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February 17, 2014updated 15 Aug 2022 3:01pm

Increased confidence will mean more M&A in 2014

Businesses thinking of selling should make preparations now to take full advantage of a buoyant market for mergers and acquisitions say Christian Roelofs and Antony Watkins

By Verdict Staff

Businesses thinking of selling should make preparations now to take full advantage of a buoyant market for mergers and acquisitions say Christian Roelofs and Antony Watkins

After over five years of falling or stagnant global mergers and acquisitions (M&A) activity, there is, at the start of 2014, optimism that this trend will finally be reversed.

This increased confidence has been principally driven by an improving economic climate and gradual increases in corporate cash and the supply of credit.

In addition, there is increasing sentiment that organic initiatives alone will not deliver future growth within the desired time frames, so acquisitions are back on corporate agendas as they can deliver immediate benefits to the acquirer and instantly exploit favourable market conditions.

M&A activity in 2014 is likely to be driven by ‘positive’ factors such as product expansion and strategic diversification, as well as by more ‘defensive’ factors such as the pressure to maintain competitive advantage or keep pace with competitors.

The above factors are likely, in turn, to generate more premium pricing and reverse the trend in recent years of M&A activity being driven by the acquisition of undervalued assets at a ‘bargain’ price.

We have seen a marked increase in M&A activity in the leasing and consumer finance sectors in recent months, including:

  • The acquisition of debt purchase and collections operator The Lewis Group by Hoist Kredit AB in August 2013;
  • The acquisition of contract hire operator Leasedrive by HG Capital in December 2013;
  • The acquisition of professions and SME lender/lessor, Leasedirect Finance by Cabot Square Capital in December 2013; and
  • A continued increase in non-performing loan (NPL) portfolio sales.

We have also seen a number of new players enter the market and existing finance providers expand their offerings which further highlights the attractiveness of the market to investors, especially in the wake of the withdrawal of ING Lease from the UK market.

Thus, based on continued interest from cash-rich investors, ongoing strong support from debt providers and macro stability, 2014 is set to be a year of increased M&A activity within the leasing and consumer finance sector.

While this is good news for would-be vendors, the road to success is not an easy one. There must be an appreciation of the time taken and the amount of work required not only complete a transaction, but also to preserve and maximise value during the process.

Early planning and preparation are usually the key to achieving a successful sale process at the maximum value. Planning and preparation should start as soon as a vendor is considering a sale, but certainly well in advance of formally marketing a business for sale. To do this, there are a number of issues a vendor should consider before going to market. These include, but are not limited to:

Pre-sale preparation

  • Who are the likely buyers and why? Trade or financial sponsor?
  • What is the vendor’s minimum acceptable sale price? Is an earn-out acceptable?
  • Establish the ‘sales story’ – what are the company’s key strengths and distinctive
  • features? Why should a buyer buy your business?
  • How could the business grow under new ownership?
  • Is there an exit for the acquirer?
  • Consider the need for vendor due diligence (VDD) to facilitate a buyer’s due diligence;
  • Early preparation of a data room – focus on the quality/clarity of portfolio data; consider funding headroom/vendor finance, including a staple funding facility with the transaction.

Deal structure and process

  • Benefits of an ‘off market’ versus the formal auction process;
  • What, if any, tax planning is required ahead of a sale?
  • Share versus asset deal structure?

People and operations

  • What are the key business risks and how they are being/can they be mitigated?
  • How have the business model and strategy evolved over time?
  • What have been the management’s achievements in their present and former roles?
  • How scalable is the current platform to deliver future growth?
  • What, if any, are the key separation risks and how can they be managed?
  • How are regulatory obligations and compliance risks managed?
  • What is the route to market and how is new business originated?

Financial performance

  • How is current trading compared to budget?
  • Prepare a re-forecast (if necessary) before going to market
  • What are the underlying earnings and loan book of the business?
  • How will seasonality impact the timing of a sale?
  • Review accounting policies to ensure compliance with industry practice;
  • What are the main KPIs and how are they comparing to budget?

In conclusion, if you are considering a business sale, effective preparation is essential and should not be left until the last minute. The more you plan and prepare, the more likely you are to maximise value and minimise deal risks.

Christian Roelofs is a director and Antony Watkins is an associate director within Grant Thornton’s leasing and consumer finance team

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