The ability to unlock value from within a business, without the need for additional long-term debt, will be a vital part of a more sustainable recovery
There’s no doubt that the Covid-19 pandemic created huge uncertainty for SMEs across Ireland, compounded by an already unpredictable business environment in 2020 as the final Brexit deadline approached. Disrupted supply chains, closing retail outlets, seismic changes to consumer behaviours and regular amendments to government advice and support were all par for the course for business owners across the country.
Many SMEs are now busy planning ahead to increase stock levels, rehire staff, and manage increased customer demand throughout the spring and summer months. It won’t be surprising to hear that, following a period of reflection, some entrepreneurs have decided it’s time to restructure, refocus, innovate and grow, while others have come to the conclusion that it’s time to exit their business totally.
As a result, we’ve seen a significant increase in mergers and acquisitions (M&A) activity as well as management buy-outs (MBO) and management buy-ins (MBI). Recent figures from William Fry show that a total of 169 transactions valued at €9.1bn were recorded in Irish M&A in 2020, a 14pc increase on 2019, and there is no doubt that many more are now actively planning to add to this trend in 2021. KPMG’s M&A Outlook 2021 report, for example, highlights that 86pc of respondents intend to pursue M&A opportunities in 2021, with many saying that it will be a buyer’s market.
But while many business owners are looking to engage in restructuring activity, they are also extremely anxious to keep the level of borrowed money to a minimum. They simply don’t want to take on term debt or cash-flow loans that will result in monthly repayments for years to come.
While lockdown measures will eventually be eased as part of the Government’s phased approach, the requirement to start repaying liabilities is going to create yet another challenge for SMEs.
It is here that the private sector can and should be playing a greater role. Alternative and sustainable finance options which unlock value from within a business without the need for additional long-term debt will be a vital part of a more sustainable and long-term recovery.
There are a range of alternative finance sources that businesses can consider, depending on their requirements, including invoice finance, grants, fintech, venture capital, angel investors, peer-to-peer lending and crowdfunding. Obviously, the best solution for the business could even be a mix of these options, such as a short-term loan with a traditional bank combined with some investment and an invoice finance facility.
In our case, we are seeing invoice finance being increasingly used to either partly finance M&A and restructuring deals – alongside some debt – or, on occasion, on a standalone basis.
This facility offers businesses access to money outstanding from their unpaid invoices, helping them to unlock income they have already earned but not yet received.
This offers businesses the option of using their own funds to improve day-to-day or seasonal cash-flow fluctuations, or finance bigger growth plans without having to borrow money.
Using invoice finance, a business can access up to 90pc of an invoice’s value within 24 hours. The remaining balance is paid out by the finance provider, minus an agreed fee, when the customer has paid their bill. Unlike a loan or overdraft, invoice finance does not involve ongoing monthly repayments.
This revolving credit option means that once invoices are paid, a business can continue the cycle – upload invoices, draw down, use the funds and repeat. The benefit is that you can access multiples of the funding required, compared with a fixed line of credit.
One recent Bibby customer utilised such a facility to finance an MBI. In this case, we were approached by experienced corporate financiers who wanted to fund the purchase of a majority shareholding in a professional services business. The company was turning over €2.5m annually and had a well-established client base generating impressive margins.
The existing management team had the opportunity to facilitate this buy-in by the new investors and wanted to realise some value for their previous efforts while remaining with the business on an earn-out basis.
A deferred consideration will be paid for the balance of the shareholding over several years and the incoming majority shareholder will take a seat on the board immediately under the MBI.
Invoice finance was an ideal fit to release the required cash and help fund this management buy-in. A confidential facility was used towards the initial contribution and continues to provide working capital to allow the business trade-on successfully without any cash-flow concerns.
In addition to funding M&A and MBI/MBO activity, it’s worth noting that alternative funding options can also be utilised to fund a range of other growth scenarios such as investing in infrastructure or equipment, funding research and development, financing an expansion or simply stabilising a business during turnaround.
This year holds the potential to be one of growth and recovery. Yes, there are still significant challenges to overcome, but across the country thousands of SMEs have shown that they are capable of adapting to change and overcoming challenges.
For SMEs, now is the time to plan by finding the right partners to achieve long-term ambitions – whether that’s exiting or establishing strong foundations to continue growing and thriving in a transformed economic landscape.
Mark O’Rourke is managing director, Bibby Financial Services Ireland