Realising value in the current merger and acquisition market

Business valuations are often described as ‘part art, part science’ or even ‘a dark art’.

In the realm of mergers and acquisitions (M&A), valuation is the linchpin, determining what shareholders stand to gain and what acquirers are willing to pay. It’s a critical element that hinges on a nuanced interplay of technical business valuation, market dynamics, and considerable judgment.

Understanding the derivation of ‘value’

Whilst it is important to recognise that relative negotiation positions come into play in determining price paid, well versed advisors can assist in maximising value by understanding value drivers and the technical aspects of business valuation. Based on my recent experiences, eight areas that I see as key in understanding the derivation, and preservation, of valuations in M&A in 2023 are as follows:

1. Recognition that M&A markets evolve: M&A markets, like any other, are dynamic, influenced by macroeconomics, politics, tax legislation, and industry-specific factors. Understanding the buyer’s perspective is crucial, as different buyers evaluate the same business differently based on their strategic goals and ability to derive synergies.
2. Buyer profiles matter: Financial vs. strategic purchasers, especially trade buyers, exemplify the varying perspectives. Strategic buyers often offer more, leveraging synergies like cross-selling, increased buying power, and cost savings. Identifying synergistic purchasers is key in a trade sale, where the buyer has a compelling reason to pay more.
3. The impact of market dynamics and funding risks: Cash-rich corporate acquirers, private equity, and family offices remain active, but funding transaction risk looms large. Identifying motivated buyers with available cash is essential. Market dynamics, competitiveness, and urgency play crucial roles, with external factors like changing tax rates or impending elections influencing deal timelines.
4. Understanding enterprise value & equity value: Offers are typically presented on a ‘debt-free, cash-free’ basis, determining the enterprise value. However, this value doesn’t consider cash and debt on the balance sheet, necessitating a closer look at equity value, which reflects what shareholders receive pre-tax. Documentation of an understanding of transaction structure at an early stage can significantly minimise misunderstanding later in the process.
5. Transaction structures can bridge a value gap: Transaction structures, whether upfront cash, deferred payments, or earnouts, significantly impact shareholder value. While upfront cash is often preferred, earnouts can add value when aligned with the buyer’s expectations and commitment to future growth.
6. Recent market trends need to be nuanced: The recent M&A market has seen an overall slowdown due to the macroeconomic challenges the UK is facing. However, this is much less evident in the SME & owner-managed business scale. There is significant diversity with premium businesses in certain sectors continue to command strong valuations and other sectors (particularly consumer) struggling. Valuation gaps between buyers and sellers persist, necessitating careful positioning, negotiation and bridging.
7. Navigating buyer caution and due diligence is key to preserving value as deals progress: Buyer caution prevails amidst uncertainties about the future outlook. Due diligence processes are prolonged and rigorous, impacting deal structures and valuations. Understanding potential value detractors, preparing for matters such as cyber risks, and emphasising ESG credentials are now integral to successful deals.
8. Plan strategically and understand your options: Preparation is vital, addressing potential deal breakers and enhancing value drivers before entering the market. Recognising value realisation options, such as trade buyer sales, financials buyer transactions (PE/family offices), management buyouts, employee ownership trusts, allows for tailoring strategies to meet specific shareholder objectives.

Overall assessment

The complex landscape of M&A valuation demands a nuanced approach with an increasing importance on transaction strategy to achieve successful outcomes. Taking advice to develop a plan, being well prepared and running a competitive transaction process are key ingredients to maximising value for shareholders.

PKF Francis Clark

I am one of a team of 35 who specialise in Corporate Finance within PKF Francis Clark.  Our experience and exposure to a constant stream of transactional activity leaves us well placed to understand the current market for M&A and to advise clients on all aspects of transactions, including valuations.

For more information on valuations, you can take a look at our recent Deep Dive webinar recording here: https://youtu.be/4faVw6zHyeg

You can also get in contact with me directly – my profile and contact details are below.