Consolidation and growth opportunities in 2020
We can be in no doubt that the impacts of the Covid19 pandemic on the economy will be felt for some time to come. At a macro-level there has been much talk of various profiles for the recovery, as we look to come out of lockdown, whether this be V (a quick rebound), U (a prolonged dip in activity but with an eventual recovery), W (a quick initial rebound but oscillating levels of activity) or L (a deep and prolonged recession).
For small businesses, how they fare will depend largely on the sectors they operate in and those of their customer base. For example, construction sector businesses may well see a V-shaped rebound as government backed construction sites are reopened. Manufacturing businesses may see more of a U-shaped recovery as getting furloughed staff back to work throughout the supply chain may take some time. If there is a second wave of the pandemic, or a prolonged reduction in economic activity, those V’s may turn to W’s and the U’s to L’s. We can only hope this does not happen.
There are of course some sectors which have seen significant growth in demand for their services during this crisis. Notably these include: Information and Communications Technology, cyber security, SAAS, food production and delivery.
Whilst positive for those in these sectors, there are risks and difficulties to be overcome, for example:
• How to quickly build your operational team and staff expertise?
• How to quickly acquire the resource, assets and equipment to enable the growth?
• How to maintain your customer base when some will inevitably go bust during the recession?
• How to fund the investment in staff and equipment?
These challenges often drive industry consolidation, and this is where mergers and acquisitions facilitate this process.
Mergers of two complimentary businesses can enable the companies to
1. Pool staff expertise and resources,
2. Increase market share through cross selling opportunities,
3. Spread the risk when seeking additional funding,
4. Rationalise overheads such as offices and admin functions, and
5. improve profitability
Information and Communications Technology, cyber security, SAAS, food production and delivery businesses are often relatively new businesses – run by owners who do not wish to simply retire. They are ambitious to grow, but perhaps need to join forces with other like-minded business owners in order to do so. Mergers can also represent the first step to a final exit strategy with a higher valuation.
Generally, the larger and more sustainable the business is, the higher the multiple used to value the business. Merging two smaller businesses creates one larger business which can be valued at substantially more than the sum of the two individual businesses.
If any of the above resonates with you, do get in touch in Hornblower. We have many years of experience matching companies together and agreeing deals which work well for both parties.
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