Despite the difficulties the coronavirus crisis is continuing to cause, there are real reasons to be optimistic about opportunities that will open up for businesses in 2021. In this article we explore why corporate acquisitions are set to rise again and what the current market means for businesses looking to raise funding for acquisitions as well as to finance organic growth, restructurings and shareholder buy outs.
Not surprisingly deal activity hit a wall soon after the UK entered the first lockdown but data from the ONS suggests that transactions levels are now recovering. For example, 90 UK M&A deals took place in September 2020 up from a low of 37 deals in May.
As we come into 2021 business owners and managers appear to have a renewed appetite to expand and to continue to grow. Where vendors still want to sell there should be opportunities for purchasers to acquire assets and/or businesses at reduced valuations. This window of opportunity may only be short lived as the economy will return to growth at some point and business that have invested and repositioned themselves will be able to capitalise.
Another factor driving a potential increase in M&A and MBO activity is a concern that Capital Gains Tax may be increased within the next two years. There is now an incentive for owner-managers to complete sales sooner rather than later, to avoid the risk of having to pay extra tax if the deal is completed later down the line.
However, whilst many buyers of companies or assets may see now as a good time to buy they are finding it hard to attract funding from traditional lenders. Most of the UK’s largest traditional lenders, including all of the main banks, have cut back on their non-CBILS lending in the last 12 months. The sheer scale of the CBILS and BBLS lending that banks have had to process has meant that many struggled to deal with the huge amount of administration – and potential default remediation – that came along with it.
Several banks have stopped opening business bank accounts for new customers due to fraud concerns with applications for BBLS / CBILS loans, making it harder for new customers to arrange loans from those banks. However, unlike in 2008/2009 where there were limited alternatives, there are now an array of different lenders to borrow from instead.
For businesses looking to complete deals and/or fund organic growth quickly, alternative finance is now proving to be a more popular funding source, partly due to the speed at which funding from alternative lenders can be made available compared to more traditional lenders. There is a strong appetite from alternative funders to support businesses that have a good management team, a strategy that makes sense and strong growth potential.
Alternative lenders are also viewing this as an opportunity for them to build strong links with the successful and highly profitable businesses of the future. Private debt funds, for example, still have plenty of capital that they are looking to deploy. Businesses looking to raise non-CBILS debt should still therefore find a wide range of options open to them.
However, businesses looking to borrow in the coming months need to ensure they plan ahead and are prepared to answer the key credit questions that are likely to come their way. With deal activity increasing and more borrowers turning to alternative lenders, many lenders are likely to become time and resource constrained so it is more important than ever that borrowers are fully prepared before approaching lenders. This is where having appropriate advice can be crucial in order to get the right funding in place.
Advisers can be critically important in helping to determine the most appropriate funding package for a business, both for today and for future funding requirements – establishing what parts of a funding solution are essential and what are just “nice to have”. Advisers also know how to present a business to a lender, maximising the chances of a funding agreement being reached.
Over the course of the next few months, we are going to produce a series of articles covering topics that may be of interest to businesses looking for funding in the year ahead, including:
How funders are currently viewing the market?
How to compare different funding options?
How will market trends in both commercial and residential real estate impact funding in the sector?
ACP Altenburg Advisory is part of ACP, a leading independent debt advisory association for SME and mid-market companies, advising clients on the options available to them and providing hands on support from day one all the way through to drawdown.
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