Of course, this is all very much a generalisation and there are always multiple factors at play in any acquisition. It’s certainly not all negative and there’s still plenty of exuberance in the market, despite glimmers of rising interest rates and a changing environment (Russia, Brexit, et al). It always comes down to fundamentals of the deal on the table (and making sure you take the right advice). However, there is a case to suggest there may never be a better time to sell your business.
As central banks around the world raise rates, so do the commercial rates on the high street (yet they do so quicker to keep pace with companies chasing assets and growth in an inflationary environment). Debt costs more because it is in more demand. In simple terms in a typical deal – say a buyer’s acquisition of a target business – there’s an element of financial leverage. Bank debt. If the buyer’s bank debt is going to be more expensive in the future then the buyer will, quite appropriately, need to plan accordingly. More cash will have to be set aside to pay for debt interest post transaction, less will be available for upfront consideration to the seller. Less will be around to re-invest in the target business operations, post-acquisition. This all has the effect of supressing corporate valuations and therefore the prices that buyers are prepared to pay for a business.
The combination of higher inflation and higher interest rates reduces real income growth which, together with falling house prices, is where a recession may begin. Whilst some of the more optimistic classic liberal types among us would argue there are always things that can be done to avoid this, it is certainly the case that we are due one anyway: the 1973 oil crisis, the pursuit of monetarism in 1980, the follow up to Nigel Lawson’s boom in 1990 and the credit crunch in 2008. On average, every 12 years. 12 plus 2008 is 2020! Economies are relentlessly cyclical. However, in addition to this there are further upward pressures on interest rates to contend with. They say that “when America sneezes the rest of the world catches a cold” so I presume the opposite is true – we all benefit if the American economy is in rude health. President Trump’s protectionist instincts on steel tariffs aside, if you take a look at the US right now the tax and regulatory cuts are widely expected to provide a shot in the arm for GDP. When GDP grows quickly, inflation can become an issue (more cash chasing the same number of assets). Central banks typically deal with this by tickling up interest rates.
If you are going through a business transition process such as a management buyout, merger or acquisition, or are thinking of selling your business, or if you would like to talk to someone about corporate finance issues, then Scrutton Bland have specialist advisers who can help. Contact Luke Morris on 01206 838466 or at luke.morris@ scruttonbland.co.uk
C O R P O R A T E F I N A N C E | S C R U T T O N B L A N D | 3 5
Made with FlippingBook - professional solution for displaying marketing and sales documents online