Corporate Finance – an interesting time to be contemplating a transaction

13 November 2020 - Elizabeth Nichols

Corporate Finance is always seen as the slightly mysterious side of financial services. All the work we do is given a project name (such as Project Beach, Project Blue, Project Mercury), and much to the consternation of our colleagues, we spend hours in hushed conversations on the phone. Helping our clients to buy and sell their businesses may be a secretive process, but frankly, if Corporate Finance means being a bit enigmatic from time to time, then there’s never been a better or more interesting time to cultivate an enigmatic personality. 

The early months of the first lockdown were quiet in Corporate Finance, but since the summer and now well into autumn, we are experiencing a large volume of instructions to buy and sell businesses. Whilst it might be fair to say that some of these are instructions that started in the spring but which ground to a halt due to the pandemic,  a greater proportion of them are new instructions where we are acting for the buyer or the seller. 
Why are we seeing so many instructions? 

  • The lockdown has focused the thoughts of everyone – including business owners. Many have contacted us with a lightbulb moment idea, others have said lockdown has brought things into focus in a wider sense, and they have had time out to consider what they really want. 
  • Interest rates are now at a record low. It’s never been cheaper to borrow funds and equally it’s never been less rewarding to hold funds on deposit. Both of these factors mean that those looking to acquire assets are prepared to perhaps take risks that  would have previously made them feel uncomfortable, in order to generate a return on cash held – or by taking advantage of low interest rates to borrow. 
  • There has been a widespread impression of COVID bargains. This is not a view I would subscribe to now, although it may possibly have been the case in April and May, but there is certainly a perception that now is a good time to buy because multiples (the mechanism by which many businesses are valued) are in some sectors lower than they have been for some time – hence the term ‘COVID bargain’. 

What makes it an interesting time to be contemplating a transaction? 
What makes transactions particularly interesting - and yes for interesting you can read challenging   is the uncertainty. You will know that businesses like certainty – even if that certainty means that they must face difficult decisions. Whilst Brexit may have introduced an element of uncertainty into business plans, then the unannounced arrival of the largest pandemic for 100 years has created a level of doubt into the process that we have never seen before. 
To illustrate this I am going to suggest a hypothetical situation regarding your favourite restaurant: a place where (before Covid struck) you may have had a wonderful meal, at the end of which you may well have said to yourself: ‘I’d pay a million for this place’. Twelve months on – the very same restaurant is now on the market for £500,000. Some will say ‘COVID Bargain’: the restaurant still has its location; the food is as good as ever and in 6 months’ time (we hope) everything will be back to normal. 

Others will say ‘no way’. With severely reduced capacity, winter weather round the corner and a possible third or fourth wave of the virus, dining out becomes so difficult for most people that the restaurant closes in 6 months. In the above (albeit simplistic) example it will be clear that presented with the same set of facts, different people would come up with different valuations if they were contemplating a transaction. 
So what’s the answer?  
In the current economic climate, there is no clear answer to the restaurant valuation example above. However what is obvious is that the degree of uncertainty we are dealing with now is far more significant than a year ago when the broad answer may well have been £1m. 

Given this situation, a positive course of action would be to talk to a corporate finance professional who could outline some of the options open to you. For example, if the restaurant is on the market for £500,000 then this would be considered to be your maximum loss – but an adviser should lay out some of the ways to reduce the risks of the transaction: 

  • Could some of the consideration be deferred – so that if the restaurant does close within 6 months your loss might be restricted to say £250,000. 
  • What’s the value of any freehold and would there be an alternative use if the restaurant closed in six months?
  • Can you share the risk? You might be able to buy a share in the restaurant, joining forces with like-minded individuals or even the head chef. Clearly sharing the risk will also mean sharing the potential upside.  
  • Diversification. Why is the business valued at £500,000 and what could be done to quickly increase this? Are there things that could be done differently now that might lead to an increase in profits and ultimately the value of the business? Many restaurants have moved very quickly to ‘click and collect’ services to keep their clientele supplied with their favourite dishes or have diversified to deliver the ingredients for occasions like picnic hampers or cocktail kits. 

So, whilst the world changes in ways nobody could have foreseen, this may be a good time to take advantage of those changes and move your business in a new direction. Come and talk to us (via a virtual world). You can meet us for an exploratory meeting at no cost and between us we just be able to come up with a solution.

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