Impact of current market dynamics on M&A transactions

| March 27, 2012

The current markets certainly present many considerations for owners of private businesses, particularly those considering the future sale of their business or those contemplating acquisitions to deliver growth.

While there is widespread uncertainty, David Tyrrell, Account Director in Corporate Advisory at Deloitte Private, believes now is an ideal time for owners to be talking with their advisers about their business, their objectives and the impact the current environment is having on their choices.

“While we are seeing some business owners deferring plans to sell or grow and focusing their attention on their existing operations, we are also seeing a number of owners being pro-active and using today’s uncertain times to their advantage,” Tyrrell says.

“Post GFC, business owners have faced a range of challenges, be it a slowing economy, increased competition due to the exchange rate, lower valuations, funding constraints, as well as the associated volatility of debt and equity markets resulting from the European and US difficulties.  Changes in consumer sentiment, advances in technology and the perceived two-speed economy have also contributed to these challenging times.

“It is almost impossible to predict when the markets are going to recover or at least begin to resemble more traditional behaviour and performance. It is a new world out there with many market commentators predicting it may take several years before any significant or consistent improvement is seen.

“Consequently, business owners need to decide between ‘riding it out’ while not knowing just how long it will be before any genuine improvement in the economy is seen, or being proactive in their behaviour and taking advantage of opportunities now,” he says.

David Tyrrell notes that a number of Deloitte Private clients are adopting the latter approach.

“We have quite a few clients who have strongly performing businesses, are currently cashed up and therefore well positioned to fund acquisitions. They are asking us to approach targets on their behalf, initially on a no-names basis, to explore the target’s willingness to engage in discussions about the possible sale of all or part of their business,” Tyrrell says.

“We find this form of approach can be very successful, particularly given both parties’ sensitivity about confidentiality, as well as associated exclusivity arrangements that can be struck. Furthermore, timelines can often be accelerated when only two parties are involved while costs can be contained until there is certainty about proceeding with a transaction.

“Conversely, we are also seeing business owners asking us to approach a specific party or a very small number of parties to explore if they might be interested in acquiring our client’s business. It is easier for business owners, particularly those who are not desperate to sell and quite happy to retain ownership if a deal can’t be consummated, to explore the potential interest of a select group of potential purchasers whilst maintaining confidentiality,” he says.

David Tyrrell further comments: “We are certainly seeing a change in the way transactions are being undertaken at present. There are many more ‘one-on- one’ dealings which have the benefit of reducing completion risk for both parties. Buyers however are being very cautious and will not be rushed into a transaction nor value businesses on a ‘blue sky’ basis.

“Pricing levels that were seen pre-GFC have reduced, in part due to lower funding levels by banks, and consequently all parties, and in particular vendors, are having to re-educate themselves in relation to expectations.  We also note that due diligence exercises are extremely thorough.”  

For other business owners contemplating a potential sale in a few years’ time, now is also an ideal time to be planning ahead.

Tyrrell advises it is impossible to predict when the perfect time is to sell.

“Rarely will all the stars align to create the perfect scenario. Business owners should however always be thinking in advance as to what is required to prepare their business for sale.  By preparing the business for sale, even if the timing for a sale doesn’t appear right from the vendor’s perspective, it allows the owner to take advantage of opportunities which might unexpectedly arise as well as hopefully maximising the outcome,” he says.

“We are seeing examples of business owners who are now deliberately choosing to have their financial statements audited, or having accounting policy and other compliance exercises undertaken to position their business for a future sale. Equally, formalising contractual arrangements, diversifying customer bases, identifying and implementing profit improvement initiatives and performing tax planning exercises are all examples of sensible preparation.

“We are also seeing that by completing these exercises vendors are far better placed to articulate the key strategies for success and develop plans to address any perceived weaknesses and threats to the business model.

“With the general level of M&A transactions expected to accelerate as the markets improve, owners who have positioned their business for sale will get the jump on others because they will have already undertaken their homework, reduced the uncertainty and investment risk and made the process easier for a prospective purchaser,” David Tyrrell concludes.

“We are always pleased to meet business owners to discuss their plans.  An initial meeting is the first step in the preparation phase and at the end of the day, preparation will equate to value.” 

This opinion piece was first published on Deloitte Private Matters and is reproduced here with the kind permission of the author.