Is it time to plan your succession?
By Nik Askaroff
A recent City Focus article in the Daily Mail predicted that M&A activity will take off over the next 12 months following what’s already happening in the USA.
On the face of it, this forecast may seem more than a tad optimistic for most SMEs still worrying about talk of a double dip recession and struggling to grow their businesses in any meaningful way. But is it? After all, it’s usually the case that whatever happens across the pond and within the major blue chips eventually cascades down to the SME sector.
The credit crunch has caused most businesses to tighten their belts, work harder and focus on the bottom line. These factors, combined with the lowest continual interest rates for a century and modest to negligible wage cost increases, have resulted in many firms actually seeing increased profits and healthy cash reserves.
However the majority of businesses will struggle to achieve any significant organic growth over the next few years. So the only option for the ambitious will be to buy growth through acquisition. Since early last year M&A volumes have increased by 73%. Locally our corporate finance team has had a record year which started with the Genesis Group sale to the Toll Group as part of an Aus $150m transaction. Our specialists in the £5m-100m market are witnessing levels of activity not seen since 2008.
Globally M&A activity is still at only 20% of its 2007 peak, and with the cheap pound the UK continues to be a key target for many international companies. Morgan Stanley predicts that clean energy, mining, capital goods, luxury goods, business services, technology and utilities will be the sectors which see most activity.
Private equity firms are cash rich and under pressure to use those funds. We are currently sitting on 16 acquisition briefs from PE firms aggressively looking to grow their portfolios. We also have two national companies wanting to acquire in the facilities management and transport services sectors, and over 20 acquisition briefs from our network across a number of sectors. This is at its highest level for five years.
Values have firmed, but not significantly which shows that companies are approaching acquisitions with a degree of caution and prudence. However, if you can get more than one party interested, acquirers are still willing to up their prices to ensure they capture their target.
Yet I am constantly amazed by the number of business owners who don’t test the market or appoint advisors after receiving an approach. You normally only get a big sale opportunity once in your life, so why wouldn’t you get expert support?
It’s very easy to be seduced by headline figures but it’s always worth testing them and seeing what the marketplace will offer not only in terms of numbers but also in construction of the deal. Value is only ever what the other side offers and our experience is that there is usually more in the kitty. The best way of extracting it is by involving some element of competition without complicating the whole process.
Succession planning starts with valuation, value expectations and achievability. This may require grooming and forward planning that could take two to three years. To maximise your value, you will want to be going to the marketplace whilst you can still show growth in your sector, not once you have peaked.
From the day you are approached or find a buyer it will still take three to nine months to complete a transaction. So if you have an exit date in mind, make sure you take advice and start planning early. In this way you will improve your value and certainly have a smoother transition.
If we believe the predictions and look at the current evidence, we could be entering a period of massive corporate and private equity appetite for acquisitions. This could be your chance to maximise your value and achieve your dream of a comfortable retirement. So why not test the market?
July 2011