CASE STUDY | When does a business deserve a valuation re-rating?

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CASE STUDY | When does a business deserve a valuation re-rating?

A business doubles its EBITDA margin in 18 months and forecasts doing it again before stabilising. Do you pay for that story today, or make them prove it first?

We recently advised on the valuation of a business supplying mission-critical equipment to the mining industry.

Over approximately 18 months, the company repositioned itself within the value chain. Rather than primarily sourcing completed equipment from third parties, it brought substantially more assembly, integration, customisation and installation capabilities in-house. In doing so, it captured a greater share of the value chain while delivering bespoke solutions tailored to customers’ operational requirements.

The financial impact was compelling:

  • Revenue grew steadily over the period.
  • Reported EBITDA margins increased from the low-to-mid teens to the low-to-mid 30s.
  • Management forecast a further step change, with significant revenue growth and EBITDA margins approaching 40% before stabilising, supported by a strong order pipeline and confidence in underlying demand.

This is where the valuation became particularly interesting. The challenge wasn’t determining what the business was worth today. It was determining how much value should be attributed to a future that management believed was highly probable, but which the buyer had yet to see demonstrated.

The seller believed the business had earned a valuation re-rating based on its new earnings profile. The buyer agreed the transformation was real, but questioned whether 18 months of evidence was sufficient to capitalise forecasts that assumed another material increase in both revenue and profitability.

As advisers, we explored several mechanisms to bridge the valuation gap, including earn-outs, deferred consideration and performance-based price adjustment mechanisms linked to future earnings. Each represented a rational way of allocating risk between buyer and seller.

Ultimately, however, the buyer wasn’t prepared to pay today for earnings that had yet to be realised, while the seller wasn’t willing to defer a meaningful portion of value for what it believed was already reflected in the business. The conclusion was simple: don’t debate the forecast, test it.

Allow another reporting cycle. If management delivered another year of strong growth and margins approaching the forecast, much of the valuation uncertainty would disappear.

In our experience, the most challenging valuations are rarely solved by selecting the right multiple or building the perfect DCF. They’re solved by appropriately allocating uncertainty between buyer and seller.

How would you have approached this transaction?

#BusinessValuation #CorporateFinance #MergersAndAcquisitions #KensingtonCapital

Why Strong Acquisition Opportunities Still Don’t Get Funded

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What successful acquirers do differently in the South African mid-market

One of the most persistent misconceptions in acquisition finance is that a strong opportunity will naturally attract funding.

On the surface, that logic is compelling. If the target business is profitable, strategically attractive, cash-generative and well positioned in its market, it seems reasonable to assume lenders and investors would be eager to support the deal.

Yet, in practice, many attractive acquisitions never proceed.

Not because the target is weak, but because the acquirer is not sufficiently positioned to access the capital required to complete the transaction.

Funders back acquirers, not just acquisitions

Business owners and management teams often spend considerable time identifying attractive targets. They evaluate synergies, growth opportunities, market share gains and potential returns.

Funders, however, typically assess the transaction through a different lens. Before they underwrite the target business, most lenders want to understand the acquirer.

Questions commonly include:

  • How much capital is the buyer contributing?
  • How strong is the buyer’s balance sheet?
  • What security is available?
  • What is management’s acquisition and integration track record?
  • Can the borrower continue servicing debt under stressed conditions?

The distinction matters. While the quality of the target is important, lenders are ultimately assessing the party responsible for servicing and repaying the debt.

Across the South African mid-market, that distinction is still too often overlooked.

The “70:30 rule” is not a rule

Many prospective acquirers still approach the market assuming that acquisition finance follows a simple formula: 70% debt and 30% equity.

It can be a useful reference point, but it should never be mistaken for a dependable rule.

Debt capacity is influenced by cash flow stability, industry cyclicality, existing leverage, security availability, management capability and customer concentration risks.

In some transactions, lenders may support higher leverage. In others, materially lower debt levels are appropriate.  Acquisition finance structures are shaped by risk, not rules of thumb.

The more important question is often equity

Discussions about debt often overshadow a more fundamental question:

Where does the equity contribution come from?

For many owner-managed and mid-market businesses, the required equity is not readily available in retained earnings or sitting in excess cash reserves.  This is where otherwise attractive opportunities often stall.

A business may identify a compelling target and even secure lender interest, yet still be unable to proceed because it cannot meet the required equity contribution. This challenge creates a structural reality within the market.

Businesses with stronger balance sheets, retained earnings and existing capital resources are able to pursue opportunities that may be inaccessible to otherwise capable competitors.

Vendor funding and DFIs: valuable, but not complete solutions

Historically, vendor funding played an important role in bridging capital gaps.

While it remains highly relevant, lenders are increasingly cautious about structures that rely heavily on seller financing. They generally want to see genuine buyer risk capital beneath their debt position.

Similarly, Development Finance Institutions (DFIs) play an important role in supporting economic growth and transformation in South Africa.

However, many businesses mistakenly view DFI funding as a universal alternative when commercial funding proves difficult to access.  Approval processes can be extensive, timelines are often lengthy, and specific developmental mandates may need to be satisfied.

Where speed, certainty of execution and transaction flexibility matter, DFI funding may not always align with the realities of a private transaction.

Debt capital comes with operating consequences

When acquisition finance is discussed, many acquirers focus primarily on pricing.

While pricing matters, it is only one component of the funding package.

Acquisition debt frequently includes:

  • Financial covenants
  • Security requirements
  • Reporting obligations
  • Dividend restrictions
  • Limitations on additional borrowing
  • Restrictions on future acquisitions

Understanding these conditions is just as important as securing the debt itself.

Why larger businesses keep compounding their advantage

One of the defining characteristics of acquisition markets is that larger organisations are often able to pursue opportunities that smaller competitors simply cannot.

This is rarely because they identify better opportunities.

More often, they have spent years building the foundations required to access capital efficiently.

These foundations typically include:

  • Strong balance sheets
  • Meaningful cash reserves
  • Established banking relationships
  • Proven acquisition track records
  • Diversified earnings streams

This creates a powerful compounding effect. Capital enables acquisitions. Acquisitions strengthen earnings. Stronger earnings unlock additional capital.

Over time, that dynamic widens the gap between businesses that can act and those that remain constrained.

Improving acquisition funding readiness

While every transaction is different, businesses that consistently access acquisition capital tend to focus on long-term readiness rather than transaction-by-transaction improvisation.

In practice, that usually means:

Preserve balance sheet strength: Build and maintain capital reserves well in advance of a transaction.

Manage relationships proactively: Build relationships with lenders and investors before capital is actively required.

Improve operational visibility: Raise the quality of financial reporting, forecasting and cash flow visibility to institutional standards.

Clarify strategy: Develop a credible acquisition and integration roadmap that demonstrates management capability.

Successful capital raising is rarely about approaching the largest number of funders. It is about presenting a transaction with a realistic capital structure, a credible investment case and an alignment of risk between lenders, investors, vendors and management.

A simple readiness check:

Before pursuing a transaction, management teams should be able to answer four questions clearly: How much equity can we contribute? What level of debt can the business support under stress? What funding relationships are already in place? And do we have a credible integration plan?

How we support clients

At Kensington Capital, we work with shareholders, management teams and investors to assess funding readiness, evaluate appropriate capital structures, identify funding gaps, and support capital-raising processes through to execution.

More often, the challenge is not the absence of capital, but structuring a transaction in a way that aligns the interests and risk appetite of lenders, investors, vendors and management teams.

The difference between a successful funding outcome and an unsuccessful one is often not the quality of the opportunity itself, but the quality of the preparation, structuring and process behind it.

Final thought

The acquisition opportunity may surface in a matter of months. The ability to fund it is usually built over many years.

Successful acquirers understand that acquisition finance is not a reactive transaction event.

It is the outcome of deliberate balance sheet discipline, capital accumulation, relationship building and strategic preparation.

Ultimately, funders back acquirers, not just acquisitions.

 

Start a conversation with us today (https://www.kensingtoncapital.co.za/contact-us/)

Copyright Kensington Capital 2026

Reframing Value in the Lower-Middle Market

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Reframing Value in the Lower-Middle Market

For business owners operating in the R20 million to R30 million EBITDA range, the path to a successful exit is often less straightforward than expected.

These businesses are established, profitable, and operationally proven. Yet when owners begin exploring a sale, they frequently encounter a market that does not fully recognise their value.

This segment of the market, commonly referred to as the lower-middle market, sits in a structural gap. It is a space where strong businesses are often overlooked, misunderstood, or undervalued, not because of weak fundamentals, but because of how they are positioned and assessed.

A Market That Sits Between Two Worlds

Businesses in this EBITDA range are often too large for individual buyers or smaller independent sponsors. At the same time, they may fall below the threshold required to attract larger private equity firms or strategic acquirers seeking immediate scale.

This creates a narrower and more nuanced buyer universe, requiring a more considered approach to positioning and execution.

Why These Businesses Are Often Overlooked

Despite their scale and profitability, businesses in this segment tend to face a consistent set of challenges when brought to market.

  1. The “No Man’s Land” Size Dynamic: They fall between buyer categories. Too large for informal buyers, yet too small to attract institutional capital at scale.
  2. Key-Person Dependency: Many businesses remain closely tied to the founder, particularly in strategy, client relationships, and operational oversight. This creates perceived continuity risk for acquirers.
  3. Limited Institutional Infrastructure: While financially successful, these businesses may lack formal management layers, sophisticated reporting systems, or documented processes expected in a transaction environment.
  4. Concentrated Operational Risk: Exposure to a small number of customers, suppliers, or revenue streams can elevate perceived risk during diligence.
  5. Lower Valuation Multiples: As a result of the above factors, these businesses typically trade at lower EBITDA multiples, often in the 3x to 6x range, which can constrain exit outcomes if not properly addressed.

Reframing the Opportunity

When viewed through a more informed and strategic lens, these same businesses present a compelling investment case.

  1. Proven and De-Risked Earnings: At this level of EBITDA, businesses have established models, stable cash flows, and demonstrated resilience.
  2. Ideal for Bolt-On and Consolidation Strategies: They are highly attractive as bolt-on acquisitions or as part of broader roll-up strategies, where scale and synergies can unlock significant additional value.
  3. Clear Path to Operational Upside: Opportunities often exist to enhance value through improved systems, management structures, and operational efficiencies.
  4. Less Competitive Deal Environment: With fewer large buyers actively pursuing this segment, transactions can be executed with less competitive tension.
  5. Strong Cash Generation and Financing Potential: These businesses typically generate sufficient free cash flow to support leveraged transactions.

The Importance of Normalisation and Positioning

A further nuance in this segment is that reported earnings do not always reflect underlying performance.

It is not uncommon for businesses to sit just outside the R20 million to R30 million EBITDA range on a reported basis, yet fall within it once appropriate normalisation adjustments are applied.

These adjustments may include owner-related costs, non-recurring expenses, or accounting treatments that obscure the true earning capacity of the business.

Without careful analysis and clear articulation, this value can be misunderstood or discounted.

Positioning is therefore critical. The objective is to ensure that the economic substance of the business is properly understood by a credible buyer audience.

A Disciplined Approach to Market

In our experience, successful outcomes in this segment are typically driven by a structured, two-phase process.

The first phase is a rightsizing and preparation phase. This involves assessing the business through a buyer’s lens, normalising earnings, addressing potential diligence issues in advance, and strengthening areas that may present risk.

The second phase is a focused execution phase. Rather than broad outreach, the business is presented to a select group of credible acquirers within a trusted network who have both the strategic intent and financial capacity to transact.

This targeted approach improves the quality of engagement and increases the probability of a successful outcome.

A More Balanced Perspective

The lower-middle market does not lack quality. It requires context.

While these businesses may not always exhibit high-growth characteristics, they often deliver consistency, resilience, and dependable cash generation.

For many acquirers, this profile represents a compelling opportunity rather than a compromise.

For business owners, the challenge is ensuring that this value is recognised and realised.

How Kensington Capital Supports This Segment

Navigating this part of the market requires more than a conventional process. It requires a practical understanding of how these businesses operate, how value is assessed, and how transactions are actually executed in this segment.

Our focus is on working closely with business owners and stakeholders to bridge the gap between underlying value and market perception.

This begins with a detailed appraisal of the business, including a clear view of normalised earnings, operational structure, and potential areas of concern from a buyer’s perspective. The objective is to ensure that the business is properly understood before it is introduced to the market.

From there, we support a structured and focused process that prioritises engagement with credible buyers. Rather than pursuing broad and often inefficient outreach, we focus on a select group of acquirers who are aligned in terms of strategy, experience, and capacity to transact.

For sellers, this results in a more considered and less disruptive process. Management time is preserved, unnecessary complexity is avoided, and discussions are centred on parties who can move with intent.

For buyers, it provides access to opportunities that have been thoughtfully prepared and clearly presented, allowing for more efficient evaluation and execution.

Having advised on transactions in this segment, we recognise that each business requires a tailored approach. However, where the fundamentals are sound, and where the process is handled with the appropriate level of discipline, outcomes can be materially improved.

An Underserved Segment, A Meaningful Opportunity

This segment of the market has historically been underserved within the advisory landscape. Yet it represents a significant opportunity for both buyers and sellers when approached correctly.

Our experience has shown that with the right preparation, clear positioning, and a disciplined process, businesses in this range can achieve outcomes that more accurately reflect their underlying value.

Not every business will be ready immediately. However, where the fundamentals are strong, the opportunity to unlock value is real.

And increasingly, it is a segment that warrants closer attention.

In the lower-middle market, value is rarely lost. It is simply not always seen.

Structuring Successful M&A Deals in South Africa: Critical Factors for Success

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Essential Insights for Structuring Effective M&A Transactions in SA

Drawing on our experience as a trusted M&A advisor in South Africa, we’ve observed several recurring challenges and critical success factors in deal structuring. In this article, we outline key insights to help stakeholders navigate the intricacies of M&A transactions with greater clarity, precision, and confidence.

Successfully structuring an M&A transaction in South Africa requires an integrated, strategic approach that balances regulatory obligations, commercial objectives, and risk mitigation. Based on our experience advising on cross-sector M&A deals, the following are the most critical structuring considerations stakeholders must evaluate to ensure transactional success.

1. Regulatory Compliance: A Non-Negotiable Foundation

The South African regulatory environment is layered and highly specific. Failure to properly account for applicable laws and sectoral rules can delay, or even derail, a transaction.

  • Competition Law: All notifiable M&A transactions must be submitted to the Competition Commission and, where required, the Competition Tribunal. The thresholds for notification depend on the asset value and turnover of the merging parties. Beyond traditional antitrust concerns, public interest considerations, including employment, local supplier impact and B-BBEE implications are increasingly scrutinised during merger reviews.
  • Exchange Control Regulations: Cross-border transactions require close attention to South African Reserve Bank (SARB) approval processes. Structuring offshore holding vehicles, repatriating dividends, or funding acquisitions with foreign debt all require early-stage planning to remain compliant with prevailing exchange control policies.
  • Broad-Based Black Economic Empowerment (B-BBEE): In regulated sectors (e.g., mining, financial services, telecoms), M&A deal structures must align with B-BBEE ownership targets to preserve or enhance scorecard ratings. The implications of changing ownership or control must be modelled and planned for meticulously in the transaction structuring phase.

2. Tax Efficiency: Structuring with the Bottom Line in Mind

Poorly structured deals can result in unintended tax leakage and materially affect transaction value. Early involvement of tax advisors is essential to shape the structure and commercial terms. We partner with experienced service providers such as Collop Tax Collective and Webber Wentzel to determine the most tax appropriate transaction structure.

  • Capital Gains Tax (CGT): The disposal of shares or assets may trigger CGT, which must be calculated and planned for in the context of the transaction type and parties involved.
  • Dividends Tax: The manner in which profits are distributed post-transaction, must take into account withholding taxes.
  • Transfer Duty: Acquisitions involving immovable property may attract transfer duty, unless exempted (e.g., asset-for-share transactions under certain tax rollover provisions).
  • VAT Considerations: The VAT treatment of asset sales versus share sales differs significantly. Particular care is required in identifying whether the transaction qualifies as a “going concern” for VAT purposes.
  • Tax Rollover Relief: Sections 42, 45, and 47 of the Income Tax Act provide for tax-neutral rollovers in certain restructurings. When applicable, these provisions can help preserve value but they must be applied with precision and supported by proper documentation and commercial rationale.

3. Choice of Transaction Type: Asset vs Share Deals

The form of the transaction is fundamental and impacts virtually every aspect of the deal.

  • Share Deals: Typically simpler to implement and attractive to sellers (who prefer capital gains treatment), share sales transfer ownership of the company as a going concern. However, they come with heightened risk for buyers, particularly around latent or contingent liabilities, historical compliance, and legacy contracts.
  • Asset Deals: These provide more flexibility for buyers to “cherry-pick” specific assets and exclude unwanted liabilities. However, they are often more complex and may trigger higher tax, regulatory, and contractual obligations such as the need to novate agreements or obtain third-party consents.

Dealmaking strategy must weigh tax, legal exposure, consent requirements, and post-closing integration when selecting the optimal structure.

4. Due Diligence: Identifying Value and Risk Early

Thorough due diligence remains one of the most decisive phases of any M&A transaction. It not only informs valuation and risk allocation but can materially influence deal structure.

  • Legal: Review of corporate authorities, key contracts, compliance with laws, ongoing litigation, and IP ownership.
  • Financial: Analysis of historic and forecasted performance, working capital requirements, and tax exposures.
  • Operational: Evaluation of supply chains, major customer dependencies, internal controls, and management capability.
  • Environmental: Especially relevant in mining, agriculture, and industrial sectors, where environmental liabilities can be substantial.

We engage reputable legal, tax, and financial advisors such as EY-Parthenon ENS Deloitte to ensure a comprehensive due diligence, risk assessment and targeted findings that can be reflected in deal terms (e.g., indemnities, price adjustments, or conditions precedent).

5. Valuation and Funding: Aligning Expectations and Resources

Valuation must be defensible and aligned with the transaction structure and funding model.

  • Valuation Techniques: Discounted Cash Flow (DCF), Comparable Company Analysis, Precedent Transactions, and Net Asset Value (NAV) are commonly used, often in combination.
  • Consideration Structure: Deals may be settled in cash, shares, or through structured mechanisms such as earn-outs, vendor financing, or deferred payments. The mix should align commercial goals, risk-sharing, and funding constraints.
  • Financing Strategy: Early engagement with financiers is critical. Through early engagement. financiers are able to evaluate the deal timeously to determine Credit appetite to fund the transaction.

6. Warranties, Indemnities, and Escrow Mechanisms

Risk allocation in M&A is often formalised through carefully drafted contractual protections.

  • Warranties and Representations: These should be tailored to reflect known risks and the outcome of due diligence. They provide a recourse mechanism for the buyer post-closing.
  • Indemnities: Used to cover identified risks e.g., specific tax liabilities, litigation, or environmental obligations.
  • Escrow and Retention Accounts: Common in South African transactions to manage risk around deferred claims and incentivise post-closing cooperation by all parties.

7. Stakeholder Management: Aligning the Moving Parts

Successful M&A deals depend as much on managing people and perceptions as they do on structuring.

  • Regulators and Approvals: Engaging with regulators (e.g., Competition Commission, SARB, ICASA) early and transparently often accelerates approval timelines.
  • Unions and Employees: In asset sales, Section 197 of the Labour Relations Act requires the automatic transfer of employees to the buyer on existing terms. Failing to engage early with labour representatives can delay deals or result in post-closing disputes.
  • Shareholders and Boards: Ensuring board and shareholder buy-in is critical. In some cases, Section 112/115 of the Companies Act may require special resolutions, particularly where disposals involve “all or the greater part of the assets or undertaking” of the company.

Conclusion

M&A in South Africa is a highly specialised exercise requiring more than just transactional know-how, it demands a multidisciplinary approach, local insight, and proactive stakeholder engagement. Successfully structuring an M&A transaction in South Africa requires more than a standard checklist approach. It calls for strategic foresight, alignment among key stakeholders, and meticulous planning throughout the deal lifecycle.

By understanding the nuances of the local regulatory environment, leveraging appropriate structuring mechanisms, and proactively identifying potential challenges, stakeholders can position themselves to unlock long-term value and ensure sustainable transaction success. As advisors, we remain committed to helping clients navigate this complexity with clarity and confidence.

Contact Us for A Free Consultation

#kensingtoncapital #MergersAndAcquisitions #CorporateFinance DealMakers SA Kensington Capital

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Kensington Capital Recognised By Gordon Institute of Business Science

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Building an Independent Advisory in a Competitive Market

In a recent feature with the Gordon Institute of Business Science (GIBS) ABC Entrepreneur series, Chesray Abrahams shares the journey behind Kensington Capital and what it really takes to build an independent advisory firm in South Africa’s mid-market.

This is not a typical startup story. It is about establishing a credible, execution-led advisory platform in a market traditionally dominated by large institutions with long track records and deeply entrenched client relationships.

Kensington Capital was founded on a clear premise: senior expertise should remain central to delivery. The firm operates as a hands-on, senior-led team, working closely with clients across the full transaction lifecycle, from strategy and positioning through to execution. This model reflects a broader shift in the market, where clients increasingly prioritise direct access, accountability, and practical, outcomes-driven advice.

One of the defining challenges has been navigating the credibility gap. Competing against established players requires more than technical capability, it demands resilience, consistency, and a clearly articulated point of differentiation. Trust is built over time through mandates won, relationships developed, and transactions successfully executed.

A key insight from the journey is that value in advisory is created as much in origination as it is in execution. The ability to identify opportunities, shape the narrative, and connect the right counterparties often determines the success of a transaction before a formal process even begins. In this context, origination is not just a precursor to execution — it is a core driver of outcomes.

The reality of building an advisory business is that progress is rarely linear. Deal cycles are long, revenues can be uneven, and momentum is earned incrementally. However, with disciplined execution, a clear positioning, and a focus on high-quality delivery, it is possible to build a sustainable and competitive platform.

As Kensington Capital continues to evolve, the focus remains on deepening origination capability, strengthening its execution track record, and consistently delivering senior-led advice. The ambition is not only to tell a compelling story, but to build a business defined by repeatability, credibility, and trusted outcomes over time.

See video of interview here:

https://youtu.be/c0Qnl_dMWus?si=k1mYK-1VUHk2y-Fp