Why you need to refocus your business now in preparing for M&A?

The M&A market is currently buoyant, but how long will this last? If you’re considering a sale or fund-raising, now is the time to ensure your business is in stellar shape to secure optimum success; there are dark clouds on the horizon and investors will be wary.

Ongoing uncertainty over the long-term effects of the global pandemic, changing consumer behaviours, inflation and the Russian-Ukraine conflict, pose a significant challenge for businesses. Yet, dealmakers have, so far, been undeterred and M&A activity has maintained its momentum, with the notable exception of capital markets where valuations have taken a hit and activity has slowed. The healthy levels of mid-market M&A activity that we experienced since Q3 2020 look likely to continue into the second half of 2022.

Despite the complex geopolitical and economic backdrop of war in Ukraine, rising inflation, escalating energy costs, rising interest rates and the spectre of a fall in GDP, liquidity is still strong. This positive M&A climate is the result of a decade of central banks’ loose monetary policies and the robust levels of private equity ‘dry powder’ looking for a home.

 
Dealmakers are adapting to the uncertainty and potential for new shocks and they are now more confident about pricing in risk and volatility. Despite the confidence and momentum in the M&A market, investors’ scrutiny has not dimmed.

Uncertainty breeds caution and investors will be looking at how companies performed in the face of recent challenges; assessing resilience and looking for any operational weaknesses. Moreover, market liquidity is somewhat time-sensitive with UK investors ready to act quickly - private equity funds tend to have a fixed life and some investors are wondering what the world might look like in 2024.

Refocusing strategy

For their part, companies are rethinking their business models and adapting their strategies to the new business environment emerging from the global pandemic recovery. Some will be looking to carve out non-core assets while others are considering expansion. Crucially, the pandemic has accelerated the need for companies to act on more pressing issues such as climate change, digital transformation, the skills shortage and the battle for talent. We focus on these matters, alongside other key value drivers, ahead of a deal to ensure our clients get the best valuation the market can offer.

Classic pitfalls

With valuations often based on profitability forecasts, we anticipate negotiations could be tougher than normal. Even though the M&A market is benign, uncertainty over factors such as consumer sentiment and rising inflation are likely to complicate negotiations.

Dealmakers buy future performance, which is often assessed with reference to recent trading. Your ability to prepare and deliver on short-term forecasts, which are normally relatively quantifiable, will be vital to secure the deal you want. However, forecasts are widely complicated by the current cost pressures. Our specialists have myriad experiences in working with clients in tough conditions to formulate evidence-based, robust forecasts.

Economic outlook

The situation could be even more complex depending on the sector you are trading in. It is difficult to agree what the year ahead will look like for certain sectors. Consumer-facing businesses have endured the biggest impact from the various lockdowns and continue to face challenges.

Although the consumer sector has been affected the most so far, the cost pressures will soon filter down into the wider economy. The greatest effects of the Ukraine-Russian war for NATO and Western allies are yet to be felt in their entirety. For example, the effect of this year’s lost crops in Ukraine will only begin to filter down into supply chains over the next few months.

We are already seeing some of those effects on British farmers who have seen fertiliser prices jump while the cost of chicken feed has leapt 50% in the past few months. There are predictions of the price of chicken doubling this year. Moreover, if farmers are using less fertiliser now, yield will fall and the cost of goods will in turn rise again, further curtailing consumer spending power.

According to analysis by economic thinktank CEBR, despite the UK only importing a limited share of its energy directly from Russia, prices for oil and gas are set in global energy markets and with the UK a net energy importer, any price volatility will eventually feed into the UK economy.

Higher oil prices translate into higher fuel prices and push up inflation, leading to a fall in consumption and slower economic growth. Higher energy costs will also increase the cost of production for goods and services which accounts for just under half of the UK’s total energy use.

The Bank of England has recently revised its forecasts for economic growth in the UK downwards. It is predicting the UK economy will shrink by 0.25% in the final quarter of 2022. The economic slowdown is expected to continue through 2023.

Optimising deal success

Understanding customer contracts and behaviours will be essential to readying your business for sale. In some businesses you can pass on some costs to customers, but in other areas you can’t. There will come a point where management will be pushing up against price depression.

At this point, making sure your cost base is as efficient as possible will be crucial, because you won’t be able to keep passing on price rises to customers. Whether it’s core processes, investing in automation or considering supply chain, management need to remove cost and maximise value.

Post-pandemic, many businesses consider themselves efficient and resilient. It has become a familiar cliche but one that will not fool investors. Can it really the case for every business that has survived?

It is essential to look at your business with a critical eye. Independent experts will often see the weaknesses that management miss. Investors will be looking in granular detail at your business’s productivity and ability to pivot on any new local or worldwide shocks.

Showcasing your COVID-19 experience

Disruption has become the norm but you can use this as a positive narrative. The pandemic showcased companies’ ability to flex and pivot dynamically. This flexibility of business models and management’s ability to adapt will be essential in demonstrating to acquirers that a business can reshape itself should the need arise.

Whatever the management team’s experience was during the two years of intermittent lockdowns, buyers will want to understand how the business responded and how management performed. Ideally, this analysis would also include how revenue pressures were mitigated and employees were treated, as well as what lessons were learnt and how they have been applied.

A company’s ability to adapt to fast-changing conditions will be a component that investors will have a keen eye on in negotiations, particularly in regard to a company’s customer base. Consumer habits and choices are changing much faster than ever before, and awareness of that is a must.

It’s all about timing

The global and economic complexities aside, the best prepared businesses can still secure a good deal with the right advice and guidance. We continued to help clients make successful deals during both the global financial crash of 2007-08 and over the past two years.

On the surface, a large part of dealmaking is a game of confidence. If you’re looking to take advantage of the current liquid marketplace, the importance of detailed preparation for M&A activity cannot be overstated. Competition will be stiff and acquirers will leave no stone unturned.

Our M&A and Transaction Services team can advise on how to prepare and present the business to maximise the chances of a success.

If you are considering entering a business transaction in the future, both Peter, Richard and Derek are available for a no-obligation conversation could make all the difference to a successful deal.

Value Creation

We work with clients to help identify and implement EBITDA and working capital improvements both before and after a deal. This can substantially help to boost your business’s value, support a carve out or integrate new assets.

Identifying and mitigating potential risks that could reduce transaction value or stymie a transaction is also an area of our expertise.

Our Value Creation Services team works on both buy and sell side transactions with services including advising on exit preparation, carve-out, due diligence and integration.

Our multidisciplinary Advisory practice provides corporate finance and transaction services, business restructuring, forensic advisory, risk and outsourced management services to clients navigating a range of challenges, changes, and opportunities.