Knill James News and Blog
by Catherine Lambeth, Corporate Finance Executive, Knill James
The past few months have been a difficult time for businesses and business owners alike. Some are surviving, some are thriving and there is an emerging group of those who want 'out'. Even for those who have managed through the pandemic, the prospect of a potential second wave – and the knock-on effect this could have for millions of businesses – is a challenge some people simply don't want to embrace.
If you've ever considered that an acquisition could be a great strategic opportunity to expand your own business, whether by broadening your customer base or moving vertically through the supply chain, now could be the ideal time to find that business at the right price, structure a deal to minimise your risk exposure and rapidly grow your business.
Valuations in a crisis period
The valuation of a company will depend on how they are currently performing.
If your competitors, suppliers or customers are facing insolvency, the value of their business will likely be on a 'break-up basis', typically lower than the net asset value of the company to account for reduced marketability of assets in a forced sale. Acquiring businesses out of administration may seem daunting, but it is a quick way to gain extra assets at a bargain price and save jobs. It could also secure your customer or supply chain in the process, benefitting your existing business.
For a business being sold as a going concern, the future is still uncertain. Company valuations have inevitably taken a dip as a result of suspended trading and heightened uncertainty in the market. It would be appropriate to put in a realistic offer price to reflect the viability of the investment. The offer should be substantial enough to pique the owners' interest, with a caveat that this price can be uplifted (or reduced) as the deal negotiations progress, depending on whether forecast monthly figures are met, missed or surpassed. This is a good driver for vendors to demonstrate the recoverability of their businesses from a crisis and uplift the value in the process.
Funding and structuring acquisitions
Vendor finance, in the form of loan notes, deferred consideration and earn-out payments, has been a staple element of SME deal structures for many years now. Whilst upfront cash payments are more attractive to vendors, they put a lot of pressure on the purchaser, in terms of gearing and cash flow - and also risk. The most commonplace deal structure is to pay part of the purchase price in cash upon completion and the remainder over a set period. Linking deferred payments to hurdles during the current pandemic will minimise your company's risk exposure, by directly correlating future payments to future results. Profitability and sales are common financial measures, but you could also consider operational targets, such as footfall, customer retention, or conversion rate of tenders.
For acquisitions of companies out of administration, the deal structure will undoubtedly include deferred consideration, and you could consider an offer of pennies in the pound for debtor collections post-completion.
Whilst banks are under significant pressure with the CBILS at the moment, lenders are still keen to fund acquisitions, especially when these will safeguard jobs. Asset-based lenders and challenger banks can be quicker to move than High Street banks. If you are considering an acquisition it's best to put a funding arrangement in place with your existing company whilst in negotiations – or even before you have made an offer – so that the funds are ready to be drawn down at any point. A sophisticated acquirer with a proven method of funding will be much more appealing to vendors.
Timeline of a deal
The process of acquiring or disposing of a company is split into various stages, the length of each being almost entirely unpredictable. If you are considering buying a company out of administration this is an accelerated process and a deal can be negotiated and completed in as little as 10 days.
For the more commonplace acquisition of a going concern, the timeline is much less regimented. The initial stage of identifying and investigating target companies can take time, but this is time well spent and would aim to prevent nasty surprises or hiccups as a deal progresses.
Once initial discussions have taken place and a deal is agreed in principle, an exclusivity agreement, such as Heads of Terms or a Letter of Intent, is drafted and signed by the vendor and the purchaser. This allows the purchaser a fixed period in which they can ask as many questions as they need to and the vendor cannot market their business to other parties.
A due diligence process will then follow: at the very least financial and legal due diligence should be completed to identify any issues which may impact the deal price or structure, but some purchasers may also consider technical, commercial and management due diligence.
The final stage is to engage lawyers, draft and agree a share purchase agreement or asset purchase agreement and the warranties and indemnities which a vendor offers. You are now the proud owner of a company!
The options available to business owners may seem complex and daunting, but as corporate finance advisers we will navigate you through the process and lead the negotiations, giving you time to focus on continuing business as normal.
Now is the ideal time to consider an acquisition, so get in touch with our Corporate Finance team on 01273 480480 to discuss your ideas and requirements in more detail.