Dealing with Brexit uncertainty as well as an unforeseen pandemic meant that 2020 was a difficult year for business owners. But for those with strong balance sheets, agile management and an ability to weather these storms, 2021 could be a very interesting year indeed!

I do acknowledge that pressures will remain in 2021. We won’t see the back of the pandemic until mass vaccination gains momentum. Many businesses have taken on unusually high borrowing levels which need to be repaid. And owners will need to address other liabilities built up through the various government support initiatives which will start to unwind.

"2021 may be a great time to grow a business."

But for those who have weathered the storm, 2021 may be a great time to grow a business. There may be opportunities to pivot into different markets, perhaps as a result of the pandemic, although quite often the quickest way to pivot a business is through acquisition.

The challenges of the last twelve months will see many business owners re-evaluating their future. Some may wish to retire, some may wish to merge with a stronger performing business, or some may simply wish to sell up.

Market consolidation

Either way, I do believe that in the aftermath of the pandemic there will be plenty of opportunities for market consolidation. I also expect that there will be a touch more realism in business valuations rather than owners holding out for unrealistic multiples.

As we have seen in recent years there have been many alternative lenders entering the market with a different lending appetite to the high street banks. They are filling the gaps in the spectrum of funding risk which used to be occupied by the high street banks. This applies as much to real estate transactions at higher LTV’s and longer tenors as it does to transactions leveraging business cashflows to facilitate acquisitions, buy-outs and mergers.

Irrespective of where your business strategy currently sits, it is always advisable to continually review your funding needs, no matter where you are in the economic cycle. The natural ‘go to’ for financing acquisitions, or indeed securing growth capital, should be your existing funding relationships.

Keeping the pencils sharp

However, with the ever-evolving alternative finance landscape, you would be well advised to explore what the wider market has to offer. This will “keep the pencils sharp” with existing relationships. This is where a Corporate Finance adviser can really add value by managing the entire process and presenting a ‘whole of market’ view. A good adviser will also run a competitive process to ensure the most cost effective deal, with the most appropriate debt structure, is secured for you.

“fail to prepare, prepare to fail”

When considering fundraising for acquisitions the old adage of “fail to prepare, prepare to fail” always resonates with lenders. It is vitally important to be well prepared and have a strong grasp on your prospects as a business. Lenders will want to understand your business in detail. You will need to present yourself as both credible and backable, with in depth knowledge of your own financial position, and that of your target.

Lenders will explain why they need information such as pipeline analysis and financial forecasts. Being open to discuss these will create an air of trust. Be realistic around the capacity to borrow and also the price you are prepared to pay for a target. Remember, you should always be prepared to walk away if the price sought is too ‘rich’.

Cost saving synergies

It is also advisable to be realistic about the extent of cost saving synergies that can be achieved as these will be challenged. Don’t lose sight of the need to ensure additions to the new organisation are a strong cultural fit as this can be potentially damaging for the enlarged business. These may not be apparent at the outset and are very difficult to address post transaction.

Of course, acquisitions are not the only way for the stronger survivors to take advantage of growth opportunities in a specific sector. Growth may also be achievable organically through winning more business, especially against weakened competitors.

Avoiding pitfalls

But there are pitfalls to avoid if adopting an aggressive organic growth strategy. Rapid uncontrolled growth – also known as overtrading – can lead to your business becoming unsustainable. Rapid growth puts pressure on staff, resources as well as financial and management structures.

Growing too quickly may also lead to issues such as outgrowing your premises, drops in staff morale, reduced production or service quality, and losing touch with your competitors’ activities.

Growing too fast without paying attention to your liabilities and sufficiency of your capital can lead to business failure. Proper financial planning and good advice can mitigate this risk. And finally, consideration must be given for the entirety of your business which needs to be positioned for growth which must include all your financial capital, human capital and data capital. If you’re not prepared for this, you could run into problems!

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