Finding a way out
Contrary to popular belief, making an exit from your
company is still possible. Jim Simpson reports.
Mervyn King only makes three major speeches a year and he chose Yorkshire to deliver his verdict that that the country was now “entering a recession”. Speaking to 1,000 of the region’s business leaders at Savile’s Hall, the governor of the Bank of England gave his gloomiest economic forecast since taking office in 2003.
Globally, the news sent sterling into freefall on the currency markets but more locally it raises serious questions for business owners: are they prepared to trade through the recession and, if not, can they sell their business for any worthwhile price?
For any management team considering a management buyout (MBO), or any owners wanting to exit from their business, the message from the market is good and bad. Businesses are still being bought but they are particularly strong businesses that are raising far less than they did even six months ago.
And those deals going through are proving far more difficult, not least because the banks have, to quote one private equity house, “effectively shut up shop and gone away.”
So, if you want to sell a business, do not even think of looking at last year’s valuation – that has gone and may not be back for many years to come. “We’re in a once-a-century situation, as Alan Greenspan says, where the credit crunch is combining with a full-blown recession, so it’s hugely difficult to get deals away,” says David Buckley, Yorkshire head of corporate finance at Ernst & Young. But he, with many corporate finance players, says exits are still possible.
Stephen Atkinson, corporate partner at DLA Piper Leeds, is adamant there is still a market – even if it is a far tougher one than even just four months ago. “The deals are still there to be done for the right business at a sensible price,” he says. “It remains the case that if a business meets a particular buyer's strategic needs, there are buyers out there with funds to do deals – if sometimes with an element of vendor financing.
“It is generally harder to push deals through to completion as funding and due diligence have got tougher, but in the past three months we have been involved in the sales of Foodvest, LeasedriveVelo and FMG Support's rental business among others. But we are working on numerous other transactions where the financing is, at least in principle, in hand, and there are still buyers around looking for the right growth opportunity.”
Steven Glover, head of corporate at Hammonds in Leeds, says some areas of business are more attractive than others – those dealing with or driven by the public sector, energy or recycling.
“Anything dealing with the oil and gas sector or power generation (particularly renewables) has been extremely active with a number of auctions going to the wire. Businesses addressing areas of government spend perceived to be the least likely to be cut such as health and education are also likely to generate deals,” he says.
What these all have in common, Glover observes, are potential buyers that have already raised their money and do not need to approach the banks.
“In these areas you have a number of trade players with big balance sheets and some private equity investors who are still actively pursuing opportunities. In some cases, such as that creates a momentum of its own,” he adds.
Buckley gives the example of Redhall, the Wakefield-based engineering group that bought Newcastle’s Chieftain Group for £18.6m. The deal illustrates that businesses serving the public and power sectors are still attractive, as Chieftain works on nuclear submarines in the Ministry of Defence’s Astute programme and services the oil and gas sectors.
And Ian Hale, director of Park Place Corporate Finance, says the market is still active. His company has completed several deals, including the Galloway Group MBO (debt-only funded) and the Eve Trakway transaction (funded through debt and private equity).
“Transactions are being funded through a combination of existing cash resources, bank-debt only and a combination of debt and private equity,” he says. “It is also apparent that trade acquirers are still active in the market with a number of our clients having received unsolicited approaches for their businesses.”
In fact, says Hale, the downturn makes it a good time to sell cetain businesses. “There are certain sectors where there are opportunities for growth, and it could be a good time to exit. For instance, debt management, business recovery and civil enforcement.”
The question nagging anyone considering an exit is whether they should wait and hope the market will improve or prepare for sale now. The prospects, according to Giles Taylor, director of KPMG Corporate Finance, are not that bright.
“I would predict that about half the transactions will be non-core disposals by corporates, 25 per cent will be the sale of stressed or distressed assets and, in truth, there will be shades of grey between these two categories,” he says. “I only expect about 25 per cent of transactions to be the traditional M&A we have seen until recently.”
Peter Armitage, partner at Key Capital Partners in Leeds, says it will take a long time for any return to normality, having seen a number of deals fall through as banks pulled out.
“We’ve been looking at good businesses with decent cash flow where we would normally expect to get three times EBIT (earnings before interest and tax), and the banks have just not been able to do anything,” he says.
“We have had to turn to asset-based lenders to make the deals happen, but you can’t get as much money from this source as you could from a normal cash flow-based debt.”
This will drive the prices down and these will be slow to rise, says Armitage, and potential vendors will have to adjust or lose out. “A number of times I have seen vendors refuse a price because they think a business is worth more and then have to accept less than half that price a couple of years later because of an economic downturn,” he says.
If a business owner is intent on disposing of this business, David Culpan, regional director of the asset-based lender GMAC Commercial Finance, has this advice.
“Vendors should work with acquirers to ensure the most favourable funding structure is in place. This could include a greater element of deferred consideration to mitigate for a shortfall that incentivises incoming management but could be structured to provide a yield to the outgoing vendor,” he says.
“With cash flow leverage multiples falling, asset-based lending (ABL), where a lender leverages against a company’s balance sheet, may yield a greater quantum of debt. Much of the ABL debt could be on a revolving basis, resulting in a lower level of cash being used to service the debt leaving more for funding trading activities and expansion.”
But if an owner wants to keep going in the current climate, there needs to be some incentive to keep the management keen – especially if the end-game involves an MBO. One solution, says Jeremy Oliver of Garbutt & Elliott, is to grant the management share options at the current market value so if they grow the future value of the business this is reflected in the value of their share options.
“When financial conditions improve they could exercise the options and acquire the shares at the previously agreed price when the options were granted rather than the higher price in the future,” he says.
But, whichever route is chosen, owners must remember the watchword of any private equity operator – keep one eye on the exit if you want to make the most of your business.
