Part 2 of 4 — What Buyers Want: Priorities, Standout Businesses & Why Deals Fall Over
This is Part 2 of our four-part conversation with Blaser Mills on the state of UK M&A. Part 1 covered current market sentiment and where acquisition activity is strongest.
What are buyers prioritising today compared with three or four years ago?
Edward: Buyers are currently prioritising risk management and due diligence to a greater extent than they were three or four years ago. Which is understandable given the world has change in terms of higher interest rates, greater global economic and political instability and a more stringent regulatory environment.
Key areas of focus include:
Buyers are increasingly focussing on seller liability provisions, e.g. time limits, notice provisions and disclosure standards, as these have become areas of detailed negotiation. Due diligence has become more intensive too, with a focus on asset valuation. In uncertain times no one wants to be the person who paid too much or failed to do the appropriate level of due diligence. Additionally, funding terms and conditions have become more difficult requiring more innovative solutions.
In the highly regulated world in which we live, buyers are ensuring that sellers fully understand and disclose regulatory risks in the target business to avoid post completion issues and claims. These can be very expensive to fix and often come with high reputational risk.
Given those significant reputational and financial penalties Data Protection compliance has become an important area for due diligence especially, practices, security protocols and processes.
Employment issues have always been a significant issue for due diligence in deals especially in asset transfer deals with the impact of TUPE. Most businesses are “people businesses” at some level so ensuring you have a happy workforce with appropriate restrictive covenants is vital.
ESG considerations, (excluding environmental risks and liabilities), are becoming less of a focus in deals. It is probably as a result of the de-emphasis in this area that we have seen happening in the USA.
Due diligence and risk mitigation is not so much about claims post completion but more about making informed decisions pre completion to maintain and drive value in the future.
Geoff: The single biggest shift I’ve seen is how much further buyers now push on quality of earnings before they’ll commit to a number. Three or four years ago, a strong growth story and a decent set of management accounts would often get a buyer to an offer. Today, we’re seeing buyers commission full financial due diligence earlier in the process, and pick apart addbacks, one-off items and “normalised” EBITDA far more rigorously than before.
Customer concentration gets far more scrutiny than it used to as well. As a rough rule of thumb, once a single customer represents more than 15-20% of revenue, we know it will come up in every buyer conversation, so we make sure clients have a clear, honest answer ready rather than being caught out mid-process.
Beyond the numbers, buyers want real evidence that the business isn’t the owner: a management team that can run things, and processes and relationships that are documented rather than simply known. Where we can, we now encourage clients to commission their own vendor due diligence before going to market, so these questions get answered on our timetable, not the buyer’s.
Which businesses tend to stand out during a sale process?
Edward: One that has done a proper pre-sale preparation for sale. Selling a business is like selling a house, first impressions count.
Geoff: Interestingly, it’s rarely the biggest business in the room that generates the most competitive tension, it’s the best-prepared one. The businesses that stand out are well organised, financially transparent, and can answer a buyer’s question on the day it’s asked rather than promising to “come back to them”. That responsiveness matters more than people expect: momentum is everything in a sale process, and every unanswered question is a chance for a buyer to pause, or quietly build a case for a lower price.
Why do transactions fall over?
Edward: Less than 1% of deals that get to our desks fail. However, on the rare occasion they do fail, it can be for can several reasons.
The main reasons tend to be a change in the buyer’s willingness to pay market value once the true Equity Value has been established and or for the larger buyer a change in the management team or direction of the buyer.
Buyers rely on due diligence to assess risks. However, it is rare for due diligence or last-minute disclosures to result in a deal failing rather than just a price adjustment or the taking out of insurance. In our experience it would have to be the revelation of a fundamental issue to the deal like title to the shares or significant IP for this to occur.
Litigation involving significant amounts or worse still unquantifiable amounts can create significant concern for buyers. If a seller cannot show proper evidence to having key contracts in place it may delay the deal but rarely cannot be resolved to allow the deal to continue.
Disputes among shareholders, especially if unanimous consent or specific approvals are required can cause issues. This is why having drag clauses in the Articles of the company is so important.
Buyers may find the seller’s proposed limitations of liabilities as being not market standard, unreasonable or too seller friendly particularly when the cap is lower that the purchase price. The buyer needs to know if something goes wrong that they have sufficient protection to be able to recover from the seller.
These above demonstrates the importance of proper and early preparation, clear communication, the proactive and innovative resolution of potential issues during the transaction process and the need for experienced advisors.
Geoff: In our experience, deals essentially never fail because of one dramatic problem. They fail because of an accumulation of smaller frictions that erode a buyer’s confidence over time: a valuation expectation that was never grounded in evidence, financial information that arrives late or keeps changing, or a due diligence process that drags on so long both sides start to lose momentum, and patience.
Timeline is an underrated killer. The longer a deal runs, the more opportunity there is for something to change – a key contract comes up for renewal, a senior manager hands in their notice, interest rates move, or the buyer’s own board loses appetite. We push hard to keep processes moving with real urgency for exactly this reason.
The other pattern we watch for closely is a seller anchored to a number they heard about from a friend’s sale, rather than what an independent valuation and a live, competitive market actually supports. Managing that expectation honestly, and early, well before a business goes to market, is one of the most valuable things an adviser does, even when it isn’t the easiest conversation to have.
Part 3 of this series looks at how valuation expectations and deal structures are shifting.
How We Can Help
If you are thinking about your exit journey and would like to find out more about how The MGroup Corporate Finance and Blaser Mills can help, please contact:
Geoff Pinder, Partner, The MGroup Corporate Finance: g.pinder@themgroup.co.uk
Edward Lee, Partner, Blaser Mills: edward.lee@blasermills.co.uk