Acquisition values at a five-year high

Fresh evidence of British business buyers’ return to confidence has emerged, with acquisition values reaching a five-year high from July through to September this year.

The latest BDO PCPI report reveals that the PCPI EV/EBITDA ratio increased to 11.1, showing a rise of 4.2 from the previous quarter and the highest record for five years.

Private business buyers are being more “bullish”, becoming less risk averse, and are prepared to pay higher multiples in a strengthening market, BDO claims.

Software provider Sanderson’s £5.43 million purchase of One iota in October in its second acquisition this year, serves as a good example of this re-emerging confidence. Sanderson’s chairman Christopher Winn said the deal “further strengthens the company position in the rapidly expanding mobile-enabled ecommerce and online sales markets”. Sanderson has good reason to be highly optimistic about its future after the deal. One iota focuses on ecommerce for mobile, and tablet devices - an area that seems destined for greater demand as Brits’ reliance on technology intensifies.

Springfield Home Care Services is another business that has continued an acquisition spree of late. It bought domiciliary care provider Pathways to Independence in November, after buying Helping Hand HCS Limited in July and Positive Life Choices in March this year. Its latest deal will drive forward Springfield’s aim to reach new geographical areas and expand its service offering.

Whether or not the UK is “on the path to prosperity” as Chancellor George Osborne recently declared, there is evidence that business confidence is rising. This is likely to lead to more businesses across all sectors reaching into their cash reserves that have accumulated during the years of the economic downturn. Businesses without ready cash may look to raise funds, possibly through a loan or selling assets such as unused property for instance, to re-enter the acquisition market.

The British economy expanded by 0.8 per cent in the third quarter this year and with business confidence at its highest level since the coalition government came into power, it may come as no surprise that BDO expects a positive knock-on effect for Q4 deal volumes – a rare occurrence for the usually quiet period.

While deal values have been driven upwards, the number of acquisitions actually fell by 20 per cent across the globe, indicating unexploited potential in the market. BDO predicts that with more businesses aware of the Funding for Lending scheme, launched in July 2012, and the government’s support for transactions, an upswing for business purchases for the closing months of 2013 looks certain.

Overall the UK is becoming more attractive to buyers, and is, BDO M&A partner Tim Clarke says, “seen by investors as a stronger growth market than some of its competitors, with private company growth at the heart of the recovery. This is driving up their attractiveness to both PE [private equity] and Trade buyers.”

Looking ahead to 2014, there are some elements of uncertainty, BDO warns, with government support in the forms of QE and the Help to Buy mortgage scheme unable to prop up the economy for the long term, and with an upcoming election in 2015 and the Bank of England under pressure to drive up interest rates. In general, however the situation is much brighter than it has been in recent years.

It will also be important to encourage the significant percentage of risk-averse SME companies still hesitant to invest in expanding their business by acquisition, having emerged from the lengthy storm of the recessionary years.

According to Baker Tilly in its Your Business Outlook 2014 report, the actions of SMEs (which represent the majority of UK businesses) will impact the pace of the recovery.

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