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This document is a worked example of the business valuation report a client will receive. It is designed to be repeatable: inputs are modelled in Excel, and the written analysis is generated to a consistent structure and standard.

Where illustrative assumptions or placeholder commentary are included, they are clearly marked and are used only to demonstrate the format.

Investment Committee Summary

We valued the business using the last three years of performance (FY2023–FY2025) and a five-year forecast (FY2026–FY2030) as provided in the model. The purpose is acquisition screening: to judge attractiveness, identify value drivers, and highlight the diligence tests that will decide the final price.

Scope and Basis of Valuation

Scope: Indicative valuation based on three years of historic accounts and a five-year forecast, as provided in the model. This note is designed to be read as an M&A investment memo. It focuses on sustainability of earnings, cash conversion, balance sheet risk, and sensitivity to the key assumptions that drive value.

• Market value; going concern; 100% equity.
• Enterprise value (EV) is estimated first and then bridged to equity value using cash, debt, and debt-like items.
• No audit or verification procedures have been performed. The analysis relies on information provided and model assumptions.
• This note is not investment advice and should not be used as a fairness opinion or solvency opinion.

Company Overview

Precision Engineering Ltd is an illustrative example of a mid-market engineering business used to demonstrate the screening format. In a live engagement, this section would summarise the company's products, end-markets, competitive position, customer concentration, and operational footprint.

A. Precision Engineering Ltd is assumed to manufacture tight-tolerance, mission-critical components and sub-assemblies, produced in small-to-medium batch runs. The value proposition is reliable quality, repeatable delivery, and problem-solving capability for complex parts.

A. The assumed end-market mix includes industrial equipment, automotive, aerospace/defence, medical devices, and specialist machinery. In screening terms, this matters because regulated sectors can support stickier margins and longer customer life, while cyclical sectors can amplify downside risk.

A. Competitive position is assumed to rest on four levers: (1) documented quality management discipline, (2) engineering capability that reduces customer rework and scrap risk, (3) short lead times driven by planning and capacity flexibility, and (4) embedded relationships with procurement and engineering stakeholders.

A. Customer concentration is treated as a first-order risk. For a live mandate, we would test concentration by revenue, margin by customer, length of relationship, and whether demand is contract-backed or purchase-order driven. A screening trigger would be any single customer exceeding 20% of revenue or the top five exceeding 50%.

A. Operational footprint is assumed to include one main UK manufacturing site with CNC capacity, inspection/metrology capability, and a supporting engineering/commercial team. Diligence would validate machine utilisation, maintenance standards, scrap/rework levels, and depth of management below the owner/MD.

A. Revenue quality would be assessed through repeat demand, pricing power, and the presence of value-added services (design-for-manufacture input, prototyping, kitting, light assembly). These factors tend to drive multiple resilience and improve downside protection.

A. In a live case, this section would close with a one-page 'what we must prove' list linked to valuation sensitivities: EBITDA normalisation, working capital behaviour under growth, true maintenance capex, and customer churn/concentration risk.

Historical Financial Performance

FY2025 shows a business with meaningful scale (£27.0m revenue) and respectable unit economics (36% gross margin). The reported EBITDA margin of 13.7% indicates solid operating earning power for an engineering manufacturer, while the adjusted EBITDA margin of 15.0% highlights potential upside if normalisation items are evidenced and accepted.

The key screening question is whether the margin profile is repeatable. In diligence, we would test pricing discipline by customer and product, confirm scrap and rework levels, and reconcile gross margin stability to input costs, labour utilisation, and any temporary mix benefits.

FY2025 reported EBITDA of £3.699m is adjusted in the model by £0.350m of add-backs to arrive at £4.049m sustainable EBITDA. The commercial point is simple: this adjustment is either evidenced, recurring, and defensible—or it is not.

If the add-backs are rejected, EV/EBITDA pricing compresses quickly. Applying the same pricing logic to the lower EBITDA produces a materially lower enterprise value, and the equity range should migrate toward the bottom end until earnings quality is proven.

In a live case, we would attach an evidence schedule for each add-back: ledger extract, invoice support, narrative rationale, recurrence test, and whether it should be treated as one-off or structural.

The model adjusts FY2025 EBITDA to remove owner-specific, one-off, and non-operational items. This is critical because purchase price is typically set on maintainable EBITDA.

We value the operating business (EV) and then bridge to equity value by adjusting for cash, debt, and debt-like items.

Interpretation: leverage is very low on a net debt/EBITDA basis (0.07x). However, lease liabilities are debt-like and should be treated as part of the financing structure when bridging EV to equity value.

Key Ratios (FY2025) — Acquisition Interpretation

The ratio set points to a business that creates value on the model assumptions: ROCE of 32.2% materially exceeds the WACC hurdle rate of 10%, suggesting capital is being deployed efficiently. Net leverage is very low (net debt/EBITDA 0.07x), which increases deal flexibility and reduces refinancing risk.

However, the operational reality is cash conversion. The cash conversion cycle of 57.2 days indicates roughly two months of cash tied up in working capital. In diligence we would validate receivables ageing and disputes, inventory quality/obsolescence, and whether working capital expands disproportionately as the business grows.

Each ratio is summarised in acquisition terms: why it is positive, and what could go wrong (or what must be tested in diligence).

Forecast and Cash Flow (FY2026–FY2030)

This section summarises the forward case used for valuation. Forecasts are treated as assumptions to be tested in diligence, with explicit focus on the few variables that drive value: revenue growth, margins, working capital intensity, and reinvestment (capex).

The forecast period is the foundation for DCF valuation. A credible forecast must reconcile revenue growth, margin stability, working capital needs, and reinvestment (capex).

Discounted cash flow (DCF) values the business based on the cash it is expected to generate for investors. We forecast free cash flow each year (after tax, after working capital needs, after reinvestment) and discount those cash flows back to today.

Interpretation: DCF anchors value to cash conversion and risk pricing, not market sentiment. However, it is sensitive to WACC and terminal growth, and must be stress-tested during diligence.

Market Multiple Valuation (Cross-Check)

This section validates the valuation range using market evidence. Multiples are used as a reality check and are adjusted for scale, liquidity, concentration risk, and the quality of earnings.

This screening uses two valuation lenses deliberately. DCF anchors value to free cash flow after working capital and reinvestment needs, while market multiples provide an external sanity check against how similar engineering businesses are priced in the market.

EV/EBITDA is the primary yardstick because it is the most common acquisition pricing mechanism in the mid-market, it is capital-structure neutral, and it gives a quick read on debt capacity. EV/Revenue is used as a cross-check because it is less sensitive to accounting classifications, but it can overstate value in low-margin businesses—hence it is secondary.

In this model, the EV/Revenue cross-check (1.10x) implies EV of £29.8m, while EV/EBITDA (8.18x applied to adjusted EBITDA) implies EV of £30.3m. The DCF base case implies EV of £24.2m, reflecting the stricter discipline of cash-flow valuation and its sensitivity to risk, capex, and working capital assumptions.

The practical conclusion is a valuation range rather than a single number: £24.2m to £30.3m enterprise value (and £23.0m to £29.1m equity value). For screening we anchor at £26.7m equity, with the explicit intent that diligence outcomes move price toward the top or bottom of the range.

This section is intentionally written to combine the best of both source documents: the defensible explanatory narrative typical of a valuation report, paired with the decision-focused structure of an investment committee memo.

Diligence Tests & Information Request List

The purpose of diligence is to convert a screening range into a defendable final price by testing the assumptions that drive value.

• Validate EBITDA add-backs (supporting invoices, contracts, and recurrence assessment).
• Working capital: receivables ageing, dispute log, credit notes, and customer concentration.
• Inventory: ageing, obsolescence policy, WIP valuation method, and write-down history.
• Capex: maintenance vs growth capex; asset condition; replacement cycle; capex backlog.
• Debt-like items: leases, deferred revenue, provisions, warranty liabilities, and customer rebates.

• Customer concentration and contract durability (renewal history, pricing clauses).
• Margin by customer/product to identify cross-subsidy or pricing pressure.
• End-market cyclicality and exposure to single sectors.
• Supplier dependency and pricing volatility on key inputs.

Glossary