Don Glossop, who founded advisory firm Andon Frères, reports on how sellers are adjusting to painful new realities – to the benefit of buyers – and why he’s optimistic about the sector’s prospects for the rest of 2009, despite the wider economic gloom.
Adam Bannister: What were the striking features of the marketplace in 2008?
Don Glossop: Well, it’s been an uncertain market. Following the Chancellor’s announcement in late 2007 regarding changes to capital gains tax, there was a surge in companies coming onto the market as people tried to get deals done before 5 April.
I expected a fairly quiet second quarter, which it was, and the market generally takes a summer holiday anyway.
In recent months there has been activity, and I haven’t seen any major downturn yet, although it's a cautious market at the moment.
There will always be a market for someone wanting to buy profitable companies
I’d say that people are thinking about things for longer before deciding to sell or buy a business.
We were around during the last economic downturn and property slump, and I felt it didn’t impact overly on sales and acquisitions in the SME marketplace. There will always be a market for someone wanting to buy profitable companies.
AB: And do you see the market entering a new phase in 2009?
DG: I think it will be uncertain still, but there will be activity and deals to be done.
Perhaps the more marginal deals will struggle – for example companies in difficulties, those bought out of receivership or where transactions are highly geared, requiring heavy borrowings – but that is probably no bad thing.
AB: What makes you say that?
DG: Sometimes vendors’ valuations are too bullish and not achievable, so hopefully we’ll enter a more realistic period of valuations.
I don’t think that means value calculations are going to change; the same principles will always apply in that return on investment is what counts.
But the anticipated difficulty in raising funds will hopefully see vendors being more realistic in their expectations.
AB: If sellers are lowering their expectations, does it make it a good time to buy a business?
DG: Yes, although I’ve always felt that this marketplace provides a great opportunity for companies to achieve rapid growth through acquisitions rather than organic growth. I'm a great a believer in buy-and-build strategies.
AB: Will earn-outs become more common to help credit-starved buyers meet the price?
DG: We’ve always seen an element of deferred consideration or earn-outs in transactions and I would expect this to continue.
For example, a company may be on the market for, say, £3mn, and the reality is that, on the strength of an information pack, one or two meetings with the vendor and a review of some accounts, the purchaser has to decide in principle whether to commit to spending £3m on a business – that’s a big risk.
Due diligence can only ever be limited, so the buyer will want to mitigate his risk by having an earn-out linked to future performance.
AB: What are the most important factors in closing deals?
DG: Vendor valuation expectations and managing those expectations. Sellers must come to terms with return on investment being the key factor in determining value.
Also, the buyer and the seller must be flexible, keeping discussions going and compromising to get a mutually acceptable deal.
