March 29, 2022
Every two years we analyse the deals that our M&A team has worked on, looking at the key legal terms of each transaction, to take stock of what is “market” and identify emerging trends. That two year cycle would have meant undertaking our analysis at the end of 2020 but, with what happened in Q1 of 2020 and subsequent COVID 19 restrictions being imposed on many UK businesses, we wondered how informative such analysis would be. Postponing our review, which we ultimately undertook at the end of 2021, allowed us to look at transactions across the three years from 2019. Our deal sample was therefore made up of pre-COVID (Pre Deals) and since-COVID deals (Since Deals), and there were some clear differences in the before and since trends. In this article we’ve outlined the impact of the pandemic on the most fundamental of deal terms – the pricing mechanism.
There are three main ways of pricing deals in UK midmarket M&A:
During the pandemic, many businesses have seen significant changes in their financial performance , some for the better and others unfortunately for the worse. It has been, and in many cases still is, difficult to know what the long term, sustainable performance of those businesses will be going forward. Typically deal valuations have looked at past performance as an indicator of future performance, but looking back to what we all hope were exceptional times, is no longer a reliable basis against which to predict future performance. When combined with the prevailing uncertainty that plagued many sectors since 2020, with restrictions, regulations and guidelines constantly changing, it has been difficult to agree valuations. As a result, there has been a marked increase in the number of deals involving pricing mechanisms, coupled with a similar increase in the use of earn outs, retentions and deferred consideration. Deals involving completion accounts or a locked box represented 87.5% of our Since Deals, as opposed to 67% of our Pre Deals, with completion accounts remaining the prevalent mechanism, with their use increasing from 37% to 50% and locked box deals increasing from 23% to 37.5% (7% of the Pre Deals featured some form of hybrid completion accounts/locked box mechanism).
The number of deals featuring unconditional deferred consideration (where only part of the price was paid on completion with the balance payable in one or more tranches on specified future dates) was fairly consistent across the before and since periods analysed but the deferred element as a proportion of the overall price increased in the Since Deals.
The use of retentions or hold backs (where the buyer retains part of the purchase price as security to ensure funds are available to cover any purchase price adjustment, and/or any claim under the share purchase agreement) also increased from featuring in 13% of our Pre Deals to 37.5% of our Since Deals. As well as being used more frequently, the amounts being withheld have increased as has the length of time that buyers typically hold back funds. Where it was typical for the retention to cover just the completion account adjustment, it is increasingly being used to cover all transaction claims.
Earn outs (where part of the purchase price is calculated by reference to future performance of the target company) are a useful pricing mechanisms to bridge any gaps in value expectations between the buyer and the seller and, again, we’ve seen their use increase as they were a feature of 37.5% of the Since Deals but only 23% of the Pre Deals.
All of the mechanisms outlined above are tools to mitigate valuation risk for the buyer, which is to be expected in the circumstances. However, it is not just buyers looking to mitigate risk, as we are seeing more sellers requesting or requiring security in the form of a charge over the assets of the company post sale or parent company guarantees to mitigate the buyer’s credit risk.
Whilst many of the restrictions imposed in response to the pandemic have lifted, times are still uncertain with Covid here to stay and with war in Ukraine. With that in mind, we expect to see continued use of the pricing mechanism, as parties look to navigate fluctuations in financial performance and to bridge value expectations.
If you would like to discuss any of the themes identified above, or would like a copy of our market monitor report, which goes beyond an analysis of a pricing mechanism and looks at all the main legal negotiation points on a M&A transaction, please get in touch here Nina.Searle@TLTSolicitors.com.
Alternatively, if you are thinking about selling your business or raising finance and would like to explore your options, we would welcome an exploratory chat. Get in touch with us today via this link or email us at email@example.com
“We were delighted with the services that Bluebox offered us. Bluebox’s attention to detail through their Diamond Programme ensured that we were well prepared for when the business was taken to market and that the sale process itself was managed expertly.
We challenged Bluebox with finding the right strategic buyer and thereafter negotiating a deal that met our requirements. In helping initially to identify and to secure the deal with Mountville Mills they accomplished just that. Communication throughout was excellent and professional, managing each stage of the process. I would have no hesitation in recommending Bluebox to any corporate shareholder or private business owner looking to divest their business.”
Richard Millward, Former Client
“We were delighted with the services that Bluebox offered us. Bluebox were challenged with finding us the right strategic investor and, thereafter, negotiating a deal that met our complex requirements. In identifying and securing the deal with LGC they have done exactly that. The process itself was efficient and smooth, largely due to the excellent communication from the Bluebox team, who also demonstrated excellent experience at managing a very engaging auction process. I would be delighted to recommend Bluebox to any corporate shareholder or private business owner looking to divest a business.”
Helen Dickinson, Former Client
It has been a real privilege working with the team at Bluebox over this last year or so. Bluebox’s attention to detail ensured that we were well prepared for when the business was taken to market and the sale process itself was managed expertly. Starting the process, I had no idea exactly what this would entail and the volume of work that has been produced by everyone and the result reached today is nothing short of brilliant.
Hugh Morris, Former Client
We are delighted with the services that Bluebox was able to offer. They showed an intimate knowledge of a deal cycle, managed a tight auction process and were highly communicative from the start. I would happily recommend Paul and his team to business owners contemplating a sale of their business in the next 24 months. Experience is key and this has paid off for us.
Laurence Seward, Former Client
Aligning ourselves early with Bluebox, and entrusting the team to guide us through their process proved to be a highly rewarding investment from all viewpoints. Bluebox’s support significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years. The earlier the engagement the better so far as I am concerned.
Mike Minett, Former Client
We began working with Bluebox in early 2015 through their Blue Diamond Programme, as we were contemplating an exit. We found that the process focussed our minds on the key areas of growth in the business, and prepared us well for the inevitable rigours of due diligence. During the sale process itself, the advice offered by the Bluebox team was invaluable. We found them to be helpful, straightforward and honest.
David Stokes, Former Client
When selecting our adviser, it was extremely important that they had access to international buyers and were experienced in cross-border M&A. The team at Bluebox proved to be invaluable by identifying a strategic acquirer from America who was not known to us and by negotiating an excellent deal for all parties. I was also impressed with the process management from Bluebox, which ensured that the deal was closed in a timely fashion.
Jeff Weinstein, Former Client
When I first engaged with Bluebox, I was hesitant as to the benefits of using an advisor to firstly, find a buyer for my business and secondly, to get a deal over the line. However, now that the deal has completed with KPM, I can honestly say that the finer negotiation points handled by Bluebox and their overall management of this process has been nothing short of first class. I would be delighted to recommend Bluebox’s services to any entrepreneur contemplating the sale of their business.
Bill Ballard, Former Client
Bluebox worked closely with us over the following six months and helped us to implement some key initiatives which made InferMed a more attractive acquisition target. Once we decided to sell the business, the Bluebox team were very diligent in ensuring that no stone was left unturned. They negotiated expertly on our behalf to ensure we got the best deal possible.
Alan Montgomery, Former Client
The pre-sale planning programme that we signed up for with Bluebox made us develop our strategies and focus on the bigger picture. It proved to be a very rewarding investment from all viewpoints and significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years.
Nigel Parsons, Former Client
I have experienced first hand the value that can be created through highly structured pre-sale planning. It amazes me that it is not something that everyone does. It is so disappointing to see around 90% of transactions collapse before they complete and pre-sale planning will not only enhance your price, but also significantly enhance your chance of a closed deal.
James Caan, Investor
We worked incredibly closely with our advisers who provided expert knowledge of the sale process with which we were not familiar. We were truly delighted with the results.
Marten Nielson, Former Client
We appointed advisers to manage the sales process after we had received a number of unsolicited approaches for the business. I was incredibly impressed by the immense value that could be created by expertly negotiating with a group of already interested parties.
Paul Duckworth, Former Client
I was delighted with the service that the team offered and their real attention to detail. The deal was not without its complexities and it was reassuring to have such experienced advisers assisting me throughout the negotiations.
Peter Bennett, Former Client
Truly delighted with the way my sale process was managed. The fact that the team I worked with achieved such a great multiple is testament to their experience and their ability to create some true competitive tension.
James Averdieck, Gü, Former Client
The team at Bluebox provided invaluable support in negotiating this complex transaction. Their access to international purchasers, and exceptional knowledge of cross border M&A ensured that the deal was concluded efficiently, achieving a highly successful outcome for us all.
Jon Parslow, Former Client
“We selected Bluebox after a fairly long round of evaluating potential advisors because of their scientific, yet challenging approach to maximising value. During our initial meetings they showed us how far short of “ready” we were and consequently we completed more preparation in the early stages which meant we were equipped for what was to come. We were delighted with our choice of Corporate Finance partner. I do not hesitate in recommending Bluebox for any SME to consider.”
Simon English, Former Client
Bluebox provided invaluable advice in managing the negotiations with incoming investors. Their skills in handling these discussions were evident from the outset and the vital interface that they provided between the incumbent team and the incoming investors was truly beneficial.
Henry Braham, Former Client
Bluebox have a professional, dynamic and experienced team that is greatly assisting me with my focus on my exit within the next 24 months. Their structured approach is very refreshing and their ‘Blue Diamond’ programme is adding immense value.
Matt Evans, Former Client
The team at Bluebox provided me with a seamless service from the start of the engagement until our deal was completed. Attention to detail was commendable and their understanding of corporate M&A very impressive. I could not recommend them highly enough.
Victor Lewis, Former client
Having tried to sell my business previously – and failed – I was only too aware of the importance of pre-sale planning. This is a talented team offering a service that most people find out about, but too late.
Simon Hulme, Former Client
Bluebox are a quality outfit. Their access to International acquirers and relationships with the highest quality domestic investors was impressive. My shareholders and I received excellent service from start to finish and it was refreshing to be dealing with a senior team throughout the sale exercise.
Michael Clapper, Former Client
I cannot recommend the team at Bluebox highly enough. Their expert guidance throughout the entire sale exercise resulted in my shareholders securing an excellent deal with which the entire team was delighted.
Mark Rodol, Former Client
I’m really pleased with the service Bluebox provided. The team demonstrated excellent knowledge of the process to follow and led negotiations for the hospital in a way that allowed us to ensure we received appropriate value whilst focusing on reputational risk. Communication and service were of a very high standard.
Steven Davies, Former Client
With Bluebox’s expert advice we were able to find the right buyer that will benefit our business strategically. We’re delighted with the outcome and look forward to starting our new chapter
Clive Hillier, Former Client
The advice offered by the Bluebox team throughout the process was invaluable to the shareholders. We strongly believe that participating in Bluebox’s pre-sale planning programme was a significant driver behind the success of the deal. Their project management and negotiation skills throughout the sale process itself resulted in an exceptional deal being delivered to all parties involved.
Harpal Singh, Former Client