Is a merger better than selling or closing your business?

While an selling may be necessary for some businesses owners, it is disappointing to hear about business owners selling out for quick deals or brokers looking for a quick 10% to arrange a deal with a tired old list of low value buyers. 

That said there are a number of owners who will be concerned in the current economic situation about the prospects for selling their business and retiring (if succession planning is not an option). Value creation for exits will invariably be optimised by longer term planning (two to three years is usually the optimal period) although COVID-19 means that many businesses may struggle unless they can increase their resilience in the short-term before returning to normal operating levels or even growth. Rather than weather that storm, some business owners are tempted to sell their business now. Although these issues are not exclusive to any one sector, some businesses (especially in creative, sporting or leisure industries) potentially face an immediate and existential crisis. Our article explains that an alternative to a quick sale or closing the business, could be a merger with another complementary business.

The problem with selling a business now is that there are unequal and unrealistic expectations about price in the current climate. As Jon Moulton of Better Capital recently commented; 

“It’s human nature not to believe that values have really dropped and it is very hard for buyers to see that they have not.”

This disconnect on pricing can be overcome by merging businesses using a consistent and relevant  valuation methodology (instead of just the acquiring party applying their own) to unlock and share the advantages of the combining businesses.  Mergers fell out of fashion for a while. Accounting standards, tax planning and a merger and acquisition space dominated by private equity’s mindset and consultants’ promotion of a ‘winner takes it all management approach’ led to takeovers being almost exclusively the only show in town. 

But the current landscape means that mergers could be an attractive option for many businesses. Like takeovers, mergers bring operational benefits such as consolidation synergies and economies of scale that unlock greater procurement savings and the spread of central costs over a wider revenue base. There may be additional revenue synergies by aligning complementary revenue skills or unlocking greater investment in specialist skills. For example, additional scale is more likely to make investment in digital capabilities more cost effective. These capabilities may be essential for revenue growth but the business case for investment cannot be made by many businesses due to a lack of scale. 

Importantly, consolidation can support value creation beyond improving operational capabilities such as providing scale, improved succession and decision-making and a more balanced portfolio of products and services that spread central costs more evenly and help balance cash flows throughout the year. 

In summary, potential attractions of a merger can be:

  • Preserve cash and even pool cash, if required
  • Unlock operational improvements such as consolidation and revenue synergies
  • Create a more balanced product or service portfolio in terms of products and cash flows
  • Create opportunities to deal with new parties other than the traditional consolidators in the category
  • Create exit and succession plans by creating share transfer options in the enlarged group and equitable earn out arrangements
  • Enhance the value of the component businesses by creating a larger group that is more likely to attract a premium when exited.

There are additional risks that can be effectively managed, such as:

1 HMRC approval that no gain or income tax will arise from the share for share exchange. This should be relatively straightforward and there are additional tax planning options to consider.

2 A commercial due diligence that goes beyond the traditional legal and financial checklists and stead focusses strategic, market or operational risks. 

3 A clear approach to management, integration and the exploitation of post-integration opportunities. 

4 An ability to find agreement without being overly deal hungry and not let the heat of the negotiation lead to excessively be risk-taking. 

5 Consideration should often be given to competition regulation as the current framework can be surprisingly restrictive for micro-sectors and can be manipulated by competitors or aggrieved parties. 

Our approach to supporting clients draws on an extensive range of transactions, with scores competed and a greater number that didn’t (in our principal’s interests). Our advisory team draw on skilled professionals who have also worked business and not just as advisors, supporting complex and publicly traded international groups 

If you are thinking  of buying or selling a business, or even have grander plans, then get in touch for a free and confidential discussion.

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