While we are seeing a significant increase in deal activity since the General Election earlier this year, the expected upturn in business activity post-election has not yet come to fruition.
In order to drive growth, businesses are turning to mergers and acquisitions (M&As) to increase profits and provide added financial security.
This activity is particularly prominent due to a highly competitive marketplace – merging allows businesses to build critical mass much more quickly than organic growth alone.
As a result of this, many businesses are moving to consolidate with competitors to increase efficiencies, drive cost savings and unite each other’s customer and supplier chains.
In a similar vein, the region has seen an increase in cross-industry mergers, with established businesses looking to diversify their current business offering.
Manufacturing
This strategy of diversification is also apparent in the manufacturing sector, with the UK’s industrial contingent looking to add ‘bolt on’ services by acquiring suppliers and expanding their product or service offering to reduce risk.
Many manufacturers have been shaken by instability in overseas markets, with the recent devaluation of the Chinese Yuan denting business confidence for exporters.
Larger businesses are much better equipped to ride out market changes and currency fluctuations, hence the increase in merger activity. Becoming less reliant on two or three core customers and increasing the businesses’ product or service offering reduces business’ vulnerability to market change.
Talent
As the UK skills shortage intensifies, attracting and retaining skilled staff is becoming a huge challenge. When acquiring another business, the biggest asset on offer may be its staff. The skills base of the business can become a key part of deal negotiations.
However, in order for mergers and acquisitions to be a success, potential deals must be closely scrutinised at an early stage to gauge their suitability.
Rather than chasing top-line turnover, prospective buyers should examine the strength of a business’s customer and supplier base, as well as its service and product offering.
Due diligence
Before signing on the dotted line, decision makers must carry out all of the required due diligence checks to assess the real value of the organisation.
Looking past the balance sheet is a must, a business’s assets and capabilities when combined with your own may allow huge efficiencies to be made or facilitate penetration into new markets.
Entrepreneurs’ relief currently stands at a lifetime allocation of £10m, which is taxed at the reduced rate of 10 per cent. For many entrepreneurs and business owners, now is the ideal time to sell, with tax conditions the best they will probably ever be.
Ross Cocker is a corporate finance partner at Clement Keys.
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