A good time to sell? Surely not ?!!
Despite all the doom and gloom, could it be a good time to exit your business ?
Unless living under a rock, it is impossible to ignore the dire predictions of economic collapse in the UK over the coming months. Hot on the heels of the pandemic and supply chain challenges, we now face epic fuel bills at home and at the pumps, in turn driving high inflation and the first increases in interest rates for years. With the Bank of England now predicting a recession, surely only a complete lunatic would consider now a “good time” to sell a business.
For those of us who are old enough to have been Corporate Finance advisers through the recession of 2002/3 and the financial crisis (and its protracted aftermath) between 2009 and 2012, as well as the pandemic, it is not necessarily as simple as that.
On the one hand, the decision to sell a business is not purely a function of where the wider market is at. Ill health or even simple fatigue can lead owner-managers to want to hang up their boots even when the timing is a bit off. In 2022, in the wake of Brexit, Pandemic and now Cost of Living crises, who could blame a business owner for wanting to trade less than perfect market conditions for the opportunity to step back. Indeed simply the thought of yet another challenging and uncertain period might make an exit more, not less, appealing. The gamble as to whether tax rates will rise or fall is also often part of that equation…….
In every set of economic conditions there are businesses that thrive. Even in the depths of lock-down, technology businesses were selling for premium valuations as the market rushed to digitalize. Traditionally, a recession can drive investors and acquirers to look with interest at companies serving the public sector and in the current downturn, one might surmise that businesses delivering supply chain resilience or efficiencies, e commerce logistics, ESG solutions, digital transformation and security and some aspects of health tech are likely to continue to be of interest.
Individual business valuations will continue to be a function, not of some academic equation or of a general malaise, but of supply and demand. As has been the case since the financial crisis of 2009-20012, there will be a focus on quality and with very significant amounts of “dry powder” (cash) in private equity funds and on corporate balance sheets, those businesses that have scale and face resilient parts of the economy, will continue to generate interest, competition and decent prices. B2b software, data and IT services businesses are a core focus for many funds and competition for strong businesses in those sectors will almost certainly continue to be fierce. For sub-scale, struggling or “old economy” businesses, the ability to generate an exit is likely to be much more limited, albeit a recession always brings out some opportunists looking for a bargain and if a recession were to be prolonged, some would shift focus to take advantage.
UK mid-market private equity funds have spent the last year fund-raising and have enormous amounts of capital left to deploy. Inflation makes it more, not less, important for them to deploy it and they will be working hard to identify resilient, growing companies and to fight off the competition to get to a deal. It is likely that in the teeth of a recession, commercial and financial due diligence will be even more painful that normal but there are imperatives for buyers as well as for sellers.
An increase in the cost of debt might deter some deals, but in reality there has been a reluctance to over-leverage which is a hang over from the mass casualties of over-leverage in the lead up to the crash of 2009. For most debt providers, there will just be a swift reversion to their standard lending criteria, with a recent slight loosening of the parameters looking like a blip rather than a trend. Even with debt margins increasing, debt is still significantly less expensive than equity and still historically cheap. Many new debt funds have been launched in the last few years. While the banks might retrench and wait it out (as usual), the debt funds arguably have as much of an imperative to lend as private equity do to invest. The same flight to quality and neurotic diligencing is a more likely response than them leaving the market en-masse.
For dollar denominated acquirers, the UK has been an attractive hunting ground for some time and the current dollar/sterling exchange rate extends that dynamic, albeit no-one ever bought a business just because it is cheap. Since the financial crash, acquirers have become increasingly and properly strategic in their identification and pursuit of acquisition targets. However interesting and cheap a deal might be, if it isn’t on the Board’s shopping list it is unlikely to gain any traction.
In practice, none of this is new. For good businesses, sales will still go ahead and at strong valuations. For less good ones they will continue to be difficult. With good preparation, good advice and a good dose of realism, I predict that many entrepreneurs will head for the exit in the next couple of years, whatever the economy is doing. The draw of a quieter, easier life will just be too great !
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