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Consumer Trends 2023: Seizing opportunity before crisis

16 January 2023

We consider techniques to help businesses rapidly acquire or invest in key suppliers, and how potential targets can best prepare for a solvent transaction when clouds gather.

In the current economic slump, many Consumer businesses are turning inward and delaying strategic M&A and investment, pending better times. However, the same pressures are driving companies throughout the supply chain into distressed or semi-distressed situations, which can be hugely disruptive to commercial stakeholders.

In this context, opportunities exist to acquire complementary businesses or consolidate within supply verticals, but these require fast action.

Distressed deals are often put together extremely swiftly but place all risk on the buyer and often only occur after significant value has been eroded. In contrast, traditional, solvent M&A transactions typically last at least 3-4 months, absorbing vast amounts of work and cost, often for relatively minimal incremental benefit.

When looking to achieve a fast result, there are structures available to allow transactions to be delivered quickly, with a fair balance of risk and reward, thus enabling sellers to realise value whilst maintaining the integrity of the buyer's supply chain or opening new channels to market.

Combining due diligence and disclosure  

Traditional M&A and investment deals are predicated on a detailed due diligence project, which is then effectively duplicated by a suite of warranties and a further specific disclosure exercise. This dynamic can be compressed by carrying out due diligence through a bespoke Q&A process. Q&A responses are then warranted as accurate without an additional suite of warranties covering the same issues.

If planned in advance and carried out in a short period, the duplication of time and effort can be effectively removed, without a substantive loss in protection for the buyer or additional risk for the seller.

Locked-box "plus"  

Locked-box deals (where the transaction is priced based on a recent set of accounts, supported by value leakage provisions) are favoured by sellers, but offer minimal comfort to buyers in semi-distressed situations, where ordinary trading has been disrupted. Combining a locked-box with covenants around, for example, levels of working capital, debt or other factors can offer the best of both worlds,  and should not unduly trouble sellers who have kept a careful track of their financial position.

Deferred payments and retentions  

Deferring or retaining a significant element of the purchase price, alongside rights of set-off against later payments, is a helpful tool for de-risking a transaction from the buyer's perspective and a sensible balance between up-front and contingent payments can often be found. This mechanic can operate well in the context of a locked-box "plus" arrangement.

Equity-based payments 

Although usually more viable for publicly-traded buyers (which will not need to add shareholders' agreements etc.), equity-based consideration can be used in all contexts and creates an alignment of interests between buyer and seller. Equity payments can allow a buyer to move quickly without drawing on vital cash reserves or debt funding, and are compatible with deferred and set-off structures.

Preparation is key

In challenging times, accurate record-keeping and financial management can often come second to keeping the lights on. This should be avoided at all costs. The better organised and monitored your business, the easier it will be to package it for a swift transaction.

Keep an open mind and be flexible

The market is brimming with advisors who are wedded to traditional deal dynamics and nervous of alternatives they may not understand or have used before. There is no single "best" way to structure a deal, but if you know the strengths of your business, the key risk factors and value sensitivities, and are well prepared, there are multiple possibilities to enable you to realise value and secure a stable future through a solvent transaction.

If you have any questions or would like to discuss any of these topics and what they mean for you and your business, please get in touch with our consumer sector and M&A experts. 

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