While acquisitions, mergers and disposals can be transformational, and potentially very rewarding, competing stakeholder pressures can complicate matters and even put the brakes on a good deal.
Here are five things we learned in the last twelve months about getting the right deal done, to help you with your future transactions in 2017:
1. Serious focus on the right return on capital
Investors are increasingly challenging management teams to determine what are their core and non-core business streams. Money and time invested should be focused on areas that provide core growth and an improving trajectory of return on invested capital. However, management teams still find it very difficult to take the plunge and sell or wind-down non-core areas of the business. Keeping one’s options open can trump cold hard business logic.
2. Getting the technical stuff right
A sale and purchase agreement (SPA) is the key document for an acquisition or disposal. In 2016 we saw generally accepted market practices documented and shared, providing the market with technical guidance to refer to in negotiations.
Locked boxes are increasingly popular. Our 2016 SPA survey showed:
- nearly three quarters of respondents report the use of locked box mechanisms increasing over the past five years
- 90% of respondents have used a locked box mechanism
- approximately half of deals now use locked boxes.
The new ICAEW guidelines for completion mechanisms provide a benchmark for completing deals.
3. Debt is different
It is no longer just about the banks – mid-market debt lenders are now viable alternatives to both traditional debt and even equity solutions. Challenger banks and direct lenders that emerged from the banking and economic crisis really came into their own in 2016. We expect to see continued innovation and growth in these flexible options in 2017.
4. Crowdfunding is here to stay
It’s a been a few years since we saw the likes of Brewdog, Leon and Hotel Chocolat raising funds using the crowd. Platforms such as Seedrs and Crowdcube have settled in to the marketplace, and whilst increased regulation and scrutiny is a certainty over the next few years, it doesn’t look like crowdfunding is the short term fad that many suspected. For investors, understanding the risk profile of the underlying investments and their rights on a liquidity event, are now more important than ever.
We are now benefitting from learning what happens a few years on following a funding. If your medium term aspirations are a sale or listing on a stock exchange, it is worth thinking carefully about whether introducing a few hundred investors is the right choice for your business. Accessing debt through peer-to-peer lending groups might be a smarter plan, or working with one or two dedicated investors offering mentoring and experience as well as their money.
5. Brexit won’t just go away
The UK’s vote to exit the EU took affect quickly with the devaluation of the sterling resulting in finished goods, raw materials and packaging imported from abroad all becoming more expensive. Consumer markets and business services were among the sectors that felt the impact markedly and quickly.
There has never been a better time for the UK to import less and look for homegrown ingredients and locally produced goods. Companies who can export are well positioned to grow their businesses, as demand for UK products is high whilst prices are cheap.
In 2016 Grant Thornton advised on more deals in the mid-market than ever before. With 134 completed corporate finance transactions, representing an accumulated deal value of £4.4 billion, we advised our clients on acquisitions, disposals, AIM flotations and raising of new equity finance, as well as restructuring deals and debt refinancings. Find out more about some of the deals we advised on last year in Leading the way – a review of corporate finance deals in 2016.
For more information, please contact Melanie Frean.