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10th September 2008
CAT.151
Corporate Finance (Birmingham Post)
With the UK economy spiraling downwards and confidence dipping accordingly, Graham Mold, director with Catapult Venture Managers, takes a look at the outlook for funding availability.
Looking back over the past five years the corporate finance community has clearly enjoyed a ‘golden’ time with very significant numbers of MBOs, BIMBOs and MBIs taking place.
During this period, funding has been relatively easy to access and, as a result, deal volumes have been high. Clearly, prospective buyers – buoyed by a robust economy – have been prepared to pay handsomely for the right business. And, even if enough debt has not been raised by a purchaser, the vendor has, in many instances, been prepared to take an element of deferred payment for their business.
These factors have, of course, had the effect of pushing up prices, but multiples are now falling as confidence falters.
So the burning question is this: How badly is the dealmaking market going to be effected over the coming 12 months as more bad news over the economy will undoubtedly filter through?
With the UK economy projected to be the only major EU country set for recession this year, prospects are clearly not looking good for a number of sectors. Housebuilding and retail have been particularly hard hit and, as the economy stalls, we are inevitably going to see increasing job losses across many sectors in the coming months.
The impact of the ‘credit crunch’ has resulted in many banks curtailing lending multiples and, in somes cases, virtually pulling down the shutters on lending.
Certainly, vendors are going to be far less inclined to accept deferred terms -hardly surprising given the far more risky environment we faced with. From their viewpoint, putting cash in at this time is ‘dicey’ as there is far greater risk of not getting their money back in the future.
The ‘knock-on’ effect of this is that over the past six months Catapult has come across some excellent opportunities which we might not have seen if it had not been for the credit crunch. The banks are no longer doing all debt deals and this is allowing us access to some of these transactions.
Whilst all equity providers are going to be careful in terms of the type of businesses they support and how much is paid for them, there is a very substantial amount of equity available to invest in the right enterprises.
One of the key benefits of bringing a private equity investor ‘on-board’ is that they can introduce experienced NEDs into deals. This approach is often one of the key determinants between the success and failure of a young business. We know that VCs tend to make more money out of investments when they have an investing NED on ‘board’ rather than one who has no money at risk in the venture.
It also stands to reason that if an NED is well connected in the industry in which a businesses operates, he or she will be able to open doors that can change the direction and value of your business in a much shorter time than would have otherwise been possible.
At the end of the day, the VC as a shareholder will only introduce an NED if it is seen as value enhancing – by doing this they will be increasing the value of the managements stake as well as their own.”
Inevitably a more realistic view has to be taken over the current value of businesses. Certainly, prices being attained this time last year are not now going to be achievable.
Pricing
The difficulty facing both vendors and prospective buyers is measuring how far prices have dropped over the past 12 months and how far they are likely to fall over the next 12 to 18 months. Buyers are understandably cautious – after all, pay too much for a business and there will be very little meat left on the bone when it is time to ‘sell-up’ and realise a profit.
Over the next year or so I expect to see trade activity involving corporates wishing to divest themselves of non-core businesses. Conversely, I predict fewer family concerns being sold – all too often one or more directors within such enterprises will only be prepared sell if last year’s prices can be achieved. Therefore, they will put off such a sale hoping for the good times to return!
MBOs
Owners looking towards an MBO or trade sale should ideally plan between three and five years ahead of an intended sale of a business.
Some owners feel duty bound to hand their businesses over to their sons or daughters when in fact it would be better to sell the company for a good price and distribute some of the resulting wealth back to the family members.
Clearly, the prevailing economic conditions are far more testing than six months ago, but a good business will always attract buyers. The key is simply this – bring in business advisers early and be realistic in what the enterprise is worth.
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For further information contact Graham Mold at Catapult Venture Managers on 07768 148187 or Paul Shrimpton at PSPR Ltd on 0121 354 7311 or 07979 505322.
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