Should I shake on it?

On the day Boris Johnson announced new national measures to battle Covid-19 and with less than a month to go until Government support such as the job retention scheme comes to an end, TheBusinessDesk.com and Bevan Brittan hosted a webinar looking at the pandemic’s impact on corporate finance and businesses.

Looking to the immediate future Christian Hunt, partner at Bevan Brittan, said he expects to see an increased amount of reorganisation and restructuring amongst businesses. This he says, will also be coupled with more distressed sales in those deeply impacted sectors such as retail, leisure and travel.

However, do these anticipated increases in distresses activity mean it’s a buyer’s market? No – at least not according Jason Whitworth a corporate finance partner at BDO. Whitworth said there’s a “twin trap, with a real spectrum of how business has been impacted by the pandemic.”

He added: “Some [businesses] are trading very well through this period, areas such as tech, life sciences and online service businesses for instance.”

It’s in these sectors that he states there is an “absolute appetite” for support from funders. In fact, he highlighted that the current market means funders can be quite competitive. He said the fact there are “too few of those really good opportunities out there”, means funders are “knocking on the door of those good businesses, desperate to do deals.”

There was no better demonstration of the dichotomy of Covid-19’s impact on businesses and corporate finance than the other two panellists on the webinar; Sarah Fatchett, CEO and founder of 365 Response and Richard Coulson, chief executive, Complete Office Solutions.

Fatchett’s firm recently secured a £3m investment from BGF that will support the Wakefield-based business to accelerate the development of its technology platform and support it in scaling up both commercial and operational teams. This sounds positive but she cautions that although it may not be the challenge others are facing it is still that, a challenge.

She said: “I know colleagues in other industries and other firms that have started-up are having really difficult times and having to suffer furlough and all sorts of different types of restructuring. We’ve had a different type of challenge, one of rapid growth, and the need to quickly support people working in completely different models. We were [prior to lockdown] quite a tight knit team working together, and then suddenly we’re spread out and working remotely which brings a challenge to that sense of team especially while experiencing rapid growth.”

In contrast Coulson, whose business has made multiple acquisitions over the last few years to support its growth, saw a dramatic, overnight negative impact from coronavirus. He said: “We’re a business that supplies services into offices, so we did see a huge impact to our revenue initially.” He added that since lockdown has eased some of the firm’s lost revenue has come back, “but not all of it”. In fact as a direct result of Covid-19 he stated that for the first time in more than 20 years his business is having to consider making redundancies.

Coulson added however, that it’s impossible to generalise about what the impact would be for businesses and whether or not it’s a good time to do deals. He stated that the situation has brought firms to “a crossroads, at which they [business leaders] have to make a decision on whether they right size their business, or whether they invest to cope with a growth that they’ve seen, if they’ve seen it.” Ultimately he says it’s “decision time for most companies”.

But how does a leader make a decision, when the health and economic situation is as fluid as it appears at present? For Hunt the secret is in keeping your house in order, stating that whatever happens investors and buyers will be conducting “enhanced due diligence” that will likely include the robustness of IT systems alongside trading relationships and the position in relation to a firm’s employees.

Similarly, Coulson states that preparation is vital. He added: “In July we prepared for different sizes, so that now we know where our trend lines are heading and therefore know what decision we have to make, because we’ve already planned for it.”

He states the line in the sand regarding furlough – which since the webinar took placed has moved with the latest announcement from the Chancellor last week – had given plenty of time to allow businesses to plan for it.

So, if deals can be done both for growth or as a result of distress what impact does social distancing and a global health emergency have on a sector that is symbolised by the handshake?

Hunt said: “There’s definitely a sea change over the last six months in relation to how deals are conducted, both in terms of dynamics around how enhanced due diligence is actually dealt with and the whole concept of not having face to face meetings, with negotiations being done over Teams or Zoom type platforms and, and even distanced completion meetings as well, with changes to how you get buyers, sellers and funders to actually execute documentation.”

Fatchett, who obviously did a deal during lockdown, said: “The virtual process was different from the ‘norm’ that I’d heard about. It was quite complicated, longer, perhaps more intense actually, because it was just one team call after another after another after another. But I would recommend doing it. And we’ve learned a lot through the process to be fair.”

She added her business was one of those that Whitworth cited and had been approached by “quite a few different PE firms and different funders.” This meant she was able to choose and ultimately selected BGF as it was a “good fit”. She said BGF worked well with herself and her team throughout the process, supporting the “virtual deal management.”

However, although changes have occurred and many things can take place virtually, Coulson said: “It’s still important in the deal process that elements are face to face at some point.”

He believes many of the deals done virtually will have started pre-lockdown, although he admits there will be exceptions that prove the rule. Whether you’re doing a deal pre or post Covid-19, with or without social distancing getting an understanding of a business’s culture is key, particularly if you’re acquiring a business as part of a growth strategy. Coulson says this is the challenge of doing a deal right now, as he believes the best way to understand a business’s culture is to witness it in person and this is difficult with the current “arm’s length approach” / digital first approach to meetings.

Ultimately as with any economic event, there will be winners and losers and Bruce Springsteen was right when he said “you don’t want to get caught on the wrong side of that line”. But, what is clear is that although there will likely be a rise in restructurings and distressed business M&A activity, there are also some great opportunities for not just survival but also growth, if you’re willing to plan and prepare for whatever is in store.

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