To sell or not to sell?
With all that is happening in the economy and in politics, there is plenty of food for thought for business owners who are considering selling their company.
Our conversations with clients across a range of sectors have thrown up a number of pertinent questions about whether now is the right time to be planning their exit.
Some of them, who were looking to retire but were forced to postpone the process because of the pandemic, are now asking about the outlook for the next 12 months as they revive their plans while being mindful of the risk factors.
Many owners speak about the major business challenges they have faced in recent years – some describe this period as an ‘absolute grind’ due to factors including the 2008 financial crash, Brexit, Covid, and now uncertainty in the face of a relatively gloomy economic outlook (but not necessarily a fully-fledged recession), soaring energy costs, high inflation, rising interest rates, wage pressures, strikes, supply chain disruption...the list goes on and on.
You can add into the mix recent political turmoil, both in the UK and beyond these shores.
The pace of change is accelerating all the time, and the challenges seem to be coming thick and fast.
Owners considering retirement or succession are asking whether now is a good time or a risky one to resume the sale process, what do they need to be thinking about, what are their options, and who would be a likely buyer.
Overall, the M & A market is stronger than we thought it might be at the end of last year, and there are still buyers out there with plenty of money, both in the UK and overseas, seeking to acquire well-run companies. There is therefore a window of opportunity for owners to progress their sale plans but there are some key issues to consider.
Let’s take a look at some of the key challenges…
Following last year’s disastrous Budget and Liz Truss premiership, things have now settled down. I don’t think a deep recession is looming, inflation should be on its way down, supply chain issues are unwinding and, although the economy is not in fantastic shape, we are overall in a better situation than we thought may be the case a few months ag. However, we are seeing a patchy reality with some businesses being affected by factors such as overstocked customers or stretched balance sheets due to ‘over buying’ in 2022. Businesses faced by these challenges will probably need to delay their sale process.
We are facing further political uncertainty with a General Election on the horizon. A concern among business owners is whether an incoming Labour government would look to raise capital gains tax. It had been suggested they might, although some senior figures have ruled out an increase.
Although it’s simply too soon to call whether there will be a change of government, an imminent General Election often has a dampening impact on M & A activity, so planning should bear this in mind.
For the first time in many years, these are also very much in the mix. They’ve doubled in the last 12 months and there may well be another increase in the short-term. They probably won’t start falling until the end of the year. This means that what was possible a year ago in terms of securing debt funding is now far more difficult.
So, if an MBO funded by debt is your favoured or only exit option for your business, the scope to achieve this is going to be constrained for some time.
For businesses requiring significant working capital funding, if company profits are being adversely affected amid the current economic climate, rising interest costs are a double whammy when it comes to assessing how much your business is worth.
Undoubtedly the biggest question from potential buyers that owners are going to face over the next 12 months is: Can we trust your numbers?
In preparing for a sale, businesses need to be ready to face more intense scrutiny than ever and must make sure their financial data is in order.
For example, we’ve been working with a manufacturer which is in a sale process. Its revenues are rising, but at the same time it’s faced cost increases. The company has managed to pass on these increases, but the potential buyer wants to know what is really happening to the business and is looking at the numbers super-carefully with a focus on volumes, asking whether the business is just benefiting from inflation or actually growing.
Private equity investors and banks too are looking far more closely at the numbers.
Until recently, I had never during my entire career had to ask business owners about energy costs when discussing a sale, but now it’s a key due diligence point.
Companies on a good deal with fixed energy contracts are now facing these coming to an end, and new rates will add significantly to their overheads.
This is especially true for manufacturers and other heavy users of energy. Buyers want to know about their contingency plans if they are facing a big hit on costs, and whether they are going to be able to pass these on to customers.
Therefore, my advice to company owners seeking a sale is to make sure you can pre-empt buyers’ questions on these issues. You must prepare well for the DD process. If you do, then I believe selling at a good valuation remains possible for many businesses.
Looking into selling your business? Our corporate finance team is well-placed to guide you through every step of the process. To get started, please contact head of corporate finance Nigel Barratt at email@example.com.