Succession Planning In The Current M&A Market
This article has been produced to give the reader, some insight to developments within the mergers & acquisitions industry, as well as tips when considering funding.
With the market currently in a healthy state, could it be said that this is in fact a ‘booming’ time for business sales?
‘Entrepreneur’s Relief’ is a tax scheme that allows sellers the benefit of lowering taxes on capital gains from an ordinary rate of 28% to 10%, this scheme is one of the many reasons as to why the market is thriving. This financial incentive provides exiting business owners the benefit of some tax relief in recognizing gains on the sale of their business. It is particularly attractive to owners who have spent many years building their businesses and increasing their intrinsic value.
Additionally, increased investor and consumer confidence has created a positive environment for both buyers and sellers. ‘Age and stage’ deals are also becoming more widespread within the industry. In such cases, owners put their exit plans on hold during the financial crisis, but with the recovery well underway many believe now is the right time to sell.
With many of the ‘baby boom’ owners nearing retirement, they are evaluating their exit options. Similarly to ‘age and stage’ sellers, the poor economy spurred a number of businesses to restructure and streamline costs to focus on the bottom line. This in turn revealed a more successful and attractive acquisition target.
Sales of businesses to trade buyers is still common practice, but the mergers & acquisitions industry is beginning to see a rise in management as well as employee buy-ins and buyouts. In these cases, existing owners are exiting their businesses by selling to groups of employees and their management teams. This suggests that owners are carefully evaluating a number of options to determine the method that best suits their exit goals and objectives.
The Funding Recovery
In comparison to the late noughties, lenders are in a much healthier position to offer support to purchasers. Additionally, there are a variety of alternative funding avenues that are open to businesses who are seeking to finance a deal, ranging from the mainstream to the less well known.
When toying with the notion of external lending options, it is imperative to weigh up the long-term nature of the relationship. Often, too much focus is placed on interest rates and the financial aspects of the financing package. However, it is important to evaluate whether the lender really understands your business as well as your goals and objectives. It is essential to take into consideration the overall deal and the relationship, not just the terms.
Mainstream banks have reformed and are giving the impression that they are willing to support good trading businesses. It is very promising to see a renewed focus on the SME market, with a majority of banks having specialist teams in place who are dedicated to this sector.
This catch-all term includes lenders who exclusively work within the growing employee buyout sector, which is fuelled by newly created Employee Ownership Trusts.
This particular form of funding is appearing more and more frequently in deals, particularly ones which include a buy-in or buyout element. Additionally, it can prove to be an effective method of funding a transfer of ownership, but care must be taken in order to produce the right business model.
For example, issues can arise if cash flow predictions are overly optimistic and the vendor cannot be paid on time. Losing a long term contract can seriously affect a company’s financial status and damage the repayment schedule.
Also, buyers have a habit of under-estimating the costs that will come through, or the money that will have to be spent post-deal.
The two scenarios needn’t have any effect on the deal, it is just the simple case of managing risk, as well as calculating repayments accurately and having contingencies in place. Both parties must be satisfied and comfortable with the agreement, and by having a full, honest and realistic conversation, it can reduce the risk of any issues later on.
Funding From Family or Friends
As obvious an option this may appear, there can be problems and as such it is important to set out clear expectations from the very outset. So, whenever friends and family are involved in funding it is vital that every party receives independent advice. Each person should know their rights, responsibilities and any possible outcomes.
In terms of financing a business acquisition this is reasonably new term but is already becoming more and more popular. With crowdfunding there are some genuine success stories and it is a method that is becoming increasingly sophisticated.
Businesses are now resorting to this source as it is a way to arise capital quickly. Once again, it is crucial to be crystal clear when determining the expectations of investors and that they are in line with what the business has to offer.
Equity or Debt?
For certain companies, it makes more sense to offer equity rather than take on debt, which in turn can take a slight shift in mind-set for some companies. To be opposed to outside sources of funding, you need to modify the outside sources of what someone is opposed to, for example being opposed to outside sources of advice. In summary, offering equity isn’t for everyone.
However, on the opposite end of the scale, there have been a number of times where an external investor has contributed more than their fair share and been a real asset to a company, driving growth. It is important that when identifying an investor, their aims are in alignment with your own.
There are a large number of private equity and venture capital investors looking for a reasonably quick sale, which may not fit with the comprehensive objectives of the company. However, certain equity investors will take a longer-term view. Because, as is the case with all business relationships, finding the right partner to work with is important to a successful outcome.
The Route to Your Perfect Exit
The corporate marketplace has risen from the recession and is currently in a healthy position. Capital to fund exit options is available and issuers are much more responsive to the needs of the businesses looking for funding. Entrepreneurs are also more attentive in their approach to evaluating and selecting financing alternatives. All of these factors support the outlook that the number of merger and acquisition deals will continue to increase. Exploring different avenues, seeking the necessary professional advice and making a fully informed decision will all result in an owner’s successful transition.
With experience in a number of key sectors and representation throughout the Americas, Europe, Africa and Asia, Benchmark International can connect you with the right opportunity. To find out more, visit http://www.benchmarkcorporate.com.