The good news is that for the first half of 2019 the market remains strong and deal values are rising. The same positive indicators we saw throughout 2018 are still in evidence: high levels of private equity money looking for investment, and larger companies with money to invest looking to buy and grow. Both investor groups see organic growth as challenging. Private high net worth money continues to look at investment opportunities, given lower stock market growth and less confidence in the property market.
Balancing the equation, there are some negatives including a general feeling that a market correction or slow down is over due and, of course, the yet to be resolved Brexit question. The impact of these twin pressures is that deals have continued and values are rising, but a renewed focus on diligence in the last six months has extended some deal timetables. For some deals this is putting pressure on up-front cash, moving into earn out or deferred payment; for others financing pressure is impacting. There is a reluctance to admit that the Brexit question is causing any of these issues, which is interesting in itself.
Companies looking to come to market need to be well prepared and with strong advisory teams; of course you’d expect me to say that, but it really is the only effective way to deal with extended diligence processes and handling price negotiations after heads of terms have been signed. Assessing risk and making a judgement about whether a deal remains viable is best done with finance and legal advice operating closely together.
We have also seen more deals with vendor diligence prepared in advance. This creates an auction process, where you provide full information up front with a view to creating competition between buyers, and leading to faster deal completion once a price has been agreed; it’s one way to defeat the extended diligence risk/price renegotiation, but it does mean higher up-front costs for sellers.
MBOs continue to receive debt finance support at the sub £5m deal level, where the business relationship with the Bank is strong; partial or two stage exits remain popular as owners seek to de-risk and transition ownership.
The other trend fast gathering pace is warranty and indemnity insurance for deals over £10m. This product has been available for years but until recently has been used more in larger deals; essentially for a premium of 1-3% of cover, you can insure the risk of warranty claims and claims under the tax covenant.
Of course you have to decide on the level of cover and link to the sale agreement, but it is now far more accessible and attractive, particularly where family trusts or family holding companies are being created. The insurance market has developed to the point that processes are slicker and there is more choice in the market.
Jonathan Grant leads the DMH Stallard corporate team across the South East and in London; if you’re looking for advice on any corporate matter, contact Jonathan at jonathan.grant@dmhstallard.com, or call 03333 231580.
