Corporate finance – review of transactions 2018

Corporate finance – review of transactions 2018

In this article, I thought it would be of interest to review the type of transactions we have advised on throughout 2018, the trends viewed in the wider market and set out some of the main issues we have faced.  This is a general overview of the type of deals involved.  In future articles I will comment on some of the common tax issues raised during the year and I will deal with other issues of interest and some of the problems we encountered which should be considered by those intending to sell their business.

During the year we have advised on the sales of trading companies exclusively within the Small and Medium Enterprise categorisation under the Companies Act (“SMEs”) and there has been a mix of industry types.  Virtually all the deals have been share sales as opposed to asset sales and from tax and commercial points of view this normally suits the vendors.

Much of the activity took place in the first half of the year with a tail off in the third quarter but with indications of a pick-up in activity in the fourth quarter for deals which will complete in 2019.  It is difficult to discern any reason for the variation in activity but it may be Brexit related – as this has increased uncertainty. It is worth noting that the Stock Market was a record high in the first half of the year but quoted company valuations have since fallen and this does have a knock on effect for private company prices.

The basic valuation principles have remained the same from previous years for trading business. A company’s Enterprise Value (the value ignoring the funding of the business) based on maintainable earnings times an appropriate multiplier with a positive adjustment for surplus assets including cash and a negative adjustment reflecting the debt levels (and Corporation Tax due) gives the Equity Value which is the amount receivable by the vendors.  I will consider these principles further in a subsequent article.

This year a significant proportion of our deals (all the larger ones) have been sales to overseas buyers – often backed by venture capitalists in their home jurisdictions.  It is not clear why this is the case but it continues a trend we have seen developing over the last few years in the SME market.  This could in part be a Brexit effect but may also reflect a reduction in the appetite of UK financiers to fund this type of transaction.

None of the deals we have worked on have been complete cash out deals and all have required the vendors to defer a significant amount of the consideration either in terms of loan notes or rolling over value into equity or quasi equity securities and/or as contingent receipts based on earn outs.  Typically the amounts deferred vary between 25% and 35% of total consideration – so a large part of the value achieved on sale is effectively left on risk and its realisation is dependent on how well the new owners manage the business going forward.

In terms of the timescale to complete a transaction this has varied tremendously and is significantly influenced by how the transaction is funded.  Our experience has been that time scales tend to stretch out which means that the vendors need to retain their focus on the transaction for a considerable time and if the selling team is a small one then reliance on professional advisers for support is crucial.

In my next article, I will consider some of the common tax issues which are likely to arise on a company sale.

David EnserDavid Enser is a Corporate Finance Director of Rickard Luckin Limited

Email: david.enser@rickardluckin.co.uk
Tel: 01245 254209
Mob: 07717 366724

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