Business leaders who wanted to exit are now reconsidering their options. We investigate what happened after the financial crisis and more recently following the COVID-19 pandemic to consider the implications for business planning and getting ready for exit.
At Price Bailey our Strategic Corporate Finance team predominantly advise on mid-market deals. While no two crises are the same, during the COVID-19 pandemic we were often asked what happened after the financial crisis in the mid-market. Now, in times of continued economic uncertainty we look back once again at periods of economic recovery and understand the lessons learnt and consider what we can take forward through ongoing inflationary pressure, high costs of borrowing, currency weakening, challenging labour markets, tax rises and looming political change.
To do this we looked at 5,270 completed majority share M&A deals, logged at Experian, from 2008/09 to 2022/23. The deals ranged in value from £1m – £25m and were all transactions where a UK company had sold 50%+ of existing shares to a trade buyer or buyout fund, albeit the buyer could be based anywhere globally.
The dip in deal numbers takes a couple of years to return
Examining deal volumes over the past decade reveals a distinct pattern that emerged in the aftermath of the 2008 economic crisis. Initially, deal volumes sharply declined and took three years to approach pre-crisis levels. Despite the gradual economic recovery, deal activity remained uncertain, particularly during the first six years.
Parallel to the post-2008 financial crisis, the pandemic’s arrival in the UK significantly impacted annual deal volumes, resulting in a substantial decrease. In the three years following 2019/20, we’ve witnessed a gradual resurgence in deal activity, albeit with understandable caution due to the prevailing political and economic instability.
Nevertheless, deal volumes only tell part of the story and can be influenced by seller decisions. For instance, in the initial months after March 2020, we observed several business owners postponing their exit plans or considering alternative ownership succession strategies, such as employee ownership. This behavioural trend among business owners has continued into 2023/24. Therefore, it’s possible that what we’re observing is a prolonged delay in exits and shifts towards alternative exit methods, rather than a straightforward reduction.
Another aspect and one that has lasting implications for the business owners and shareholders is that of value. From the ~5,270 deals that we analysed we noted that, in contrast to valuations following the financial crisis, in the immediate aftermath of the COVID-19 pandemic, valuation multiples increased by between 3% and 83% depending on if the business was valued on a basis of profits (EBITDA) or revenue, and if there was an underlying strategic premium that put the business in the most valuable 50% of businesses. However, when combined with reduced deal numbers in 2020/21, the higher valuations may be more representative of the unique conditions of a global pandemic that identified significant growth opportunities for certain businesses and sectors within the UK.
On the contrary, the subsequent negative swing of 12% to 20% observed in FY 2022/23 arguably provides a more reasonable basis for valuations in a post-COVID era. This period marked the first full year without lockdown conditions and trade restrictions. Nevertheless, these valuations remain influenced by ongoing uncertainties stemming from political shifts, rising living costs, and global supply chain challenges. These disparities could potentially reach levels as significant as 30% to 36%.
Based on the deals we are both advising on and seeing complete elsewhere in the market, the median EBITDA multiple (5.5x) will almost certainly increase in the coming 12 months. However, within the statistics, this may get supressed by the rush to sell par and below par performing businesses in the lead up to the next general election.
In valuation multiple terms, one of our Strategic Corporate Finance Partners Chand Chudasama commented that “for the average business in the UK over the last 10 years, the best time to sell was normally yesterday.” This is indicative of valuation multiples sliding, deal sizes remaining stable or in low decline and therefore businesses need to work harder, to be more profitable, in more challenging economic times in order to preserve value that otherwise would have been priced in after the valuation recovery post financial crisis. Chand also commented “For businesses that have strategic features and capabilities above the median in their sector the opportunity to break through the unappealing value environment is very real and, ironically, is easier to access now as good businesses now clearly look stronger against the rest of the pack – the data and our experience both show lots of opportunity to access premium value, but the standards are rising. Many business owners who are catching up ultimately prefer to hold and hope, or look at alternative deal structures such as MBO or EOT, rather than chase the rising standards which, in many circumstances, is a sensible choice.”
Average deal size (£m)
Interestingly, the average deal size during the period following the financial crisis continued to show growth. This, coupled with diminished multiples, suggests that even with an increase in distressed purchases, the overall size of deals expanded. In the initial wake of the COVID-19 pandemic the same pattern emerged, as average deal sizes increased and average multiples fell in 2020/21. What we have seen since, however, is falling deal sizes and falling multiples – multiples have declined by between 7%-10% since 2020/21 (depending on whether you are looking at average or median multiples each year) compared to between 3%-4% since the onset of the financial crisis. Pre-pandemic, businesses had an even chance of achieving valuation multiples of at least 9x, and the top 25% of businesses were attaining multiples of 18x or higher. However, the post-pandemic landscape witnesses altered expectations. Between the periods 2019-20 and 2022-23, the 9x multiple benchmark has contracted to 8x, and the top 25% of businesses are now achieving multiples closer to 16x and above. Taken as a whole, all things being equal, since the beginning of the 2008 financial crisis the best time to sell your business has always been yesterday.
So, is now the right time to sell my business?
One of the key points for consideration when it comes to the right time to sell your business is the question of sentiment. As a result of any economic uncertainty, there is a loss of confidence suffered in the market. Confidence will vary by sector and may be regained in some parts of the market quicker than others; however, sentiment is something that is far outside anyone’s control, and as we demonstrated earlier in the article, it can take time to return. In the current market, as we have identified above, the data suggests that the best time to sell your business was yesterday, but do you feel like it is? Answering that question is a lot harder and far more personal to each situation – many business owners naturally worry about how buyers behave in these situations and whether they can still get what they want for their business in these conditions. However, when it comes to acting on sentiment, there is a lot of hope value mixed in and many business owners prefer to wait in the hope that conditions improve.
Trends are not everything and the problem with stepping back and looking at aggregated data over a number of periods is oversimplification at a time when few decisions seem simple. Amidst these complex market dynamics, an intriguing perspective arises for business owners: are you perhaps more inclined to be a buyer or an investor rather than a seller in the current climate? As valuations experience downward pressure, a distinct avenue of opportunity unveils itself for those who have the foresight to see beyond the immediate turbulence. As prices continue to experience downward pressure, the prospect of organic growth versus acquisition gains prominence. Is there greater potential for your business in weathering the storm and nurturing organic expansion, capitalising on the chance to position your business more favourably down the line? Or does the current market volatility create an opportunity for shrewd acquisitions that can fortify your business’ portfolio? While the data might advocate for selling sooner than later, this juncture prompts contemplation of a broader spectrum of possibilities that ultimately contribute to your business’ valuation journey.
Strategic capability has also never been more important – the ability to position yourself in such a way that highlights a desirable value driver for an acquirer remains the most certain way to attract a premium valuation. This can achieved through many routes but must be ‘real’ (i.e. not hope value) and measurable. Recent examples where we have seen businesses access premium valuations through strategic features of their business include via: revenue growth rates with reassuringly low marketing expenditure, superior gross margins, superior cash conversion, exclusive access to markets, products or supply that others wish to access, the ability to pass on price rises without negatively impacting demand and increasing productivity numbers. These are just a few examples of outcomes from clever business models that lead to value growth.
However, if now is the right time for you, your business and its stakeholders to sell, then positioning yourself to achieve the best possible price is critical in these conditions. Below, we consider the current market conditions and summarise our top 5 strategies for improving valuation.
How can I improve my valuation in current times of uncertainty?
- Use debt to invest in profits growth, not in maintenance or survival – If buyers are funding the deal with debt, they will care that growth potential outweighs debt serviceability and this adds real value and supports premium multiples.
- Have a very good second tier management team who are remaining in the business after sale – This will support business continuity and reduce the risk of a valuer depressing the valuation due to concentration risk factors surrounding the outgoing owner or management team.
- Ensure that the business is positioned to sell to fundamentally attractive, reliable, customers, and re-position if it is not. – Buyers in every industry like buying into customer bases that are resilient, predictable and lucrative and this influences the multiple paid.
- Build real growth capabilities around a desirable strategy and business model. Don’t rely on the apathy of past traditions – If the business is not actively managing these factors then it is harder to argue a premium to an average multiple. Beating the ‘all ships rise with the tide’ analogy is critical to being valued above average.
- Make decisions using, accurate, real time information regarding the market, revenue opportunities, costs, production, supply chain and accounting – Evidencing value early in negotiations is critical to creating a competitive scenario from bidders, helps due diligence (which is now far more stringent than in prior years and is leading to late price chips on deals), and shows a level of corporate governance and decision making that gives a buyer confidence that they should pay a premium.
If you would like to learn more about how valuations are changing, join our webinar series where, each quarter we will provide an update on valuation multiples and share stories of recent M&A negotiation and valuation experience.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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