What are we seeing in the current M&A marketplace...

The past 5 years have seen many new and different obstacles for business owners to navigate including Covid-19, supply chain pressures, rising interest rates, inflation, and government instability.?

These factors have had significant impacts on businesses and also on reshaping strategies and plans of owners and corporates.?

Below details a high-level summary of what we are experiencing in the current M&A landscape from our own experience alongside discussions with complimentary advisors.?

Deal volumes?

Generally, we are seeing good demand for stable or growing businesses which is driving activity, although there appears to be a more cautious market than in 2022 from a buyers’ perspective resulting in deal completions slightly reducing.?

The difficulties experienced by many businesses have also had a knock on impact to the timing of key shareholder decisions. Navigating through challenging trading conditions (in most cases carrying additional debt raised through Covid-19 loans) has undoubtedly taken its toll on many, who may be looking to accelerate retirement or succession plans. Alternatively, these plans may have been pushed back whilst the business recovers and owners work to strengthen Balance sheets and equity value.?

In our experience, there is still a strong appetite for exits and for growth. The key is to assess the right timing alongside value expectations to have a measured growth or exit strategy.?

From a buy-side perspective, the appetite for good businesses is still strong, however, acquirers are balancing attention between internal risks and challenges with external investment in expansion, which is leading to more caution and consideration with transactions. Internal risk appetite changes may also impact the size of the investment or initial outlay.?

Deal timescales?

Each deal is individual and can significantly differ in terms of the time taken to complete. However, on average we are experiencing transactions taking longer than in pre Covid-19 conditions due to many factors including the following:??

What is a maintainable level of profitability??

This question has become more difficult for a buyer to appraise as most businesses haven’t experienced a ‘normal’ trading year since 2019. Answering this question is pivotal for buyers to assess their own returns, valuation expectations, and deal structuring. As expected, the answer is taking longer to firm up, and typically enhanced Due Diligence is requested by buyers to help conclude (also increasing timelines).?

A more cautious buyer approach?

In times of market volatility, buyers may act more cautiously with significant investment decisions. Rising rates and increased supplier costs for buyers will impact their assessment of their own headroom within the business and with covenants, subsequently impacting the risk taken when making acquisitions.?

Funding caution?

Banks and alternative debt providers are also increasing their time spent on assessing maintainable profitability and exerting caution in the current market conditions. This is therefore impacting Due Diligence requirements, leverage levels, and debt serviceability headroom. Overall, the level of uncertainty with funding decisions is also impacting a buyer's ability to make quick decisions to progress transactions.?

Deal value/structure?

The factors detailed above are leading to a slight shift in deal values and multiples.?

As buyers are acting with more caution, this is typically resulting in a shift towards more deferred consideration / earn-out structures in initial offers, or proposing slightly lower multiples – multiples have been relatively buoyant in recent years, therefore, a slight ‘normalisation’ could be expected.?

Also as indicated in a Dealsuite March 2023 European M&A Monitor, multiples had seen a slight drop in H2 2022 across the UK and other European regions.?

Conclusion?

There will always be good demand for strong, well-performing businesses (especially those that perform well within difficult trading conditions). However, with more caution from buyers, resulting in less aggressive multiples or increased levels of deferred consideration proposed, valuation gaps between buyers and sellers may occur. Negotiations can therefore be more drawn out for both parties to reach an agreeable position.?

Delivering a controlled exit process is vitally important for business owners at this time to maintain and enhance value. Working with independent advisors such as CN Strategic Advisors (“CNSA”) is key to ensuring you initially fully understand your exit options, appropriately position value drivers and investment opportunities, and identify and approach suitable strategic buyers.? With interested parties, CNSA would subsequently lead negotiations on the deal structure including day one consideration ‘vs’ deferred/earn-out consideration, as well as maintaining momentum to completion and project managing a controlled process. ?