By most accounts, deal-making in Scotland is rife, with the amount of acquisition and consolidation in some sectors of the economy breaking records.
But while Insider reports on when these transactions are done - or announced to the market - there is often scant detail on how they were pieced together, by many different people, over the course of many months, and often with many ups and downs along the way.
So this article is an attempt to rectify that, by speaking to the lawyers, advisers, investors and accountants in order to find out exactly what happens at each stage of the process.
Inception
The start of the journey can be prompted by any number of things: owners deciding to sell up to start something new or begin retirement; a larger business looking to gobble up market share or useful intellectual property; a growing company sensing an opportunity to scale; or mid-market consolidation and merger.
Either way, this is where the owners and leaders start contacting professionals to set things in motion.
Depending on the size of the business and potential deal, this could start with a favoured solicitor or accountant, or be both plus an advisory firm.
John Blair, corporate finance partner at accountancy practice Consilium, said that typically his firm does more acting for sellers than buyers, as there aren't that many actively-acquisitive Scottish companies, so there’s usually more sell-side activity.
“It typically takes one of two routes - owners want to exit but don't know how that will happen - so we try to find a buyer, negotiate and take the process through to completion - and probably more common is a business coming to us having been approached, so missing out the first chunk of work, then wanting to get the deal done.”
Melanie Clark, a partner at financial advisory firm Dow Schofield Watts Scotland, explained that there are different situations where she would be engaged to sell a company. “It can be a large corporate deciding to sell off part of the business that doesn’t fit their strategy, private equity exiting a portfolio investment, or a business owner deciding to exit or take investment into the business.
“The most common - and my favourite to work on - is where the original shareholders decide to exit,” she continued. “This process can take a bit of time, so it's best to engage with an advisor early, as we will start off by looking at the quality of financial information and internal processes, identifying any issues that may scare off a buyer.
“We then work with the business to iron out any issues - this could be something like not preparing regular management accounts, so we will encourage them to start doing this ASAP, meaning we have a decent period of financial info to present for diligence.”
James Kergon, senior partner for Scotland and also deal advisory partner at KPMG UK, said a firm like his can be introduced at any stage, from advising on strategic options during initial discussions, to providing due diligence prior to a proposed transaction completing; as well as giving input on integrating an acquisition post-transaction.
“The key in any situation is to consider your strategic options early and to start preparing for transactions as soon as possible - we continue to see companies who under-prepare in advance of a transaction, leaving value on the table or opening themselves up to losing some value during the process.”
Initial agreement
So following on from the first acquisitive approach, or decision to sell up, it’s now time to make things official. If they haven’t been already, this is where outside experts definitely have to become involved.
Keith Gibson, a partner at N4 Investments, said that as an adviser, his role is to support stakeholders in finding solutions to their funding and transactional needs.
“We work with a wide network of both debt and equity providers and can introduce them to relevant opportunities, supporting them to put in place a structure that meets their needs.
“Before providing solutions however, it is key to understand our client’s goals so that we can work with them to put in place short, medium and long-term plans to help them to achieve these goals,” he stated, adding: “Raising funds can be part of these plans, but is only one element of support that an adviser can provide.”
David Beveridge, managing director at Scottish corporate law firm Macdonald Henderson, said that normally his involvement begins when there’s a kernel of an idea between two companies.
“They might have a number in their heads, so we usually get involved at the Head of Agreement stage, which is a kind of a roadmap, made up of few pages of the parties, the price, the assets, any adjustments that might be made, the timeline, the level of due diligence, confidentiality and exclusivity bits.”
Blair confirmed that this document is a broad outline of the deal, agreed right at the start, often with accountants rather than lawyers, because it's mostly monetary matters. “That triggers the due diligence phase to start, which is essentially lists of information requests and is often a pretty onerous task - although virtual data rooms do make the process easier these days.
“Understanding their own numbers and having a realistic idea of their value - preferably which someone else has come up with - is very useful, as is having good quality information readily available,” Blair went on, adding: “But resources are often tight, and they’ve still got their business to run, so it’s best to get this kind of thing in order before starting the process.”
Clark added that the initial stages often involve an Information Memorandum (IM), which is supported by the financial model for any projections, although if a shareholder is exiting completely, it is up to the buyer to do their own projections and business plan.
“Then we do a buyer list from our own research and network, in collaboration with the seller to make sure they are happy,” she explained. “Under a Non-Disclosure Agreement we will share the IM with prospective buyers and if this leads to an indicative offer that the seller is happy with - often after some negotiation - we move to a due diligence process.”
Due diligence
Beveridge commented that legal teams often become the ringmasters at this stage, setting up a usually cloud-based, virtual data room on behalf of clients, collating all the information that will be provided to the buying company for those authorised to see it.
“Lengthy due diligence requests lists are made - questionnaires on cyber security and insurance, etc, then once that’s all done, the buyer will lead on the documentation, the acquisition document, asset/share purchase agreement; and then the parties will negotiate that.”
He added that what’s lost in cordiality is more than made up for in productivity and control, as mailing/faxing/emailing documents back and forth has been replaced by video conferencing and data rooms.
April Bingham, head of corporate at Scottish law firm Bellwether Green, agreed that post-pandemic, a lot of early meetings are via video call, with clients, corporate advisors and accountants on their side of the transaction. “Less so with the opposite legal team, as most lawyer-to-lawyer communications these days are over email and via exchange of drafts - we like a written trail of what has been said or agreed.”
For those on the investment side, getting to know a company is also crucial. Ian Buchan, partner at Nevis Capital, likens it to going from a first date through to marriage.
“From introduction by a mutual friend - or the internet - through building a relationship, checking each other out and making plans together, before finally tying the knot with a legally-binding contract.
“The most important part of the process for us is getting comfortable that it is a business that we want to own for the long term and that it is run by people that we want to spend time with and who share similar values.”
Practically, this means an initial introduction - often with confidentiality agreements exchanged - which leads to a proper meeting to get a more high-level understanding of the business and what shareholders are looking to achieve.
Information exchange comes next, before an outline proposal showing the main terms of the deal - price, payment schedule, process to completion, plans for the existing shareholders, etc - then more in depth diligence and the signing of contracts.
Negotiation
With potentially many millions of pounds being exchanged and the future of companies at stake, there is always likely to be a bit of back and forth between buyer and seller, with legal teams and advisory firms really earning their fees.
Clark explained that once diligence is done and the buyer is satisfied, a Sale and Purchase Agreement (SPA) is then worked on.
“We get involved here to help negotiate the SPA on the seller’s behalf - our input is mainly around things which impact the end price, for example what is included in net working capital and net debt, which will have been looked at in detail during diligence.”
This is, of course, where a deal can make or break, with Clark suggesting that the main reason transactions tend to collapse is around price expectations - the buyer believes the business is worth more than the seller wants to pay.
“As advisors, it is up to us to set realistic expectations for the seller from the outset, as there is no point in telling them they will get an unrealistic multiple just to win the sales mandate - you'll never be able to deliver on what you promised and that isn’t good for the relationship.
“In addition to setting realistic price expectations, the other key factor comes back to ensuring the business is prepared for sale.”
Beveridge agreed that when selling a company, it pays to have your house in order in terms of compliance, meaning things like property interests in the company, major contracts with clients, employee contracts are all up to date and documented.
“You also need to make sure the buyer’s got the money - asking for proof of funds - as well as being disposal ready on the sell-side,” he continued, adding: “Quickly growing companies can sometimes forget about the basics, with holes in the less sexy bits like HR systems and documentation.
“Transactions can also succeed or fail on company culture, so things like how well do you get on with them and what are their plans.”
Buchan concurred that once a price has been agreed, the most common source of collapse is a breakdown of the relationship between the buyer and seller.
“In any transaction, there are some points during the deal where things become a little contentious or stressful - to avoid this leading to a collapse, it is important to build trust with your counterpart.
“Being open, honest and upfront about the positives and negatives of the business and the deal and being willing to listen to and understand the other side of the story is vital - things can go wrong where the buyer has been sold ‘hockey stick’ growth and diligence shows that this will not be delivered.”
Kergon also listed things like bad data analytics, inaccurate or incomplete budgeting and financial processes, poor IT infrastructure and management bandwidth to deal with a transaction process, as key factors which can determine the success or failure of a deal.
“The exit process is complex and time consuming, buyers will be interested in management and finance teams who have the capacity to effectively manage and have visibility during the process, so failure to engage properly with the buyer audience will result in a lack of appetite for the transaction,” he argued.
Coming to terms
Given how dominated many Scottish sectors are by less well-resourced small and medium-sized enterprises (SMEs), it is in these latter stages that many deals begin to falter.
Bingham said she most often has problems with delay and obstruction when firms that are inexperienced in mergers and acquisitions work get involved. “This can really slow things down, increase costs and sometimes endanger the deal - and it’s also difficult when a client does not have a good corporate finance and tax adviser instructed.
“Some clients can be concerned about adviser costs, but the financial gains that can be made and risks mitigated with a good team of legal, finance and tax advisors can make fees very good value for money.”
On larger deals, occasionally something comes out of diligence that causes concern and the seller is not willing to indemnify the related risk, although insurance products are emerging that may help with this.
Until very recently, warranty and indemnity insurance has been considered cost prohibitive in the Scottish market, stated Bingham, adding that while it's rare to see a party pull out for market reasons; it does happen occasionally.
Kergon added that Scotland also has a higher weighting of family-owned, private businesses. “As you might expect, this type of shareholder base brings a slightly different dynamic into deal-making activity, as they often care more about who the business is being sold to and what their plans are for it than a private equity investor might be.”
Completion
Most of the experts we spoke to agreed that between three and six months is about par for the course these days, in terms of the process going from start to finish.
Beveridge noted that companies can change within that timeframe, so there’s a drive to get things done between end of tax or financial years. “Things can also be driven by personal life - if someone’s selling up and retiring - but a three month exclusivity period is pretty standard.
“Things are taking a bit longer at the moment though, perhaps because buyers are watching the macroeconomic picture, borrowing costs are rising and there are staffing and supply chain issues.”
Another point shared by most of our deal-makers was that while smaller in scale and scope than markets elsewhere in the UK, the Scottish ecosystem is both competitive and collegiate.
Beveridge stated that lawyers and accountants are often in competition and collaboration from week to week, but “generally speaking, people are pointing in the same direction - doing the deal to the benefit of all stakeholders”.
Buchan said that in his experience, deals are done on a more personal basis north of the border. “Connections are more easily made between buyers and sellers because the market is that bit smaller and we’re more likely to know each other or to have mutual connections that can vouch for the other party.
“This works with the local advisory community too, as advisors will generally have a good idea of what different potential buyers are looking for and therefore are able to match buyer and seller more successfully.”
He added that it’s also a less transient market than, for example, London. “That means people likely to come across each other numerous times over a long period of time and so maintaining a reputation for honesty and straight talking is critical.”
Clark noted that with a larger number of businesses at the smaller end of the scale, there are consequently fewer advisors chasing larger fees. “Scotland has less variety of corporate advisory firms compared to the other regions in the UK and is relatively underserved on the lower end of the SME spectrum, with Big Four firms moving on to pursue bigger transactions.
“Scotland is perhaps viewed from the outside as one market, however there are local differences between the main cities like Edinburgh, Glasgow and Aberdeen,” she also pointed out. “For example, Edinburgh has a strong focus on financial services, whereas Aberdeen has renewables and oil and gas expertise.
“Business owners expect the advisors to have local presence and knowledge of the market, while also having access to potential buyers and investors nationally and globally.”
From Bingham’s perspective, deal teams tend to be smaller in Scotland, which keeps costs a bit lower and helps efficiency.
“There are not a huge number of senior corporate lawyers in the Scottish marketplace and I would say that most take an open, pragmatic and straight forward approach – we wouldn’t get many deals done if we didn’t.”
Kerry Sharp, director of entrepreneurship and investment at Scottish Enterprise, argued that the country punches above its weight compared with other areas of the UK.
“As a market, Scotland is highly connected and supportive - so for an entrepreneur asking for help, they can almost always be pointed in the direction of someone that can provide an answer.
“We have a fantastic early-stage investor base, with lots of angel syndicates - the best performing angel market outside of London - and other investors, including ourselves, that can provide investment at that crucial stage in a company’s development.”
The problem in Scotland has often been with taking that next stage in scaling up, although Sharp reckons that the Scottish National Investment Bank has gone some way to helping fill that funding gap.
“Companies are also being more ambitious and looking to raise investment not just from London but from further afield,” she stated. “We now have a team whose remit it is to help those that are targeting international investors, as we recognise that by attracting such capital into Scotland, we also bring other networks and experience.”
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