Despite the political uncertainty in 2019, the Manchester based HURST Corporate Finance team was still completing deals, but the general election understandably had a short-term impact on decision-making.
We are well into 2020 and it’s apparent that decisions are now being made. We, therefore, believe the M & A market will be strong for the next few years, with some of the main driving factors being:
- Whatever your view of the election outcome, political uncertainty has now ended. For individual sellers, a stable tax environment is an important factor in their decision-making;
- Brexit is now a given; we have already been approached by an EU company wanting to acquire in the UK to ensure it can compete here post-Brexit. Similarly, UK companies may decide to acquire/develop a presence in the EU;
- Significant capital is still available to support M & A, whether that is by borrowing from, partnering with, or selling to, a private equity institution. Many funders did not hit their investment targets in 2019 as the market stalled towards the end of the year; and
- While the outlook for the UK economy is mixed, it seems that the new government is prepared to fund infrastructure projects which should have a galvanising impact on the market.
With political uncertainty removed, business owners can now plan over a long-term horizon, which is ideal for those considering an eventual exit. We will be hosting a seminar on 30th January with the focus on how to build value and plan ahead of a sale. Whether this is something you are considering imminently, or in the long-term, there is no time like the present to start preparing your business.
Here are some of the key things that should be considered before starting the sale process:
Understand the options
Many owners do not understand their options; for instance, is a full exit the best option or would a management buyout be a more realistic option? Talking to advisers and funders will give you food for thought and will help you formulate the right strategy.
Achieve your ambition
Many of our transactions result from owners reaching a point where they are too stretched and have ceased enjoying their life at work. Selling at this point is a perfectly rational thing to do but, with capital readily available to support investment, owners can take their business further than they sometimes realise.
Plan for post-deal
Make your decision on an exit with a full appreciation of your financial position post-deal. Do you have sufficient capital to do what you want to do? Furthermore, what are you going to do? Retire, do charity work, start another business?
Understand the tax
Make sure you plan your tax affairs and restructure accordingly. Will all shareholders qualify for Entrepreneurs’ Relief? If not, remember the qualifying period is now 2 years. Also, don’t forget inheritance tax; cash is fully taxed, whereas qualifying shares are not.
Build the growth story
Buyers and investors will want to understand your growth prospects; therefore, you should have a good understanding of the market you are in, who operates in it and what the growth prospects are. Remember that due diligence will review your financial forecasts (which are a must for any sale process) and the growth assumptions you use.
Grow Profits/Reduce debt
A trend of growth immediately preceding a sale will attract buyers, particularly where that growth is sustainable. If you can use those profits to reduce debt and increase cash, you will also benefit, as debt has a £-for-£ negative impact on value.
Be ‘deal ready’
Transactions are stressful for those who have never been involved in one, and most of that stress occurs during due diligence. You will significantly reduce the stress, and more importantly remove the risk of a price reduction, if you are well-prepared for due diligence. Any good adviser should be able to give you checklists to help, as well as offering guidance as and when needed.
Although serendipity can play its part in M & A, executing a plan and being prepared well in advance are more likely to lead to success.
The moral of the story? Market conditions seem to be picking up, and there is plenty of appetite from private equity institutions. If you are currently considering the different exit options, there is no harm in putting preliminary steps in place to build value – it’s never too early to start planning.
To discuss any of the topics raised in this article in more detail, feel free to contact Nigel Barrat by clicking here or by calling 161 477 2474. We are also hosting an event on this topic. See full details here.