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Investment Committee Summary

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).

• Obtain monthly management accounts and KPI pack (revenue mix, utilisation/capacity, pricing and gross margin bridge).
• Evidence each FY2025 add-back with payroll records, 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.

Scope and Basis of Valuation

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

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.

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.

Company Overview

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

• Precision engineering services including machining, fabrication, and related technical services (to be confirmed in diligence).
• Value-added services may include design support, prototyping, and small-batch production (to be confirmed).

• Industrial and manufacturing customers requiring outsourced engineering capacity (to be confirmed).
• Mix of repeat contract work and project-based assignments (to be confirmed).

• Differentiation likely driven by quality, reliability, lead times, and engineering know-how (to be validated).
• Local/regional reputation and long-term customer relationships may support pricing stability (to be validated).

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

• 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.

Historical Financial Performance

FY2023–FY2025

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

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

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

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.

Key Ratios — Acquisition Interpretation

Latest Year — FY2025

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.

Forecast and Cash Flow

FY2026F–FY2030F

The model forecasts revenue growth of 5% per year from FY2025, increasing revenue from £27.0m 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 to £4.7m (£4,721k). Capex is assumed at 3.0% of revenue and working capital is assumed to increase in line with growth.

Evidence required to support or weaken the forecast: order book and pipeline conversion metrics; pricing power and contract terms (indexation, pass-through of materials/labour); capacity/utilisation without margin dilution; and capex plan vs the 3% of revenue assumption.

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

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.

Market Multiple Valuation

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.

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

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

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

Buyer Conclusion, Offer Strategy & Next Steps

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.

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.

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 reported EBITDA of £3.7m), funding 45.9% of the purchase price and implying an equity/alternative funding requirement of £13.1m (£13,098k) at completion.

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

• Working capital peg and completion accounts: Offer based on a normal trading working capital peg; completion accounts adjust the price versus the peg, 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.

• 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).

• 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.

Glossary