Everything Anyone Tells You About M&A is Horses@!t

Everything Anyone Tells You About M&A is Horses@!t

Jof Walters

Tuesday, 25 February 2020

We have spent a good few years working on an M&A project and during that time we've learned a thing or two...

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We’re nice folk at Million Labs. We don’t swear much and we rarely get angry. Simon once said, ‘Gracious Me!” after forgetting to save a document, but that’s about the extent of it. However, no matter how reserved and British we are it’s pretty hard not to get vexed when we take a look at the mergers and acquisitions market in the UK. It’s almost enough to put us off our elevenses. 



Let’s begin with a qualifying statement. Mergers and Acquisitions is a broad canvas. It encompasses everything from huge corporate take-overs to the sale of your favourite chip shop*. Large ‘deals’ are in the minority if you measure by volume rather than value. For example, businesses that receive offers of more than £5m from buyers make up less the 2% of the market.



Now, we don’t really mix with the city boys that handle massive transactions, we’re from Birmingham after all. So this post isn’t picking a fight with the investment banks and big four accountancy firms. We’re sure that they ply their trade with absolute honesty and transparency while acting like paragons of virtue. 



Over the past two years Million Labs has been researching the other 98% of the market: the sale and acquisition of SME. It’s been a wild ride that has bought us into contact with businesses making everything from bits of Bentley to a really good fry-up. We have listened to wonderful stories of businesses built in bedrooms growing to become roaring successes and horror stories about unscrupulous agents, solicitors, bankers and accountants ripping off ageing owners seeking an exit.



Over that time our little No-code M&A engine MillionDeals.co.uk (you can read a post about that here) has been churning through a bucket load of data to help us understand how transactions work in practice. We wanted to breakdown the voodoo of valuations to understand the levers that most defined the exit price of a business. In this world data is king and boy do we have a lot of it. The one thing we have learned is that everyone is lying. 



Lies, Lies, Lies 



This market is the last bastion in British finance of the complete and utter scum-bag. You know the guy? He’s got a gaudy Rolex watch and a bad suit he had made in Thailand. He drives a bog standard Audi and yet wants to tell you about it. This guy will clamp your hand in his hairy paw while trying to charm you with a toothy hyena grin. He might be an agent, solicitor, accountant or banker but he’s most definitely a crook and a liar. 



It’s hard to rank the size of a lie but possibly the most prevalent (and damaging) we came across was “I can sell your business”. It’s really hard to sell a business. About 8% of companies that actively try to exit through a trade sale succeed. Bafflingly the largest agents in the market reduce that success rate to about 2%-3%. They over-value companies (to win appointments), obfuscate financial information required to raise acquisition capital and draw the sale process out. More simply: if I said, “I can bake cakes” but only one in fifty was edible… you’d call me a liar. 



While a business isn’t selling, it’s degrading. The owners have already taken their eye off the ball and mentally banked the valuation. They are also diminishing the cash asset of the business by paying agents and advisors. When we examined a cohort of businesses that were actively for sale last year, more had failed than had sold. Like I said the lie is prevalent and damaging.



Tied up in that lie was, “I can value a business”. The voodoo of online valuations is presented as a mathematical fact when, in most cases, it has bugger-all basis in reality. In the world of valuations common sense goes off for a nice IPA and a grumble in the corner while fairy dust and fantasy romp around beguiling business people. 



To value a business you need to understand a few simple things: 



  • What you can earn from the business being acquired over a given period (and that includes the present value of the business on its balance sheet);

  • The cost/impact of external funds used to complete the purchase; and 

  • What return a buyer would seek on their investment.



Valuations are a little like quantum mechanics: The value of the business varies based on who’s looking at it (I’m possibly misunderstanding the implications of Weizmann’s 1998 ‘Double Slit’ experiment, I dropped out of physics before 6th form because my tutor was far too attractive for the subject matter and I couldn’t concentrate). 



So, to be clear, a simple profit multiplier (if you wish to seem clever say EBITDA a lot right about now) is to valuation what Michael Fish is to spotting hurricanes. 



Another lovely whopper is, “I’ve done hundreds of deals.” This is oft uttered by provincial accountants and solicitors or those horrible spotty twerps that turn up to perform ‘free company valuations’. No you haven’t you twat, no one has. 



So few businesses are sold each year, and there are so many agencies involved in the sale of businesses, that most ‘professionals’ will complete a handful of ‘deals’ in their career. To put that into perspective I’d guess the largest agency in the UK completed about 60 deals in 2019. They have over 120 employees… and that, kids, is why business agents are really expensive. 



This is really damaging when you consider how poorly experienced the ‘professionals’ servicing transactions really are. Solicitors and accountants are often charging five figure fees for a job they have never successfully done before - fees that they get paid whether the deal completes successfully or not. 



A final lie for you is “I’ve got all the money”. Sellers tend to expect buyers to be top-hatted monopoly men millionaires. They expect business geniuses that arrive in a limousine and poor cash onto the table from fine Italian brief cases. Buyers, for their part, try to live up to that image. After all, if the seller knew how little actual cash they actually have it wouldn’t do at all. 



More than 90% of the transactions we looked at were almost completely funded by a third party. Just like houses, businesses are big. Just like houses people use a bank loan to buy them. Just like mortgages, the bank loan is usually secured against the asset its buying. Yet unlike houses when people sell a business they really hate the idea of the buyer borrowing to acquire it.



There are two reasons for this: One, it puts the business at greater risk of failure and, unlike a house, people moving out of a business have often left friends (even family) living in it; and Two, the flipping Glazer Brothers. 

 

Back in 2005 (I think) the Glazers acquired the Manchester United by securing loans against the club. Normal folk in the north heard the phrase ‘Leverage’ a lot around that time and, most importantly, were given to understand that ‘Leverage’ was a terrible and awful thing. I cannot begin to tell you how often, when discussing acquisition finance with a seller the Glazers come up often followed by the disparaging question “what you mean he hasn’t actually got the money to buy my business?!”



Just to be clear, if you’re selling a business for more than £100k assume the buyer is borrowing to complete the deal. The average buyer has £140k in cash. Pro Tip: If you help them by providing the data and access required by the bank in their own underwriting the deal will complete three times quicker.



Conclusions



The main reason businesses don’t sell is that there are less buyers than there are sellers. However, only one in four buyers that try to acquire actually complete a purchase. The market for completions in the UK could quadruple in size. The reason it doesn’t is scandalous. Sellers and buyers are ripped off by unscrupulous professionals and forced through an out of date financial process operated by scoundrels, scum bags and liars. 



For our part we’ll keep nibbling at the problem until we work out quite how we solve it. We currently don’t charge people for valuations, sales or guidance because we can’t honestly say we are any more likely to sell or buy a business than anyone else. We simply don’t want to lie.



  

*the best chip shop in Britain is the Sefton Fish Bar (Chick-King to those in the know) on Upper St John Street in Lichfield. This is a fact.

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