My previous blogs on the Enterprise Finance Guarantee (EFG) scheme created significant interest. The EFG has been a very emotive subject for the UK public, with many people feeling that the level of lending is insufficient. Much of the public anger is aimed towards the ‘bailed out’ banks (presumably because the tax payer feels they are a ‘part owner’).

I believe the initial publicity of the scheme led to unfair expectations being placed on the banks. Some individuals appeared to think that the EFG represented free money for businesses. However I can not defend the lengthy credit application process seen at certain banks, which can lead to unfulfilled orders, aborted transactions and in extreme cases business failure.

Despite the unfavourable public opinion, the intention of the EFG is very honourable. Not everybody is aware that EFG loans can be used to acquire businesses – whether this involves a share acquisition or a purchase of trade & assets. The criteria applied by banks is simple – it is consistent with their normal commercial terms (i.e. the existence of a government guarantee does not mean that sensible lending criteria are discarded).

Not all lenders are willing to use the EFG to acquire existing businesses. Please let me know if you would like details of those that currently do offer this facility.

Julian Dobbin is a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Julian you can call him on 01908 605552.  

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A number of commentators and advisers involved in corporate finance/M&A are starting to point to an increase in corporate transaction volumes. 

I am very pleased to announce that a longstanding Mercer & Hole client – Pioneer Productions – was sold to the Welsh television production company Tinopolis. It is the one of the few ‘significant’ successfully completed deals that I have been involved in 2009. As with any transaction of this size there are many obstacles along the way, but in 2009 it takes additional motivation and perseverance to get over the finishing line.

The tentative recovery in the SME transactions market is a reflection of several factors:

• confidence has steadily improved throughout 2009, helped by buoyant stock markets, avoidance of a ‘banking armageddon’ and fewer bad news stories
• a gradual reduction in the disparity between buyer expectations (who were after rock bottom prices) and seller expectations (who were still thinking of 2007 multiples)
• some improvements in liquidity in the small to medium business sector
• necessity – companies which are approaching failure can be forced to sell all or part of their business.

So it seems likely that 2010 will bring a rise in the transaction volumes seen in 2009.

Julian Dobbin is a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Julian you can call him on 01908 605552.

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It is no secret that the number of corporate deals completing in 2009 is significantly less than previous years. There are many reasons for this (too many to list in this blog) – one important factor is the perception of vendors on the valuation attributable to their company. 

If an entrepreneur has spent 20 years creating a profitable business, it is natural that he or she will wait for the right time to sell. It instinctively feels like the wrong time to sell - valuations across all asset classes are low in comparison to those seen in recent years (though the markets are showing a small recovery as I write, they are still substantially lower than 2007 levels). The sale of shares in private companies are also generating lower valuations – though not as low as many people expect.

Valuations are always subjective and each valuer will probably treat the impact of the recession differently. From my perspective, the additional considerations for a valuation include:

• earnings valuations – in my experience multiples have reduced by 1-2, and earnings forecasts must be revised to reflect the maintainable profits in the medium term (on average this will be a lower figure than would have been projected in previous years). Please note that three recently completed deals have seen multiples in the 4-5 range (pre-tax).
• net asset valuations – an adjustment should be made to reflect diminishing stock values, and the valuation and recoverability of trade debtors should be considered in detail. Freehold values may have reduced since surveys undertaken even three months ago.
• discounted cashflow – earnings levels should be considered in light of the economic down turn. For the discount factor – the cost of capital must reflect the long term outlook, assuming that today’s low interest rates will continue could create substantial overvaluations.

There are some genuine recession proof sectors – but even in these areas, valuations should be reviewed, as the reduced availability of finance can place additional risk on a business.

Julian Dobbin is a partner at Mercer & Hole. Please contact him directly to talk about multiples and valuations relevant to your business.

The views given in this blog are personal to the author.

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Once you have made the decision to make an offer to invest in, or acquire, an SME you are probably past the point at which your accountant should be brought in to the process. Not only can the accountant provide sound advice on the ‘corporate finance’ aspects (for example the valuation, key terms etc), it is crucial to set an appropriate structure from a commercial and taxation perspective. 

This is particularly important in distressed situations. Mercer & Hole have recently advised on a distressed management buy out – under the initial terms, the acquirers were effectively taking on all old group liabilities (even though the majority did not relate to the division in question). This is clearly not an acceptable approach – and after several calls / emails the deal was very different. 

Beware of sellers that say ‘we can do this without the accountants and lawyers’ – they are likely to have their own interests at heart…

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This scheme will support bank lending, of 3 months to 10 year maturity, to UK businesses with a turnover of up to £25 million who are not able to access the finance they need. It will provide loans of between £1,000 and £1 million and is currently available until March 2010.

The guarantee can support new loans, refinance existing debt, or conversions of existing overdrafts into loans to release capacity to meet working capital requirements.

It is a very flexible tool in comparison to the previous scheme – the parameters in size have been widened significantly, and an interesting new feature is the flexibility to use the EFG in 'share' transactions.

Only time will tell whether the EFG will be a success. The decisions to lend are delegated to the banks, who will apply their own criteria. However it appears to be a step in the right direction, and I for one hope that the EFG scheme will provide a lifeline for the many viable, but cashflow pressurised, SME’s in the UK.

See guidance from Business Link by clicking here.

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It may sound obvious, but I thought I would raise the issue of ‘preparation’ in business sales as many transactions I have been involved in recently have illustrated a distinct lack of it.

I have written previously about making the business as autonomous as possible from the current owners – this is the key method to successfully inflate your sales price. There are several other simple procedures which a vendor should undertake

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