In the UK, business owners that have been considering when to sell for a while now – some potentially since before the pandemic – may well see a benefit as exchange rates fall, as they tempt overseas buyers back to the UK. However, are they ready to take advantage of any opportunities that come their way?
Over the last several months, the presence of a strong dollar against a weak pound has encouraged overseas trade buyers by giving them an advantage in purchasing already well-managed, UK-based businesses. The continuing hawkish approach of the US Federal Reserve and the relatively muted reactions from the markets as a result of the UK Government’s Autumn Statement both suggest that these opportunities may be available for a while longer. Although, due to ongoing geopolitical tensions and rising interest rates, UK businesses that are considering a sale should look at going to market now.
IMPROVEMENT IN M&A ACTIVITY IN 2023
An improvement in M&A activity certainly seems to be in the cards into early 2023, as lenders, corporates and private equity firms have all reported strong liquidity, meaning that there is funding available. The private equity (PE) firm, Advent International, recently disclosed to the Financial Times that it had asked for three acquisition ideas from each of their portfolio companies – this could be an indication of how positive M&A sentiment has become.
Elsewhere, venture capitalists have also declared being bullish about 2023 and Venture Capital Trusts are reporting high levels of activity in fund raising. The results of a recent survey conducted by CMS Law indicated that 88% of senior level executives at corporate companies and PE firms in Europe, the Americas and Asia-Pacific regions, were considering M&A activity in Europe; further confirming the growing interest in M&A activities.
Are you considering selling?
Prepare ahead
For SMEs that are UK-based and considering a potential sale, it is vital from them to prepare ahead of time to enhance their business valuation. Businesses that have a strong position in a growing market are the most likely to attain the best valuations, especially if they are also able to demonstrate their ability to pass inflationary costs to customers and that their operating model is resilient.
Tie into the key talented people
It is also important to tie into the key talented people. This could be done using tax-efficient employee share schemes or other types of reward and remuneration. Buyers and PE expect to find a strong leadership team but more and more now they want to find strength in the second tier of the business too.
Strong management team
It is important to have a strong management team with a coherent strategy if you intend to attract interest from PE or a trade buyer from overseas. Employing the right people in the right roles is important and developing leadership teams that comprise of individuals with skillsets and backgrounds that complement each other can make a big difference.
Review cashflow management
In the current inflationary climate, and with living costs such as energy and fuel increasing rapidly, many businesses are continually reviewing their cashflow management. With costs changing on a weekly basis, it is very challenging for businesses to measure and monitor their operating margins. Businesses should aim to reduce the levels of uncertainty as much as possible, for example by negotiating longer term energy supply contracts.
Prepare up-to-date financial information & monitor KPIs
To ensure that the business is ready at any time in case a buyer comes looking management need to be on their toes, constantly knowing where they are on their strategic journey. This means regularly preparing robust and up-to-date financial information, monitoring the key performance indicators and appreciating past performance whilst remaining focused on the future. The due diligence process that a buyer will put the business through can be a very demanding experience, so it sensible for SMEs to be well prepared by maintaining comprehensive, up-to-date records and agreements, which support the strategic direction of the business.
Take a softer approach
Finally, a softer approach to deal negotiations from vendors may be better and they should be prepared for differences in opinion when it comes to price expectations. Whilst many overseas buyers will be incentivized by the favourable foreign exchange rates, the global economic crisis has created a climate of uncertainty for everyone and inevitably this will erode some market value.
Are you prepared?
Businesses that are prepared to go to market now, will find corporates, investors and lenders with a strong cash position which could play into their hands, and it is increasingly likely that they will attract the interest of an overseas buyer too.
For further information, or to discuss your specific circumstances, please contact our Corporate Finance Team here or via the below contact form.
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