M&A in the New World
COVID-19 impact
While the COVID-19 pandemic paralysed M&A worldwide earlier this year, there seems to now be some light at the end of the tunnel with countries and businesses beginning to reopen in an effort to breathe life back into both global and local economies.
There is no doubt that there have been, and will be, winners and losers because of coronavirus. Certain sectors have benefitted from the new ways to everyday life (particularly those in the healthcare, IT and media sectors), but there is no question that many businesses have suffered, especially those not able to quickly adapt.
Unfortunately, this means a lot of businesses will collapse in the wake of COVID-19 (in addition to those that already have). However, we are also likely see an increase in both consolidation and distressed M&A as companies less affected seek to take advantage of others looking for a quick exit. On the other hand, well-run businesses in resilient markets will be in a stronger position to negotiate higher valuations.
Empirical data shows that the winners in the aftermath of the 2008 financial crisis were those that acquired “quality assets”. Similarly, economic downturns such as the one we find ourselves now in will present a raft of opportunities for those that can identify and capitalise on the right ones. For example, it has been said that corporates and financial investors will likely prioritise technology investments in response to accelerated digitisation brought about by COVID-19.
While the future is ultimately dependent on whether there are more waves of the virus, and how well-equipped economies and businesses are to react, many commentators are predicting M&A activity to pick up again in the latter half of 2020 and next year. However, there will be other factors to consider too such as Brexit and the impending election in the USA.
How M&A may be affected going forwards
Deal structure and valuation
With greater impetus being placed companies to manage liquidity in the face of uncertainty, it is likely that we will see an increase the proportion of share consideration/earn-outs versus upfront cash. Earn-outs are likely to increase as popularity, as they will provide a means to sellers to achieve an element of cash up-front, but to realise more value in the future when market conditions stabilise, while giving buyers protection in the event things do not improve.
Purchase price adjustment mechanisms
Until recently, locked-box accounts have been the preferred choice of purchase price adjustment mechanism. However, it is likely that we will see an increased use of completion accounts as buyers seek to deduce targets’ new “normal” levels of working capital.
Due diligence
First and foremost, buyers will want to understand how targets will have been affected by COVID-19. Not only does this mean understanding the impact on the financial condition of the target in question, but buyers will also have an increased focus on the areas of the business that have been affected by the virus. People and HR (furloughing and redundancies), finance (government support packages), and IT (increased levels of home working) will be scrutinised.
Additionally, assembling data room documents and arranging site visits and meetings with management will, and have already, become more challenging following COVID-19. There is a good chance this could mean due diligence processes could take longer than one would expect previously. On the other hand, if there is an increase in distressed deals, one would expect processes to get wrapped up quicker.
Warranties & Indemnities
Buyers will consider whether there needs to be any COVID-19 specific warranties to ensure they are protected against any risks resulting from the virus. From the seller’s perspective, they will want to ensure they warrant all possible consequences of the virus and obtain W&I insurance as necessary for cover. They will need to be mindful, however, that certain insurers are attempting to exclude COVID-19 from their policies to mitigate risk.
Corporate Finance post-virus
As we move forward post-virus, the world of corporate finance ‘deal doing’ is likely to be very different. The priorities and requirements of some business owners will have changed and the traditional “hands on” advisory service model may not suit all. Here at Bluebox, we have recently launched “Bluebox Velocity” to help bridge this gap.
Bluebox Velocity provides business owners looking to sell their business, raise funds, or buy a business, with menu-based corporate finance products and packages. There are no tie-ins, exclusivity clauses or monthly fee commitments, giving customers flexibility to navigate their M&A processes on their own terms. Of course, some business owners will want, need, or prefer the traditional corporate finance approach, in which case Bluebox is here to help as always!
To find out more about Bluebox Velocity, please visit www.blueboxvelocity.com
Entrepreneur interview – Hugo Tewson
- You are currently Chairman of numerous businesses and Co-Founder of the Chronic Foundation. Where did you start your career, and how did you grow your experience so broadly?
My career started in the reception of Saatchi’s. I spent a long time thinking about what I wanted to do having been in economic intelligence, and I decided I wanted to work for Saatchi. So, I sat down in reception, stayed there for three days until someone asked me what I wanted, and I asked for a job.
I had an interview with a chap that told me to leave even after I had offered to work for him for free for two weeks! Just as I was leaving his office, he got a call to say that he had won a huge contract. Following that call, he decided he would need some help for two weeks. So that is how I started - right place, right time.
- What was the inspiration behind your co-founding The Chronic Foundation?
We started the Chronic Foundation in 2004. I was having dinner with a business partner whom I had set up two previous businesses with and he saw me surreptitiously injecting myself and started laughing. I asked him what was so funny, and he said that “all this time we have known each other and worked together so closely, I had no idea that you were diabetic. I am too!”.
Following that conversation, we started to focus on diabetes and how people were in denial about it. We wanted to raise awareness. We ended up advising firms big and small who were in that space or who wanted to enter the space around tech support of behavioral change and helping worthy innovations.
- What type of Boards do you Chair and how do you add value?
I only chair boards of small, fast-growth companies or companies with potential for growth. They are all under 70 people and the smallest firm I have worked with was just two people.
How I add value? Firstly, I have a very broad network. This was strengthened when I became a Sloan Fellow of London Business School and I have also consciously built strong relationships with exceptional people who help small businesses.
The second way I help is by bringing the right teams together, both at a board level where it is really important to have chemistry and respect, but also helping management teams find the right people who are prepared for the long haul that an early stage business can often present.
Thirdly, I like to think I can be very valuable in strategy and negotiations. I have worn many different hats in my life; I have been an entrepreneur, I have co-founded businesses with a number of people, I have been a consultant, and I have been a coach. As a chair, I think I add value by understanding when to change my hat. When you are a chair in big companies there may be less flexibility, but in small companies, I believe it is appropriate to sometimes roll your sleeves up and get stuck in if there is a critical task, get involved with management at a closer level, or to coach business leaders.
- With exception to the coronavirus pandemic, what has been one of the most challenging things you have had to contend with during your varied career?
Without doubt the most challenging thing is seeing wonderful small companies, often with excellent ideas and an excellent team, die, or begin to die. That could be a result of coronavirus, bad debt or having insufficient funds or significant people gaps. It usually comes down to two things: “cash or talent” (to quote UK “Strategy man” Deri Llewelyn Davies). I found this particularly challenging in a health business I worked with recently, which improves the lives of children, and is having a tough time. It would be very upsetting if I thought we could not re-treat children who had experienced a life-changing therapy and if we could not scale this to reach many more children who could all benefit hugely from the innovation.
- How have the businesses you are involved with coped during the coronavirus pandemic, and what contingency plans have they put in place to ensure survival through this unsettling time?
Survival for me is about a couple of things. It about not being in denial about what is happening and meeting the reality head on as quickly as possible. A great mentor of mine once said, “Hugo, if you see a crisis coming bring it on early, don’t pretend it is not happening”.
I think it is also about adapting quickly. That might mean radically changing your cost structure but equally, it may be about seeing new opportunities, in new people, in new products, in new markets or in M&A activity. It is not just about cutting costs. You need to adapt to the times.
- You are involved with numerous Healthcare businesses. Have these businesses seen an increase or decrease in customers / patients during the pandemic?
Largely, I think the pandemic has presented a significant opportunity, especially for digital health businesses, and this is since doctors are seeing less people face to face. As they have always done this historically, it provides a great opportunity for many of the digital innovations that have been held back by conservated doctors’ old habits. We are learning more and more that doctors do not have to see patients, and that patients can become far more responsible for their own health. I was recently talking to a previous lead of health at PwC, who was saying the same thing. I have a lot of doctors in my family and although they are extremely bright, they can also be some of the most conservative people when it comes to changing habits. This crisis has brought it on and forced change.
In Chinese, the word crisis combines two words; ”Catastrophe” and “Opportunity”. I think this is very true for healthcare. Whist it has been critical and dreadful at the same time, it has been an enormous opportunity for positive change.
- Throughout your career, have you had much experience with selling businesses or raising funds for businesses?
Yes, I have. These have all been small, fast-growth businesses and it has been a fascinating journey. You never stop learning.
- How do you think the world of corporate finance might change in the future?
I think corporate finance can really help to bring about “joined up thinking”. Helping small companies better understand their business model, future customers, future investors, and possibly future acquirers can potentially accelerate a company radically. I say that with some caveats. Aligning a business more closely to its exit strategy is often about knowing the end game, having a clear picture of that end game, and then working backwards. I did a fantastic interview once with a champion salesman who outsold everyone in his sector and who later became CEO. He said exactly that.
- You have recently used Bluebox Velocity, what was your experience like?
Extremely positive. I have not only used Velocity once, but I have used it a second and a third time too! This is a service I have looked for, for some time, because I think larger corporate players are increasingly looking to do more corporate investments involving earlier stage businesses. I know a fair bit about this as I have worked with some large, mainly American, companies on long term programmes to look for smaller companies where they see much more value than the original entrepreneurs might have. In healthcare, this can be very important as it can mean getting a vaccine or a diagnostic out to the market quicker, and to more people to save more lives.
I think Bluebox Velocity addresses a gap in the market, especially at this unsettling time. People might want to raise funds or sell quickly, and they perhaps don’t want to pay the traditional upfront fees they were paying previously. I think the pricing is right and it has proved a phenomenal service and worked very well for me. I am very confident it will work very well for other customers.
- Post-pandemic, how do you think the world of business and “the way we used to do things” may change?
Far more people are going to be working from home on Zoom, etc. and I think it will change the structure of homes, and indeed, families and relationships. A short example of this is that I advise one company that had annual rent and services of £340,000. They are going to reinvest these savings back into the business. While they will provide an office with seven well-spaced hot desks and two conference rooms, they are going to invest the difference in their employees. A worker who might live in a one-bedroom apartment will be gifted the finance to rent a two-bedroom apartment so they can call it a home office. They have also investigated adding a home office into families’ gardens. It is about being imaginative and changing the way we work but possibly for the better.
I do think it is still important for teams to meet on a weekly or monthly basis and when we do meet, it is important not to lose the social connection, and not just meet about business – whether that is face-to-face or virtual.
- Quick fire
What was your go-to lockdown pastime? Discovering cycling and cycling to my country office four miles from my home.
When travel restarts properly, where is the first place you’d like to visit? Where I am now, my house in the Black mountains, Wales.
Three things you would take to a dessert island. A knife, the works of Shakespeare and a cappuccino machine.
Life motto. My Grandfather’s poem. “Help us to be masters of ourselves that we can be the servants of others”.
Dealing with your bank during this recession - Stephen Cockell
Dealing with your bank during this recession
Over the last few months we have worked with companies across many sectors to successfully secure emergency funding from banks. It has not been plain sailing. When the schemes were announced, the banks were not prepared, and needed to mobilise their front-line teams to immediately switch to handling the mountain of applications that quickly came their way. Added to the scale of this exercise was the urgent need to devise a credit policy that could be easily understood by staff that ensured some degree of consistency.
The simplicity of lending policies dissuaded bankers from using their discretion, and in many cases the workload ended up on the desks of the least experienced. As if that was not enough, the history of these Government-guaranteed schemes had not been a happy one for a few banks who had been reluctant participants in earlier schemes. Thankfully the 100%-Government guaranteed Bounce Back Loans (BBL) gave a lifeline to businesses who needed no more than £50,000. For loans above this level we have been successful in raising the finance needed by clients, sometimes reversing a decline decision, to obtain the funding required.
We now move to the next phase of the cycle as banks come to terms with the state of their lending books, and seek to manage risk and potential losses. I am optimistic that lessons from the last recession have been learnt by banks, but sadly history tells us that it's only a matter of time before banks look to use under-performing businesses and risk pricing arguments to maximise their return and curtail facilities or put them on demand, and only available at the Banks’ discretion.
What can you do to improve your banking relationship and protect your business from more intrusive approaches by banks over the coming months?
- Managing your bank. We need to make the Bank our friend. And you need to help your Relationship Manager (RM) support your business, by setting out a proposal that will carry their recommendation. That means understanding what makes for a successful proposition, and addressing this in a constructive and informative way.The banks are focused on a narrow set of criteria that necessitates customers demonstrating that they have the ability to repay the loan over time, with a margin of safety.
- Finding your sponsor. With the weakening of authority of the traditional bank manager, and more latterly the RM, the ability to achieve support outside of credit policy is challenging.
You need a senior individual inside the Bank who will champion your cause in difficult times, and that means understanding the hierarchy within the bank and building a relationship at an influential level. Using these escalation tactics will prove hugely useful when you hit a bump in the road.
- Step up communication. Don’t assume that the Bank knows how your business operates. Every interaction with the Bank is an opportunity for you to educate the Bank about the business, pointing up the reasons why it is sustainable. Do not shy away from the risks, but explain how they are managed.
Regularity of information builds trust, and a set of results and forecasts that indicate steady progress will count more than a spectacular upturn every so often. A good mantra is ‘no surprises’ that will prove reliability and help the RM to position your business favorably.
- Secure terms now. You will have heard “hope for the best, but prepare for the worst.” Review your banking facilities and prepare for a longer economic downturn than you expect with market conditions worsening, and then ask yourself – do I have sufficient finance to cope?
Your aim is to have sufficient funding with a good degree of headroom and the right length of committed facilities that give you peace of mind. Terms will likely contain test levels of financial strength, and you should negotiate to maximise the flexibility so that you can run your business in the most effective way.
- Look for alternatives (just in case). The time to start an active dialogue with other lenders is now. Over recent years there has been substantial increase in the number of new banks and new capital entering the UK market entirely focused on lending to businesses.
These new lenders are willing to lend, and provide you with an alternative to give your business the best chance of getting the finance you need. Use an experienced advisor to get you in front of the most appropriate lenders.
Summary checklist:
- The value of a long-term relationship with a Bank has sadly diminished over recent years.
- Helping the banks to support your business demands a focused approach, and more proactive behaviour.
- Timely and regular information is crucial - last minute requests tend to get the wrong answer.
- Demonstrate that the risk has not materially changed, to ensure continuation of lending facilities on the same price and terms.
- Maximise the funding and flexibility available to your business, and where possible extend the facility commitment.
- Use experienced banking manpower on your side of the desk to get the best results.
About Obica Consulting - raising finance to grow your business
Obica Consulting was founded by Steve Cockell in 2017. During his long banking career he helped businesses of differing size and many sectors across the UK at all stages of the economic cycle. He is now primarily focused on helping businesses grow and invest for the future.
The banking market has changed rapidly over recent years. Steve’s intimate knowledge of this area – and the players within it – mean that he can quickly identify funding options for you, target suitable providers and help negotiate terms.
Operating with FCA authorisation ensuring the highest standards, he often works alongside ex-colleagues, so that his debt advisory practice brings the right resources to the table. This means that you have first hand lending knowledge and senior banking manpower at your disposal to maximise the opportunity to secure the best result.
Negotiating new debt facilities, refinancing, bolt-on acquisitions, facility extensions, and covenant resets are a core skill. Successful fund raising means more than maximising debt quantum or minimising margins. It is about sourcing the right debt product from the right provider at the right price with the right terms.Steve has total integrity, bags of direct experience and a huge number of contacts at banks, enabling him to provide informed guidance and access the funding you need. His personal access to senior individuals at every SME lender gives you a hotline to decision makers.
E: steve@obicaconsulting.co.uk
T: 020 8605 3701
COVID-19 Funding Support - how to access Government Funding
Helping you access Government Funding
COVID-19 is creating significant liquidity and operational issues and we want to help you tackle them. Even the strongest of businesses are finding the operational and financial challenges created by COVID-19 too much to bear. Many need help, and quickly. Our short-term focus at Bluebox turns to assisting those in need at this difficult time with practical advice for business owners as to how they best move forward. Whether it be accessing recently announced government funding, dealing with your bank or even restructuring. These will be difficult decisions, at difficult times, but we are here to help.
It MAY be a huge challenge, but with the Chancellor recently announcing £330bn of financial support for business, we are confident that there will be sufficient support for those owners with a sound underlying business. With all the support being provided by the Government, we have created a very easy to use 90-second ‘real-time’ questionnaire that flags exactly what support you should be eligible for and how to access it in the coming days and weeks.
Based on responses, our software provides you with immediate and clear advice as to how to access the ‘Coronavirus Business Interruption Loan Scheme (CBILS)’ as well as other support offered by the UK Government. Access the questionnaire here or simply visit www.covidfundingaccess.com.