Assume the perspective of a Risk Officer and compose a memo for the specialist venture debt bank outlining why a Management Buy-Out (MBO) is an attractive option for managers. Identify and explain the specific risks of providing debt to Monsoft? How could the bank mitigate these risks?
Corporate Reporting & Finance
Monsoft is an established fintech that provides back-office/ administrative software for banks to manage customer mortgages. The company has 8 clients in total with 3 of the top 10 UK banks using their software.
The company was founded by Tim Bennis, who serves as both CEO and CTO. Currently the software is sold through multi-year licences, which are deployed on Monsoft’s customers own servers, however Monsoft also has plans to sell its product through the software as a service model (SaaS). Tim estimates that this would cost £3m and take 12-18 months to implement, the move to a SaaS model will likely increase the value of the company by 50%.
Ownership: Tim owns 30% of the shares in the company with the remainder held by various venture capital firms, the largest of which is a small UK venture capital fund, Growth Partners that owns 40%. Each of the other shareholders own approximately 10% and are not aligned with Tim or Growth Partners
Shareholder Exit: Growth Partners is nearing the end of its lifecycle and has failed to raise a subsequent fund, so needs to sell its 40% shareholding in Monsoft for cash to its investors rather than take additional equity stakes. There are three financing options currently available: acquisition by a high growth fintech, sale to a private equity firm and a management buyout.
see ‘this screenshot’ for information on Plutus and Valuation Guidance
REQUIREMENTS
A: Business Valuation
Compose a memo to the Board of Directors of Monsoft covering the following topics:
1. Calculate the 2022 value of Monsoft by applying the following three methods:
• 1. Discounted Cashflow (DCF) with terminal value based on Price/Sales multiple applied current TTM (Trailing Twelve Month) revenue
o The DCF will use the forward years projections up to 2024
o Assume that there is no depreciation, investment, or interest but if there is a tax liability, that is, if the company is profitable – assume the UK corporate tax rate is 19%
• 2. Forward P/E valuation, – Apply the same assumptions as for the DCF to determine what an implied post tax earnings figure would be for Monsoft in 2022 and apply the relevant PE multiple
• 3. Price/Sales
Include an advantage and disadvantage of each valuation technique
2. Assuming Plutus hits the $20m revenue target and the new revenue multiple is applied, calculate the value in GBP of the equity stake the owners of Monsoft would have in Plutus.
3. Compare and contrast the Plutus and Victors offers from Tim Bennis and Growth Partners perspective? Using the
information provided, please suggest an alternative scenario whereby both Tim Bennis and Growth Partners goals can be met and Monsoft has sufficient funding for its growth.
4. Describe the specific sectoral considerations when valuing a software company and to provide a recommendation on what a reasonable value the company should be based on your calculations and research
Consult the following resource:
B: Business Financing
Assume the perspective of a Risk Officer and compose a memo for the specialist venture debt bank outlining why a Management Buy-Out (MBO) is an attractive option for managers. Identify and explain the specific risks of providing debt to Monsoft? How could the bank mitigate these risks?
C: Business Disposal
You are a corporate finance advisor working for Plutus. Write an email to Plutus’s CEO identifying the critical steps involved in an acquisition process after the target has been identified. Explain what you think are the critical items of what Plutus needs to conduct on Monsoft.