Little by little, news stories are beginning to reveal signs of returning business confidence. While boom times may still be some way off, some businesses will be wondering whether this is a good time to invest in acquisitions.
There is no right answer to the question: is this a good time to buy? Individual circumstances will determine the answer, including the quality of the asset or the suitability of the business target, the price required and the funding structure available.
Some types of asset or investment have been proving more attractive than others recently, such as commercial properties with quality covenants, or niche businesses in strong sectors with good visibility of future demand.
When it comes to negotiations on price, vendors can have higher expectations than acquirers are willing to meet. However, prices have fallen, particularly where vendors have been forced to make a sale. Instead of deals being done at prices equivalent to eight times EBITDA (earnings before interest, tax, depreciation and amortisation), the current going rate is closer to five or six.
Funding availability obviously has an impact on deal viability. Buyers with their own cash resources are always best placed. Finding external funding can be difficult, though not impossible. Alongside bank finance, private equity backers continue to consider opportunities although they are more cautious than in the past and, therefore, highly selective about the deals they support. Management needs to be able to demonstrate a clear vision for how they will grow business value, and the capability to deliver that vision.
Buying from an administrator
With some businesses in financial trouble, there may be opportunities to buy business assets from an administrator. Traditionally an administrator advertises such businesses in the classified ads of the newspapers, alongside the standard notice in the Gazette.
However, the growing popularity of so-called “pre-pack” sales where transactions are conducted rapidly and without the glare of publicity, means that some opportunities will not be advertised. Those interested in deals in a particular sector need to register their interest with corporate recovery specialists in the larger firms, as well as corporate finance teams. You may then get a confidential call to sound out your interest in a deal should an appropriate business opportunity come up. It is important to be specific about what you are looking to buy. Keeping your ears to the ground for leads on businesses in trouble is also essential.
If an opportunity does arise to buy business assets from an administrator, a cash offer will always be preferred over an earn-out arrangement. Quick action is also key. This means that due diligence may be more limited than normal, but as the deal is to buy assets and perhaps goodwill, liabilities (apart from any associated with employees) need not be a cause of concern.
Acquisitions advice
If you are looking to make an acquisition, Moore Stephens Corporate Finance can help. The firm’s M&A service advises on acquisitions (as well as divestments), assisting with searches for suitable potential deals, conducting negotiations, performing due diligence and ultimately getting the deal completed. The team can also help with fundraising, ensuring, for example, that bank proposals are comprehensive and attractive and include realistic business plans and forecasts.
Please contact Roger Clement to find out more about how you could benefit.