Digital transformation, readily available funding and the global pandemic have led to unprecedented mergers and acquisitions (M&A) activity in recent years and in the UK, two thirds of chief executives say they will be looking to consolidate in some way.
However, M&As are not without risk. For this episode Philip Mettam, director at Meridian Corporate Finance, talks us through some of the common risks, how they can be mitigated and introduces the 3 Ds of divorce, disease and death!
If you would prefer to read rather than listen to this episode, you can find the transcript below.
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TRANSCRIPT
Johnny Thomson 00:02
Activity and interest around mergers and acquisitions has never been greater, but what are the pitfalls and how can they be avoided? Hello everyone and welcome to the RiskACUMEN podcast, which offers thoughtful insight around risk management. 2021 was the biggest year ever for the global mergers and acquisitions market. And while this was undoubtedly fueled by the pandemic, things like digital transformation and readily available funding, have also been pushing the agenda. This year in the UK, two thirds of chief executives say they will be looking to consolidate in some way. However, none of this is without risk. And so today I'm joined by Philip Mettam, a director at Meridian Corporate Finance, who's going to talk us through what some of the risks are and how can be managed. Hi, Phil, how are you?
Phillip Mettam 00:56
Hi Johnny, really well thank you, great to be here.
Johnny Thomson 00:59
So, before we get started, give me a bit of background about what you do Phil and your involvement in mergers and acquisitions and succession planning too of course.
Phillip Mettam 01:09
Yeah, of course. So my job is kind of like being a fancy estate agent. So we're the guys that business owners come to when they're getting to the point in their lives and in their careers where they want to start thinking about how they wind down the working aspects of their work life balance, and look at putting in exactly as you said, plans around succession. And how do you get that continuity of the business? So, we typically look at it in three ways. There's obviously investment, and we do our own fair share of kind of investing and helping people structure investments. There's obviously the kind of straight sale. And then the other piece we look at it as the kind of grey area in the middle around management buyouts, bringing in additional resource and bolstering that company structure.
Johnny Thomson 01:56
So often it's what do we, what do we do with our business?
Phillip Mettam 02:01
Absolutely.
Johnny Thomson 02:03
Yeah, yeah. Now, I mentioned at the beginning of course, that there's a lot of activity around mergers and acquisitions right now and there are various things fueling this aren't there.
Phillip Mettam 02:15
Yeah, absolutely. I mean, the UK market has historically always been an attractive market for investment. You know, even post Brexit it's still viewed as the gateway to Europe. So we do see a lot of external investment, mostly again, historically, unsurprisingly from North America, but increasingly from other areas where they're looking for an English language foothold into Europe. There's also other drivers, you know, the low interest rate economy has been brilliant for investment into companies in the sense that canny investors and entrepreneurs looking to make their money sweat, investing in equity and backing businesses has been alongside property, one of the two areas that really can generate some meaningful returns. So it's been a very, very healthy environment for a number of years now.
Johnny Thomson 03:02
Yeah. And in many ways, that's continued, despite the fact that the interest rates aren't increasing compared to the inflationary rate. There's still money to be made, isn't there?
Phillip Mettam 03:13
Yeah, absolutely. I mean, you know, in a roundabout way it makes people really think about what they're doing with the cash that they may hold. You know, not doing something now has an actual penalty to it with inflation up. So, yes it's certainly not lessening off and I think there were concerns around kind of the impact post COVID and post Brexit, but to-date, we're certainly not seeing any of that translating into lower deal volumes or different pricing.
Johnny Thomson 03:40
When it when it comes to mergers and acquisitions what are the big differences between, you know, large corporations going through that process and SMEs? Or are there any real differences, are they very similar?
Phillip Mettam 03:53
At a high level, you know, the structures and processes in terms of needing to get lawyers involved, and the approach you take looking at accounts are the same. Inevitably, the difference is, when you're dealing with owner managed businesses you're dealing with owner managed issues. So you know, the succession planning, what do people want to see, what's the legacy they want to leave behind? Family wealth planning, tax planning, increasingly, all of those things come into play, which you don't see with large corporates to the same extent. There's a much greater emotional aspects and much less of a pure spreadsheets approach. And certainly, that's kind of the area where, as an individual advising them you're trying to quantify qualitative risks. You know, the kind of feelgood factor. And I think that's certainly one of the challenges we see day to day in our job is that emotional aspect of the management process.
Johnny Thomson 04:49
Yeah, because they're letting something go that's been a fundamental part of their life. It's not just a business.
Phillip Mettam 04:55
Absolutely.
Johnny Thomson 04:56
Give me a sense Phil of how well in your experience, mergers, acquisitions and any other kind of succession are planned for by small to medium sized businesses.
Phillip Mettam 05:08
I think broad brush, unfortunately, in particularly the owner-managed business space, there is an aspect of kind of the Peter Pan mentality, which is when things are going well, you know a bit like life insurance, you know people never really think about life insurance when things are going well generally. But certainly when stuff starts going downhill, you start wondering why you hadn't thought about these kinds of things earlier. Unfortunately, I would say two thirds of our clients generally coming to us, for one of the kind of three Ds of divorce, disease and death. You know, something that triggers them to have to look at, I need to do something and I can't carry on with the status quo. It's part of what we do. But it certainly adds a you know, a time pressure that ideally you wouldn't want. And I think it's, you know, it's the same as selling a house, you don't ever want to be a desperate seller. So you know, one of the things we're very, very keen to try and do is get involved with companies and get involved with business owners fairly early on. And we do a lot of work with the wealth banks, we're you know, we're panel advisor for Coutts. We spend a lot of time with people five to 10 years in advance, talking them through what they're looking for. And again, having that timeframe and having that preparation, you don't always have it, but when you do, it's a lot easier to deal with all of these qualitative issues, because you've got time to tee them up and build them into your plan, rather than just dealing with them as a, as a last minute exercise.
Johnny Thomson 06:33
And of course those things that need to be included in the plan, as always, are the risks as well. So, what do you see as the key risks in this kind of situation Phil?
Phillip Mettam 06:45
Yeah, I mean, so risk management for us, you know the most important thing for us is always around deliverability. So it's all well and good going out and getting, you know, a huge offer or a massive valuation on a company. But ultimately, if you can't then deliver that through to completion, it's no use to anyone. There are three or four really, really common issues, which you know if you ask any advisor, accountant or lawyer, they're just perennial problems that crop up on pretty much every transaction. And those are people, property and pensions. You know that they're going to be a feature of every business, but there are so many different aspects and there's so many different ways of dealing with them, they almost always have a little bit of a curveball at some point in the process. A huge amount of what we do is trying to deal with that upfront. And again, this is where the preparation piece is really, really useful. Because if you can get in there early and look at, okay, you've got property sat within company that actually is a personal property, let's extract that. You've got a pensions issue or something that we can deal with, but it's going to take a year to unwind. Or you've got some really difficult staff or staff that aren't motivated enough. You know, we can we can solve all of that, you know anything is solvable with time and money. But it's a lot easier to do outside of the pressure of a sale process and with the flexibility around doing what's right for you in the business, rather than doing what an acquirer or someone who's looking at the business wants to see at that specific moment. So it's, you know generally it's the same problems. Every business is different, obviously. But there's certainly ones that are easily addressed, if you deal with them in advance.
Johnny Thomson 08:25
Yeah, and I would imagine that those three P's, the people one connects most with the emotion that you talked about as well earlier, because you're dealing with other people's lives who are connected with a business as well, of course. y
Phillip Mettam 08:38
Yeah, absolutely. I mean, you know, it's inevitably our job is to go and get shareholders maximum value. And that's what we're incentivised to do. And, you know, that is a hugely important part of our job. But that is linked in to managing all the other stakeholders, because actually it's very hard to sell a business and get maximum value if you've got really unhappy staff. Likewise, if you've got issues around property and pensions and various other aspects, it all comes back to the deliverability of the transaction, as well as the value. So yeah, it's inevitably a really, really important part is the whole stakeholder management. And that goes, you know right through to your customers, your suppliers, your partners elsewhere in the industry, and how do you communicate it and what's going to happen afterwards. It's all part of, you know, the proper process management that you'd ideally put in place.
Johnny Thomson 09:30
And you mentioned one of life's inevitables earlier, when you use the word death. There's also the other one which is tax which will always come into this and it's a major risk because it always throws up unexpected elements, doesn't it, in terms of planning and understanding how that all flows through?
Phillip Mettam 09:54
Tax is an interesting one because you have, it's often a problem, in the sense that you know, as you're going through, people obviously want to scrutinise historic tax, looking at what you've paid and are there any issues and all those kind of things. Generally, you know most businesses tend to play things with a pretty straight bat. Where you tend to find things get a bit more complex is, you know if you've got overseas shareholders, maybe you've got some overseas trading. Inevitably you can have wrinkles there that need explaining. So we spend a lot of time doing that. But then ultimately, for the average owner manager, there's the more personal aspect around, if you're going to get some value, and you're going to have to pay tax, how is that tax structured? What do you have to do? So, we take the approach of sticking to what we're really good at and bringing in experts elsewhere. So we work with best in the market, in tax and in legal services, to make sure that the client gets the best possible advice. Again, addressing that early on is a better approach, because then we can approach the market with a preferred route, a preferred outcome, that we can then go and get the best possible offers for rather than asking enquirers to look at it. And the other thing you know, is looking at all of these risks, and where appropriate, it might be we can't do anything to address the risk. I mean death, death is classic one. You know, nobody out there can stop it happening. But what you can do is you can build resilience. You know, there's plenty of life insurance providers and other insurances for other aspects of the business where you can look at putting stuff in place to mitigate those worst case scenarios. And all of that is reducing risk for a buyer. So from our perspective, selling a business, the more you can reduce that risk, the more you can negotiate a good price and a good structure, because the downsides have being limited.
Johnny Thomson 11:41
Okay, so it's clear there's a lot can go wrong. It's also clear that, you know, controlling and mitigating the risks there largely comes from the planning. What other measures really need to be on the checklist? I mean, you've alluded to one already there with insurance, but there's more than just the life insurance side of things, isn't there? There's many ways in which you can you can transfer the risk or you can, you can deal with it in another way.
Phillip Mettam 12:05
Yeah. So when an acquirer is looking at a business, they're obviously looking at all the areas where stuff could go wrong. We're obviously selling them a dream, trying to upsell them all the benefits. But inevitably, someone like me with a spreadsheet, on the other side is looking at what and where are the ways this could go wrong. And there's a couple of obvious ones. I mean, particularly with owner managed businesses, you know, again if you compare it to a corporate, inevitably they're not going to have the same level of processes and controls and, you know, security measures and other aspects. You tend to find much more of a kind of an entrepreneurial approach to doing business, right down and from, you know, the owners to the staff members who have probably given a bit more authority and autonomy than they might be in a large corporate. So a lot of what we do is kind of looking at that early on. And again, just identifying areas where there's going to be an issue. Do you have backups of all of your emails to clients, so that we can, you know, start at least showing them we've got data that they would want in a proper CRM platform, or whatever it happens to be. But then there's also just looking at the staffing piece generally. And it's, it's always amazing how many people have employment agreements that are completely outdated, because they've been there for 10, 20 years, they've been a really good employee, they've never caused any trouble. And it's one of those things that goes in a drawer. So you know, looking at leases, looking at employment agreements, looking at your supplier contracts, all of these things, again, bit of prep ahead of time, identify any problems where there might be some and sort them out. But also smoothing the way forward, you know, letting your bank manager, letting your company accountant know, making sure they're up to speed on what you're planning. Because, again, you know, what you don't want to surprises and finding out someone's taking a month off to go and tour around South America just when you need them to be signing off accounts. So, it's all of these bits and pieces, which again, it's irrelevant of the industry, project management is inevitably a huge part of it. And none of it individually is rocket science, but it's just making sure you put the right pieces in place at the right time. And trying to keep people unstressed, undistracted, from what they have to do day to day, which is running the business, keeping customers happy, keeping staff happy. You know, we do this professionally, we'll help you with it, we can guide you through it and ultimately try and minimise that disruption for everybody involved.
Johnny Thomson 14:33
I'm interested in whether you would go as far to look culturally at the, you know, the organisation that was taken over or was making the acquisition, to make sure there was a good fit and a good match, or is that, does that kind of go beyond your remit? It's certainly a risk that I could see what would need to be looked at and would need to be assessed because obviously, that's where longer term failures could come from.
Phillip Mettam 14:59
Absolutely. So I'm acting for a client currently, and we're acquiring a small regional player in their market. And the cultural fit is hugely important because people buy people. So if you're buying, you know, in this case we're buying a sales organisation. They've been very, very successful. But part of the reason they've been successful is because of the way they approach customers. So as an acquirer, what you want to make sure is that those customers aren't going to all be leaving in the first year, because you have a fundamentally different approach, which isn't going to go down well. And then taking it a step backwards, you need to do the same with the staff. Because any business you buy, you're not just buying numbers on a spreadsheet, you're buying people, you're buying skills, you're buying resource, you're buying relationships. And the integration side of these processes from an acquirer perspective, is hugely important. Because when the sellers are off, you know, on a beach hopefully drinking pina coladas and enjoying their well-earned money, you know someone's got to pick up the pieces. So, yeah a huge amount of the process is getting that relationship, you know, making sure that everybody has a warm, fuzzy feeling with what's going to happen, that you've got a really clear strategy. Here's what's gonna happen on day one, here's what's going to happen in 30 days, 90 days, the first year, you know, reassuring people, because if you go on Google and you say my company is being sold, the first thing that comes up are horror stories. And as I say, in reality, most of the time you're buying business, you want the people you want the talent, you want continuity. So that kind of, again, stakeholder management and messaging, you know and how you can make people feel really valued, hugely important for the retention of the value of what you're buying. And again, when you're selling, really easy to overlook, because again hopefully you're you know, long gone with your money by that point. But when you're looking at the legacy point, you know, one of my clients said I need to be able to bump into one of my employees in the high street and not feel like I've sold and down the river. And I think for the owner, manager, you know, where they've built the business. They've hired the people they've worked with for years, it can't be under underestimated how important that is to people.
Johnny Thomson 17:10
Yeah. And that runs back to the emotional aspect that you that you spoke of.
Phillip Mettam 17:14
Absolutely.
Johnny Thomson 17:15
Yeah. In the beginning. Yeah. Yeah. Anything else Phile, that we need to... any other key key risks that we have overlooked?
Phillip Mettam 17:23
I think the other big risk, which nobody ever really talks about and it's something inevitably advisors like I can often brush over, is what's next for the seller? You know, it's like the lottery winner, everybody loves the idea of having loads of money in the bank account, but what's your drive? What's your motivation? What's your interests, when your interest for last 30 years has been running and growing a company. It can be a real shock. And again, you know, we worked really closely with wealth managers, but we also work really closely with a lot of our old clients, because generally, they have a huge amount of experience and a huge amount of expertise, which actually are pretty rare and pretty valuable as a commodity. And almost always, within three to six months, they've kind of done the sitting on the beach, and unless they had something else lined up, you know, another interest or as I say, obviously different if they're retiring for an unfortunate reason around, you know, disease, or just simply retiring. It's really important just to look at how that transition happens.We often find people are sticking around and doing a handover for you know, six to 12 months, but usually not sticking around with a permanent role at the company, if they've sold it. So it's just something that often gets overlooked., but again is hugely important part for the individual and the emotional part of all of this, which is you're handing over your baby, you've built something for a long time, have a little think about what's next. What's the ultimate objective from all of this as a person rather than as a business owner?
Johnny Thomson 17:25
Yeah, it's a really, really important point, it's a case of understanding why it is that you've had this business for that time and how you're still going to meet that need, in essence, well beyond you moving on from from that business.
Phillip Mettam 19:18
Absolutely.
Johnny Thomson 19:19
And finally, Phil who on the outside should should you always involve? You know, you've mentioned lawyers and so on, with any merger or acquisition? And also, are there any good sources of information out there, perhaps stuff online that people can can tap into in these situations as well?
Phillip Mettam 19:37
Yeah, so I think there's kind of three key people that you should have involved in any deal. So the first one is you will always need really good lawyers. You know, the lawyers are there and you always hope that the documentation goes in a drawer and never has to be looked at again, but they're there as your insurance policy. That is the ultimate risk management is... they document everything, but they also document all the what ifs. So having not just a good lawyer, but a lawyer who does this day in day out, you know, they're dealing with company sales, they know the issues. And they can look at things, not just from a technical legal perspective, but from a commercial point of view of what is normal, what's acceptable, you know, what's really meaningful in terms of risk. That is, you know, hugely valuable. And it's something you know, we spend a lot of time clients, again finding not only where do you find that balance of commercial and technical skill, but you're going to be going through some really long evenings and stressful times. Most people only sell a business once, so it needs to be someone that you can get on with and trust. The other one is tax advice and again, that can that can be a fairly simple role, or it can be really complex, depending on what your business and your personal situation is. That's usually useful. Obviously, you know, finding someone who does what we do, having someone that, again you're going to be spending six months at least probably, you know, talking to us, going through this process.You've got to not only have someone you trust in terms of their ability and skill set, but someone that you know, when they ring you up on a Saturday morning, you're not thinking oh my god I really, really want to these people again. So that's hugely important. And then the final one is the accountant. So whether that's your internal accountant within your business, if you've got finance director or your external accountant, if you use external accountancy. You know, having the right team around you who can support you, as a business owner, through what will be a very stressful additional workload that inevitably is going to fall on your plate, is hugely important. There's a lot of resource out there. There's lots of people who do what we do. There's lots of lawyers and lots of accountants. Again, it should always come down to track record. I think in the UK, trade sales, only about 40 to 50% of them actually complete. And it's almost always because of the problems we've discussed earlier. So finding someone that you know, has that track record of working through those problems, helping business owners get the outcome that they're really looking for, which is a successful sale and money in the bank account. You know, that's the most important thing and meet lots of people. Because it is a personal thing you need you need to buy into people individually.
Johnny Thomson 22:23
Excellent Phil. Fascinating stuff and a subject I must admit, I didn't know a great deal about ahead of our conversation, so many, many thanks for your insight.
Phillip Mettam 22:34
No problem, absolute pleasure.
Johnny Thomson 22:36
And thanks also for the most depressing framework I've ever come across. The 3 Ds of disease, what was it...
Phillip Mettam 22:43
Death, disease and divorce.
Johnny Thomson 22:46
Yeah, I'll never forget those, yeah, but must always be kept in mind. So brilliant stuff. But yeah, thanks very much again Phil. Really, really appreciate it.
Phillip Mettam 22:57
Thanks Johnny. Bye bye.
Johnny Thomson 22:58
And that's all we have time for, for this episode of the RiskACUMEN podcast. If you have any questions or comments around the topic we discussed today or any of our other risk related content, please head to our Linkedin page. You can find a link at riskacumen.co.uk. Thanks everyone for listening in and until the next time, goodbye for now.
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