Uncertainty and corporate finance advisers – preconceptions, myths and expectations

“Have you ever seen such a mess?” was the question.

“Well, no and yes.”

Macroeconomic shocks and threats, political theatrics, radical shifts in risk perceptions, market volatility, disrupted plans, short term priorities, cash is king, a new world order…

Every crisis has unique features. But there are common denominators. The dot-com bubble, the financial crisis, Brexit, the pandemic, Russia’s war in Ukraine, rampant inflation and, well, whatever this is.

In each crisis there are short term priorities around managing the business, cash, people and stakeholders, notably customers, suppliers, lenders and shareholders. If uncertainties give way to a changed landscape, business models need reassessed and strategic plans reengineered, whether that be around growth and sources of capital or the impact on exit and succession planning.

Business owners and management teams can draw support and insight from many sources in times of uncertainty, including their trusted advisers including their auditors, lawyers and, of course, corporate finance advisers.

Myth 1: Corporate finance advisers are fixated with completing deals and charging success fees

This might be true in some parts of the wider M&A market but should not be the case with those advisers whose own focus is on supporting private business owners and entrepreneurs over the long term. This is a relationship game where a once in a lifetime decision needs the careful evaluation of multiple factors.

Whilst a buy-out, a trade sale, an acquisition or a capital raise might be the end point (for which most clients do prefer a success-based fee), such projects take a long time to plan and to execute properly. More importantly, the prelude to such a transaction can be even longer, sometimes years, before shareholder objectives align with business performance, management succession and market conditions.

Good long-range planning both optimises the end result and reduces transaction risk; corporate finance advisers can be remarkably patient and considered.

Myth 2: Corporate finance advisers don’t understand the people behind the business

The best advice is bespoke, founded on experience and not reeled off the pages of a corporate finance manual.

Getting to know how a business works and the industry dynamics around it can involve some sound business school methodologies and good research. However, making time to understand the people – notably the owners and the management team - and their respective strengths and attitude to risk and reward, is fundamental to providing the right advice. Notably in respect of which transaction routes are appropriate and deliverable, and which one should be pursued as Plan A.

The investment in an advisory relationship is two-way process and best started early. Not only will advice then be “informed”, but it will be objective and tailored rather than being part of a generic “sales pitch”.

Furthermore, if circumstances change in the market, the business or management, a knowledgeable and trusted adviser is on hand that should be entirely focused on the particular client’s best interests. To do otherwise and fixate on a near term success fee would be bad business practice.

Myth 3: Corporate finance advisers don’t consider all the options and default to wide sale processes

Corporate finance advice is not business broking. The latter is an estate agency approach to marketing small, undifferentiated businesses to a wide industry and intermediary audience and is advice lite.

A corporate finance adviser should be able to consider everything from the optimal sources of debt and private equity finance to the relative merits of a trade sale, buy-out, equity release, Employee Ownership Trust or even a flotation. All this should be in the context of knowing the client, the business and the market, together with drawing in the input of other advisers to present a holistic assessment of the options available and the expected outcomes for shareholders and management.

Of course, some situations are reactionary. A very common scenario is a business receiving an unsolicited approach from a trade buyer. Such approaches cover a wide spectrum from opportunistic tyre-kickers to highly compelling strategic buyers, with a premium being potentially available to keep the business off-market. Care must be taken in managing information release, determining fair value, negotiation and granting exclusivity; but testing the market is not always necessary with the right advice and proper deal management.

The process and associated costs for each transaction route vary, but if a client is concerned that the advice is not being presented clearly, competently and impartially, it is time to look elsewhere.

Myth 4: Transaction processes don’t allow owners and management to get to know the buyer or investors

Securing a “good home” for a business can be as important as price for many vendors; plus there might be an earn-out to work through over 2-3 years.

Similarly, getting the wrong investor, regardless of terms, can amount to a bad marriage and be value eroding for all.

The reality is that few private businesses suit a highly engineered transaction process with rigid timetables, no access to the senior people and a contract race at the end. Such businesses often have aspects of vendor dependency and management transition and can need integration planning. Any earn-out terms should only be agreed to in the context of knowledge of the buyer’s strategy and implicit trust.

Reciprocally, buyers and investors are diligent, and increasingly so in times of uncertainty. They value time and access and this, if properly managed, should result in the best terms and the best partnership.

Ultimately, processes need tailored to the particular business and its audience, with focus and interaction being positive dynamics: quality over quantity.

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The myths of how corporate finance advisers operate, and the actual expectations that their clients should have of them, apply in all market conditions. Times of uncertainty and crisis accentuate them.

Are we in a long-term crisis or a short term reset (at the time of writing)? I truly don’t know. But I believe good businesses can adapt to any circumstance and so must their advisers.?