The Truth about Business Valuations and Brexit
It is easy to get carried away with the daily gloom and talks of crisis in the media and convince yourself that now is a bad time to be selling your business. Undoubtedly there are some sectors that are struggling and recent news of the demise of Thomas Cook will do little to build confidence in the UK economy.
Dated: 3 October 2019 Author: Richard McNeilly, Managing Partner
However, if I take a deeper look at some of the recent high-profile casualties, it is quite difficult to argue that they are victims of BREXIT. It seems to me that they are instead examples of businesses that have not moved with the times, failed to anticipate customer demand and are often crippled with debt.
So, where does this leave the M&A market? In my view, it is in rude health although I accept that that timing of transactions and the impact of BREXIT should be carefully considered there are many other factors that should lead to confidence.
There is lots of cash chasing good quality investments and this can only serve to drive valuations up. At the lower end of the risk spectrum, Banks have got their act together and have a strong appreciation of what is a ‘Bankable’ deal and which deals carry a higher risk premium. Importantly, the Banks are seeking out alternatives for customers even when they can’t fund a deal, which means the deal is not lost to the market.
Peer to Peer offers further liquidity for some transactions and there are small number of highly skilled asset-based lenders and mezzanine funders ready and willing to support the right deals.
Private Equity remains a strong option for businesses with significant opportunities to grow and demand for deals ensures that the terms of investment are reasonable.
Finally, trade buyers have built their balance sheets in the years post-recession and want to put surplus funds to good use, without compromising their core business.
Stable state economy
Despite the media noise, the economy is okay. Yes, we could be growing quicker and yes, and end to BREXIT procrastination should help confidence but we have all seen much gloomier times and we can hardly claim to be in the boom before a bust?
Our stable state (boring) economy is helpful in so much as it helps buyers pick the real winners – those businesses that have carved out a niche and are thriving without the help of a booming economy
Savvy buyers and investors are well informed but current market conditions breed entrepreneurial flair and creativity in well manged businesses and demand for those businesses is alive and well.
Like it or not, we are operating in a global economy and UK businesses are in relative terms, good value for money. The strengthening of the euro and perhaps more importantly the dollar has led to increased activity from European, Asian and US buyers. This investment keeps the rest of the market on its toes and provides sellers with a broader choice when considering sale.
There will be businesses that are adversely impacted by BREXIT and it would be foolish to think that ‘No deal’ will not have some impact on the economy and probably drive down valuations in the short term. However, to date, I find it difficult to build a case for BREXIT supressing business valuations.
As in any market, there are winners and losers depending on the nature of trade and so my advice to buyers and sellers is simple – proceed with your plans, carefully consider the impact of BREXIT and structure the deal in a way that works for you.
Buyers cannot expect a BREXIT discount for a high performing, innovative and well managed business and Sellers must be realistic about Buyers wishing to manage their downside risk, which may impact on structure.
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