Hunger for acquisitions is on the rise
A buoyant deals market is driving up the prices being paid for businesses by growth-hungry and cash-rich trade buyers and private equity investors.
Nigel Barratt and Ryan Niblock, of HURST Corporate Finance, told business leaders on a Zoom briefing that the number of companies seeking acquisitions has increased significantly over recent months – in stark contrast to the market’s collapse following the first lockdown in March last year.
As a result of this trend valuations, which are generally based on a multiple of a company’s underlying profits – Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) – have risen sharply.
The multiples being paid by trade and private equity buyers have surged, with ecommerce, technology, IT and healthcare businesses in particular commanding higher premiums, said Nigel.
HURST has seen an upsurge in the number of clients mulling acquisitions as well as advising more clients on the sell side.
Focusing on acquisitions in the firm’s latest update on the M&A market, Nigel said clients on the takeover trail are in a good financial position, having made use of government support programmes and because of the availability of cheap debt. Private equity institutions are also cash-rich.
Other factors driving acquisitions include a desire to fuel growth and to diversify, while the impact of Covid-19 has spawned an appetite for new business models, which can be achieved by bringing in new skills, expertise and technology through takeovers.
The rationale for acquiring businesses may also encompass a wish to expand into new sectors and territories, create synergies with target companies, a lack of scope for continued organic growth, to reduce competition and to secure supplies, added Nigel.
Businesses considering a sale themselves down the line may also consider acquisitions a few years beforehand, to boost their market position and add to their skillsets.
Nigel said this is a particular theme for private equity houses, which frequently buy one business and then make acquisitions to create a bigger enterprise that is easier to sell for a higher price.
He said the supply side of the acquisition equation is also buoyant, amid the perception among company owners that we are in a seller’s market.
The pandemic has highlighted the danger of having their entire wealth tied up in their business, while the threat of tax increases – in particular capital gains tax – presents another reason why owners are looking to sell, said Nigel.
Ryan outlined the options for funding acquisitions, pointing out that any surplus cash or debt has a £ for £ impact on the valuation of a business.
He also emphasised the need for robust due diligence to verify the state of the target.
“An acquisition can transform your business and increase shareholder value. Get it wrong, and it can be a stressful and a costly mistake.”
Due diligence should examine its finances, tax liabilities, contracts in place, commercial position, insurance cover management skills and technology systems.
A post-deal implementation plan is also essential, taking into account integration of the acquired business, management, cultural alignment, controls, financing and reporting.
The acquisition process will be very time-consuming and extra resources such as trusted adviser can play a crucial role.
Nigel said: “An acquisition can transform your business and increase shareholder value. Get it wrong, and it can be a stressful and a costly mistake.”