By John Foundling, corporate finance partner, Menzies LLP.
Business owners in the UK that have been looking to sell for some time – potentially since before the pandemic – could benefit from changes in foreign exchange rates that are enticing overseas buyers back to Britain’s shores. But are they ready to capitalise on any opportunities that come knocking?
For several months now, the strong dollar and weak pound have presented international trade buyers with a window of opportunity to acquire well-managed, UK-based businesses. The US Federal Reserve’s continuing hawkish approach and the somewhat muted response of the markets to the UK Government’s Autumn Statement both suggest that this won’t be changing any time soon. However, with interest rates on the rise and geopolitical tensions ongoing, UK businesses that are keen on pursuing a sale should consider going to market now.
An upturn in M&A activity certainly seems to be on the cards, with lenders, corporates and private equity firms all reporting strong liquidity, which means funding is available. The private equity (PE) firm, Advent International, recently told the Financial Times that it had asked portfolio companies to each come up with three acquisition ideas – an indication of how positive M&A sentiment has become. Elsewhere, venture capitalists have reported being bullish about 2023 and Venture Capital Trusts are reporting strong fund raising activity. Confirming growing interest in M&A activity, a recent survey by CMS Law found that 88% of senior level executives at corporates and PE firms in Europe, the Americas and Asia-Pacific regions, were considering M&A activity in Europe.
For UK-based SMEs considering a potential sale, it is important to prepare in good time to optimise their business valuation. Businesses with a strong position in a growing market are likely to achieve the best valuations, particularly if they can also demonstrate the resilience of their operating model and their ability to pass inflationary costs to customers.
A strong management team with a clear strategy is vital if seeking to attract interest from PE or an international trade buyer. Having the right people in the right roles is essential, and building leadership teams comprising individuals with complementary backgrounds and skillsets can make a big difference. It is also important to have talented people tied into the business either through tax-efficient employee share schemes or other forms of reward and remuneration. A strong leadership team is expected, but increasingly buyers and PE are looking for second-tier strength too.
In the current inflationary climate, with energy and fuel costs rising rapidly, many businesses are keeping a close eye on cashflow management. With costs changing on a weekly, some businesses are finding it more challenging to keep track of operating margins. Businesses should look to remove as much uncertainty as possible by negotiating longer term energy supply contracts, for example.
Being ready should a buyer come knocking, is all about management having their finger on the pulse and knowing where they are on their strategic journey. This involves preparing robust and timely financial information, monitoring the key performance indicators and understanding past performance whilst staying focused on the future. A buyer’s due diligence process can be a demanding experience, so it makes sense for SMEs to be well prepared by maintaining comprehensive, up-to-date records and agreements, supporting the strategic direction of the business.
Finally, vendors may need to soften their approach to deal negotiations and be prepared for differences in opinion when it comes to price expectations. While favourable foreign exchange rates are an incentive for some overseas buyers, the global economic crisis is creating a climate of uncertainty for everyone and this will inevitably erode some market value.
For those that are ready to go to market now, the strong cash position of corporates, investors and lenders could play into their hands and it is increasingly likely that they will attract the interest of an overseas buyer too.