A disrupted market creates opportunity from mergers and acquisitions

Jonathan Grant, Head of DMH Stallard’s Corporate Department looks at what 2022 might bring for the M&A market in the South East

MERGER & ACQUISITION TRENDS 2022 A disrupted market creates opportunity for Mergers & Acquisitions

THE DISRUPTION OF 2021 LED TO AN ACTIVE DEALS MARKET

2021 produced a strong South East M&A market, with successful, high performing businesses targeted by large trade buyers, private equity (PE) investors and private equity-funded groups, all looking to grow through acquisition. Buyers have pushed for quick deals, and prices have been high; this has in turn put pressure on sellers to be well prepared. The greatest activity has been in the £10m to £50m space and successful deals have been run by well organised/experienced deal teams able to manage the disrupted business environment.

In 2021 professional services (financial advisory/insurance broking), digital services (communications and marketing), technology and SAAS, pharmaceutical/health sector, and builders merchants/construction related businesses have seen high deal volumes.

❛❛ Logistics and infrastructure are sectors well set for M&A and investment ❜❜

2022 WILL BRING MORE OPPORTUNITY

As we move into 2022, there is still consolidation in financial services, although now at the sub-£10m level and for insurance broking. Professional services in the form of accountancy and legal are continuing to see new entrants and pressure for consolidation.

Looking forward, I expect digital and online marketing/SEO to be in high demand reflecting the BD “pivot” required by many businesses. Less expected, is increasing interest for quality retail and leisure businesses. Whilst traditional retailing was hard hit in 2021, many online retail businesses surfed a wave of surging demand through lockdown. A market with this level of disruption creates opportunity for trade and PE buyers to build new businesses, as the market adjusts to a “new normal”. Expect businesses with quality brands to be in demand.

Logistics and infrastructure are sectors well set for M&A and investment. Moving goods around the world continues to see demand exceeding supply. Acquisition offers an opportunity to improve margin for large manufacturers and luxury goods companies. Securing a reliable route to market will remain important in protecting reputation. Meanwhile, large Government infrastructure projects, such as HS2, offer businesses who have secured tender contracts significant growth and opportunity.

BUSINESSES ABLE TO SUCCESSFULLY NAVIGATE THESE CHALLENGING MARKETS, WILL BE IN HIGH DEMAND

The New Year also brings with it some signifi cant threats to business, which has the potential to disrupt, or to stimulate deal activity. Any business putting itself on the market needs to deliver to a growth plan, or face pressure on price. Logistics challenges combined with labour shortages and rising labour costs will all add pressure. Just as these macro economic factors can be a threat to business, they can also produce pressure for merger and consolidation as businesses seek to protect themselves from a challenging market. Those who successfully navigate the challenges are likely to be in high demand.

WILL THERE BE AN INCREASE IN DISTRESSED DEALS?

Perhaps one surprise of the last 20 months, is how few restructuring/ distressed deals the mid market has seen. As Government Covid loans end and tax suspension winds down there will be an increase in distressed deals. Commercial banking has been relatively quiet over the last 20 months, due to the pressure of servicing Government support loans, but this is returning to a more normal pattern now. Some business will be successful in securing growth fi nance but others may fi nd they run out of time or capacity in the commercial lending market.

WILL INFLATION PLAY A ROLE?

Some of the infl ationary pressures faced by businesses has been extreme, with the cost of shipping goods rising by up to 40% and salary infl ation for “hot” sectors reaching similar levels. Some of these costs will inevitably be passed onto UK manufacturers needing raw materials and to consumers buying imported goods. Whilst the Bank of England seems reluctant to increase interest rates rapidly, this seems inevitable, as a response to growing infl ationary pressure. Highly leveraged businesses will face increasing costs and pressure.

DMH Stallard’s Corporate Team are “Very professional, City-standard expertise but much more responsive and accessible. Feels like a real partnership. Knowledge and experience are excellent and are a given.” Client quote, Chambers 2022

If you are considering preparing your business for sale or are actively looking to diversify, contact enquiries@dmhstallard.com www.dmhstallard.com

The process of selling your business

THE PROCESS OF SELLLING YOUR BUSINESS

STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5 STAGE 6 STAGE 7

Right time to sell

• Revenue rising • Profit rising • Good leadership team • Continuing growth prospects Find the best deal

• Use broker? • Use trade contacts? Interested parties set up Offer Letter/ Letter of Intent Diligence/ Data Room is set up Key documents produced to include:

• Sale/Purchase

Agreement • Tax Covenant • Disclosure Letter • Employment

Contracts Completion process

• Minutes and resolutions • Undertakings • Money movement Understanding the risks

• Renegotiation? • Price chip • Loss of confidence • Business performance • Key people leave