This is a thought leadership article by PrimeGlobal member firm FRP Corporate Finance Partner Matthew Flower explores the opportunities available to businesses considering M&A through the pandemic
Throughout the pandemic thus far, businesses across the UK have largely focused their efforts on stabilising their operations in light of the new commercial pressures brought about by COVID-19. For many, that has involved streamlining their business and turning to government support schemes to counteract reduced revenues, order books, or periods of enforced closure. Ultimately, it has led to a position where many firms have a significantly higher burden of financial liabilities than they would have anticipated this time last year.
Now, as we approach a tipping point where firms are expected to address that burden, attention is turning to how they can begin servicing their increased debt sustainably. In some instances, a sale of a minority stake to private equity or a merger with another business might prove a useful route to doing so and ensure firms achieve an overall recovery in the long-term.
One of the key options for business owners to consider is whether releasing equity will provide them with the resources to overcome short-term challenges or create opportunities for growth.
Having initially focused their efforts on ensuring the health of their portfolio companies through the pandemic, private equity houses are now beginning to return to the market and actively seeking investment opportunities. Despite the financial impact of the pandemic, the private equity community still has significant levels of capital to deploy and we expect the pace of investment to pick up considerably next year as lockdown restrictions begin to ease.
All of this points to a conducive environment where business owners can bring vital financial resource and expertise on board to help create a positive future for their organisation. Of course, there remains the age-old reluctance among many business owners to take on private equity investment for fear of losing control of the business they have built.
However, in a competitive market where there is an ongoing flight toward quality assets, some traditionally majority-only private equity houses are also extending their offer around minority investments – in part as a response to the opportunity to provide development capital due to the reduced appetite among mainstream lenders to provide further debt. Owners should be mindful that minority equity investments will still demand certain investor protections, but this might be a viable alternative to relinquishing economic and strategic control with a partner that can help unlock new opportunities or provide capital to grow.
Beyond a minority private equity approach to stabilisation or, in many cases, growth an alternative option for business owners could be to combine with a larger entity through a merger or other business combination. This could potentially provide access to more attractive debt funding options to drive growth. This access can result either from synergies delivered via the merger or from the strength of the larger entity’s existing covenant with its funding partners.
This again is likely to involve giving up some (potentially significant) element of control but can deliver a positive solution that protects the business and its staff while creating future growth opportunities.
For business owners considering supporting their recovery through a merger or minority private equity investment, it’s important to conduct an internal review of cash flow and capacity to grow, to understand where they sit in the market. Even now, there remains a large amount of capital looking to be deployed so business owners should explore and seek guidance on the options available to them and how each could benefit their business in the longer term.
It’s also important that business leaders invest time and resource in preparing their business narrative to effectively market themselves and attract the backing of an investor or new strategic partner. Every business is different and gathering all of the relevant information will mean they are better able to present their proposition correctly and prove that their growth strategy, if properly resourced, is sound. Private equity firms and, increasingly, non-bank credit providers, in particular, require thorough education around a business’ strategy, and greater levels of detail around its financial performance.
The landscape will continue to evolve as the economy recovers and business owners need to maintain a flexible approach to the increased M&A options open to them. By looking at M&A through the lens of stabilisation and growth, the long-term benefits are increasingly likely to outweigh the perceived negative of reducing overall ownership. As such, it’s important that business leaders seek early advice to assess their position in the market, the options available to them (be that equity or debt), and ensure they prepare effectively to aid their recovery and growth through M&A.
FRP is a leading business advisory firm with a strong reputation for providing cross-border solutions to create, preserve, and recover value across a range of complex stressed and distressed situations. Working across the board, from multinational organisations to small enterprises, we develop effective strategies for all kinds of businesses.Learn more