity): £23.0m (£23,045k) (DCF base case).
• Screening anchor (enterprise value): £24.2m (£24,195k) (DCF base case).

1.3 Latest-year snapshot (key metrics)

1.4 Why this screens as attractive (buyer view)

• Stable gross margin at 36% across the three-year period, with modest EBITDA margin expansion (13.5% to 13.7%).
• Low leverage and strong liquidity in FY2025 (net debt £250k; current ratio 2.49x; quick ratio 1.92x).
• Strong returns profile: FY2025 ROCE 32.2% versus the model WACC of 10.0% (economic value creation).
• Bankability on cash flow: funding feasibility indicates lender tests pass on DSCR and interest cover at maximum senior debt, subject to leverage being at the threshold.
• Multiple valuation approaches triangulate to a consistent range, with the DCF base case at the bottom end providing a conservative anchor for screening.

1.5 What could break the deal case (what to prove in diligence)

• Adjusted EBITDA relies on £350k of FY2025 add-backs (owner costs, one-offs, and other normalisations). These must be evidenced and sustainable post-acquisition.
• The maximum senior debt capacity is binding on leverage (3.0x Debt/EBITDA). Any adverse adjustment to EBITDA or higher lender conservatism reduces capacity and increases equity requirement.
• Forecast assumes 5% annual revenue growth and stable margins; evidence is required on order book, pricing, capacity, and customer retention to support this.
• Working capital assumptions (DSO 55 days; DPO 40 days; inventory days improving) must be validated; adverse drift would increase funding needs and reduce free cash flow.
• Deal scenarios that reduce Day-1 equity introduce refinancing exposure at Year 4 (balloon) and counterparty risk (deferred consideration and vendor loan notes).

1.6 Screening stance (clear anchor and logic)

We recommend using the DCF base case as the screening anchor at £23.0m (£23,045k) equity value (£24.2m (£24,195k) enterprise value). The multiples cross-check implies upside if the business sustains forecast growth and the adjusted EBITDA is validated in diligence. However, lender leverage capacity is tight at the maximum senior debt level, so the offer strategy should prioritise (i) certainty over add-backs, (ii) working capital protections, and (iii) a structure that balances equity cheque size with refinancing risk.

1.7 Decision gate: progress, hold, or decline

Actions required next (priority order):

• Obtain monthly management accounts and KPI pack (revenue mix, utilisation/capacity, pricing and gross margin bridge).
• Evidence each FY2025 add-back with payroll, contracts, invoices and board approvals; test sustainability post-transaction.
• Customer diligence: top-20 customers, concentration, churn/retention, contract terms, pricing change history.
• Working capital diligence: ageing reports, inventory analysis (WIP vs finished goods), supplier terms, seasonality; define a normalised working capital peg.
• Capex maintenance requirement: asset register, capex history, planned major projects and lease commitments.
• Debt package discussion with lenders: confirm leverage covenant headroom and whether leverage is set on reported vs adjusted EBITDA.
• Legal/operational diligence on property and related-party arrangements (rent normalisation and any security package implications).
• Agree indicative deal structure (Scenario 1 vs Scenario 4 as primary candidates) and draft headline terms with protections.

2.1 Purpose of this note

This memorandum supports an acquisition screening decision, providing an indicative valuation range and assessing funding feasibility and deal structuring options.

2.2 Premise and basis (market value, going concern, 100% equity)

The valuation is prepared on a market value, going concern basis, assuming the acquisition of 100% of the equity. Enterprise value is derived from DCF and market multiples and then bridged to equity value by adjusting for debt, leases and cash.

2.3 Data sources and reliance

Inputs are taken from the provided Excel model, including historic financial statements, forecast assumptions, DCF valuation, comparable company multiples, and funding/deal scenario tabs. No audit procedures have been performed.

2.4 Limitations (screening note; not a fairness opinion)

This is an indicative screening memorandum. It does not constitute a fairness opinion, investment advice, or a commitment to transact or finance. Forecasts are assumptions to be tested in due diligence, not promises of performance.

Precision Engineering Ltd operates in the Engineering Services sector. The business employs approximately 185 people (estimated) and was founded in 1998 (per the model cover page).

Products/services

A. Precision engineering services including machining, fabrication, and related technical services (to be confirmed).

A. Value-added services may include design support, prototyping, and small-batch production (to be confirmed).

End-markets and customer types

A. Industrial and manufacturing customers requiring outsourced engineering capacity (to be confirmed).

A. Mix of repeat contract work and project-based assignments (to be confirmed).

Competitive position and differentiators

A. Differentiation likely driven by quality, reliability, lead times, and engineering know-how (to be validated).

A. Local/regional reputation and long-term customer relationships may support pricing stability (to be validated).

Customer concentration

A. Customer concentration is not provided in the model. Diligence will test top-customer concentration, contractual stickiness, pricing power, and churn.

Operational footprint

A. Site footprint, capacity constraints, and key operational dependencies (equipment, critical staff) are not provided in the model and must be confirmed in diligence.

What we must prove (linked to value drivers)

• Sustainability of the 36% gross margin and drivers of any margin volatility.
• Evidence and repeatability of adjusted EBITDA add-backs, and the true post-acquisition cost base.
• Customer retention and order book support for the 5% forecast growth trajectory.
• Maintenance capex requirements versus the 3% of revenue assumption.
• Working capital normalisation and whether a working capital peg would be above or below current levels.
• Any operational constraints (capacity/utilisation) that limit growth or require additional capex.
• Ability to refinance any Year-4 balloon amounts under the proposed structures.

4.1 Profit and loss highlights

Interpretation: The model shows a stable gross margin and improving operating leverage, consistent with disciplined cost control or modest productivity gains. Key diligence is to understand revenue mix and whether the 36% gross margin is structurally supported (pricing, mix, utilisation) or dependent on cyclical end-market strength.

4.2 Quality of earnings — reported vs adjusted EBITDA

FY2025 reported EBITDA is £3.7m (£3,699k). Total add-backs of £0.350m (£350k) result in adjusted EBITDA of £4.0m (£4,049k).

FY2025 add-back categories (from the model):

• Owner/director add-backs (£238k): excess owner compensation, owner benefits, excess pension, spouse on payroll.
• One-off items (£65k): aborted transaction costs.
• Property adjustment (-£45k): below-market rent normalisation (reduces EBITDA).
• Other adjustments (£92k): R&D capitalisation adjustment, share-based compensation, charitable donations.

4.3 Balance sheet and leverage (latest year)

As at FY2025, the business holds cash of £2.2m (£2,200k) and total debt of £2.5m (£2,450k). Lease liabilities total £0.9m (£900k). Net debt (debt less cash) is £0.2m (£250k).

• Net debt/EBITDA: 0.07x (very low leverage).
• Debt-to-equity: 0.35x (conservative capital structure).
• Interest cover (EBITDA/interest): 24.66x (strong).

Interpretation: The target appears lightly levered at FY2025. The acquisition leverage is therefore primarily a function of lender appetite against earnings rather than existing balance sheet constraints.

4.4 Working capital and cash conversion (latest year)

FY2025 working capital profile is DSO 55 days, inventory 42.2 days and DPO 40 days, implying a cash conversion cycle of 57.2 days.

Implication: A ~57-day cash conversion cycle is meaningful for an engineering services business with WIP/inventory exposure. Acquisition funding should assume ongoing working capital support and protect the buyer via a normalised working capital peg.

Diligence tests required:

• Receivables ageing and bad-debt history; concentration by customer and payment behaviour.
• Inventory/WIP composition, obsolescence provisioning, and production cycle times.
• Supplier terms and any early-payment discounting or supply concentration risk.
• Seasonality analysis to set an appropriate working capital peg.

Each ratio category is summarised in acquisition terms: why it is positive for a buyer, and what could go wrong or must be tested in diligence.

6.1 Forecast summary

The model forecasts revenue growth of 5% per year from FY2025, increasing revenue from £27.0m (£27,000k) to £34.5m (£34,460k) by FY2030F. Gross margin is held at 36% and EBITDA margin at ~13.7%, resulting in EBITDA rising from £3.7m (£3,699k) to £4.7m (£4,721k).

Capex is assumed at 3.0% of revenue, and working capital is assumed to increase in line with growth (modelled as a cash outflow each year).

Evidence that would support or weaken the forecast:

• Order book and pipeline conversion metrics; visibility on FY2026–FY2027 demand.
• Pricing power and contract terms (indexation, pass-through of materials/labour).
• Capacity/utilisation: ability to deliver growth without margin dilution.
• Capex plan and maintenance backlog vs the 3% of revenue assumption.

6.2 DCF valuation

A discounted cash flow (DCF) values the business by forecasting the unlevered free cash flows the business can generate and discounting them back to today using a risk-adjusted discount rate (WACC). A terminal value captures cash flows beyond the explicit forecast period using a long-term growth assumption.

Model assumptions: WACC 10.0%; terminal growth 2.5%. Base-case enterprise value is £24.2m (£24,195k), which bridges to equity value of £23.0m (£23,045k) after adjusting for debt, leases and cash.

Sensitivity (Enterprise Value) — selected points:

WACC would move up if earnings are less defensible (customer concentration, margin volatility, weaker cash conversion, higher capex) or if leverage/refinancing risk is higher. WACC could move down if revenue is contractually secured, margins are proven through cycle, and cash conversion is strong and stable.

7.1 Why these metrics are appropriate

EV/Revenue and EV/EBITDA are commonly used for engineering and industrial services businesses and provide a market-based cross-check to the intrinsic DCF. Given differences in size and liquidity versus listed peers, the model applies a size/liquidity discount to peer medians.

7.2 EV/Revenue cross-check

Applied EV/Revenue multiple is 1.10x, implying enterprise value of £29.8m (£29,816k) and equity value of £28.7m (£28,666k) (per model).

7.3 EV/EBITDA cross-check

Applied EV/EBITDA multiple is 8.2x, implying enterprise value of £30.3m (£30,265k) and equity value of £29.1m (£29,115k) (per model).

7.4 Summary of valuation outcomes

A higher multiple would be justified by strong recurring revenue, defensible margins, and validated adjusted EBITDA. A lower multiple would be justified by customer concentration, cyclical exposure, weaker cash conversion, or higher capex requirements.

8.1 Final screening conclusion

The business screens as a bankable acquisition candidate with stable margins, improving profitability and strong liquidity. The valuation range is coherent across DCF and market multiples. The main feasibility constraint is that maximum senior debt is bound by leverage at 3.0x EBITDA, requiring a meaningful equity cheque or alternative sources.

8.2 Offer strategy (indicative)

Price anchoring approach (range-based)

• Indicative pricing to be framed around £23.0m (£23,045k) equity (DCF base case), with upside to the top of the range contingent on diligence validation of adjusted EBITDA and forecast support.
• Treat the model's £24.195m enterprise value as a reference point for a clean enterprise value offer, bridged to equity at completion via debt/cash and a working capital mechanism.

Funding feasibility (UK lender criteria) — headline outputs

At a target acquisition price of £24.2m (£24,195k) the modelled maximum senior bank debt capacity is £11.1m (£11,097k). This is the binding leverage constraint (3.0x Debt/EBITDA on FY2025 EBITDA of £3.7m (£3,699k)), funding 45.9% of the purchase price and implying an equity / alternative funding requirement of £13.1m (£13,098k) at completion (before deferred consideration or vendor financing).

Deal structures (aligned to £24,195k deal price)

All deal structures below are aligned to the target deal price of £24,195k, consistent with Feasibility Inputs and the valuation outputs. Affordability is assessed using DSCR over the first four years (deferred period), and refinancing exposure is assessed by the residual bank balance plus any balloon amount from Year 5 onwards.

Feasibility view:

Scenario 1 is the cleanest lender story (no deferred/loan note/balloon refinancing risk) but requires the largest equity cheque. Scenario 4 offers the best balance of affordability and covenant resilience (strongest DSCR) with moderate refinancing exposure. Scenario 5 passes the DSCR hurdle but is close to the threshold and carries the highest refinancing requirement; it should only be used where equity is constrained and refinancing is underwritten in advance.

Structure levers and protections

• Working capital peg and completion accounts: offer based on a normal trading working capital peg; completion accounts adjust the price versus the peg (if working capital above peg the price increases; if below peg the price decreases), ensuring the business transfers with appropriate debtors, stock and creditors to trade normally.
• Deferrals / vendor loan notes: reduce Day-1 equity but introduce counterparty risk; require robust warranties, escrow/retention mechanics and clear payment triggers.
• Balloon refinance risk: structures with balloons assume refinance availability in Year 4; mitigate through conservative leverage, covenant headroom and lender engagement pre-signing.
• Warranties/indemnities and disclosure: emphasise revenue recognition, customer contracts, working capital, and any related-party arrangements.

8.3 Conditions to justify top end of range

• Adjusted EBITDA add-backs fully validated and sustainable post-acquisition (including rent normalisation).
• Evidence of recurring/contracted revenues and low customer churn supporting the 5% forecast growth assumption.
• Working capital normalises at or below current levels with limited seasonality risk, supporting free cash flow conversion.
• Capex requirements consistent with the 3% of revenue assumption and no hidden maintenance backlog.
• Funding terms achievable with leverage covenant headroom beyond 3.0x at close (or lender willing to use adjusted EBITDA).

8.4 Conditions that push value to the bottom end

• Material disallowance of add-backs or identification of recurring costs currently treated as one-offs.
• Customer concentration and contract fragility (short-term purchase orders, weak pricing power).
• Higher capex required to maintain capacity/quality, or working capital absorption materially above model.
• Lender reduces debt capacity below £11.1m due to covenant conservatism, increasing equity cheque and lowering affordability.
• Execution risk on Year-4 refinancing for balloon structures.

8.5 Required confirmatory due diligence (prioritised checklist)

• Quality of earnings: Revenue recognition, margin bridge, payroll and owner-related items; validate all add-backs with evidence.
• Commercial diligence: Customer concentration, churn, pricing, contract terms and pipeline quality.
• Operational diligence: Capacity utilisation, key person dependency, production bottlenecks, HSE and quality systems.
• Working capital: Normalised working capital, seasonality, receivables ageing, inventory provisioning, supplier terms.
• Capex: Asset condition, maintenance backlog, lease obligations and capex plan vs assumptions.
• Legal & tax: Property and related-party contracts, litigation, tax compliance, change-of-control clauses.
• Financing: Lender term sheets, covenant definitions (reported vs adjusted EBITDA), security package, amortisation profile and refinance plan.