Mergers and acquisitions by Pat Abel, Corporate Finance Partner at Hart Shaw
It’s been a busy 18-month period for us in the corporate finance department at Hart Shaw. Historically, we work more on buy-side transactions than sell-side, probably around 70% – 30% ratio. However, over the past 18 months this has swung the other way. On looking as to why this might be the case, we can identify several possible influencing factors:
Firstly, many owner managers that could/should have exited on or before December 2007, but who decided to hold out for higher valuations, believing the strong market conditions would continue, are now 12 years older and in many cases have endured a sustained period of difficult market conditions. Resulting in a large numbers of businesses owners who are now well into their late 60’s or early 70’s and need to exit before their business values diminish. However, buyers often want a sensible hand-over period and many deals involve some form of earnout or deferred consideration thus, the older the vendor is the trickier this becomes for both sides.
Private Equity funds are awash with cash and needing to deploy their funds, Afterall that is what they are paid to do. They will be very particular on the types of businesses they buy, they must have a strong defensive business model with some key selling point and competitive advantage, but also allowing further growth over the next 3-5 years. Private equity now compete head on with corporates for transactions and they are willing, in lots of cases, to buy up to 100% of the equity or a majority stake.
We can’t not mention BREXIT as it would appear to be having an impact too. The uncertainty caused has meant that some owners have gone to the market to find a buyer ahead of the actual outcome of the exercise. As we get nearer to the outcome, the number of new sale mandates has begun to tail off as owners now realise it’s too late to sell and therefore need to see what happens post BREXIT before deciding what to do.
Another significant factor is the amount of monies available to listed companies, that are seeing opportunities to acquire businesses to grow their market share and to use some of the cash they have been sitting on during the recession. Prices are lower than they were pre-recession in a lot of cases, so some bargains are to be had. This is further value enhancing for overseas corporate buyers that also get the exchange benefit created by the devaluation of sterling caused in part by Brexit.
So, what does all this mean going forward? If you are an owner manager of a business in the region and you are looking to realise your investment in the short to medium term, then there is no doubt that there are buyers out there for the right opportunities and the cash is certainly available. However, timing is often critical. If your business doesn’t fit the private equity model due to lower growth prospects or not being a market leader in your sector, then you might want to look at the middle management team as a potential exit route in the form of a management buy-out. If the team not fully capable of running the business, it might be advisable to bring someone in or indeed be the leader of the buy-out? If a trade sale is the preferred route, then look at the business as if you were a buyer and address all the areas you would expect to see. Buyers typically look at a three-year time horizon when conducting due diligence, therefore having a progressive set of financial results with a clean balance sheet is essential to the smooth running of a sale process.
Planning and considering the options open to you is vital so consider taking advice early so that you can address areas that may become issues to a buyer.