The evolution of digital technology has revolutionised almost every industry, bringing with it huge efficiencies, flexibility and a transformation in Britain's working practices. But how has digital impacted the M&A industry - a sector built on traditional business relations and expensive service providers?
The 'old guard' is strong in mergers and acquisitions and the industry has held out for at least a decade as businesses all around adapted with the evolution of the internet, online connections and technology developments such as the cloud. As the tables finally turn for M&A, we're exploring the new digital landscape in M&A and how business buyers can be sure they take full advantage of the opportunities presented.
Digital due diligence
Aside from the ultimate cost of the business itself, due diligence has to be one of the most expensive stages in making an acquisition. The reliance on established relationships between accountants, business brokers and valuation experts had left many buyers trapped in predetermined routes to acquisition, without the flexibility to use their own contacts and approach.
However, the availability of information online was the point at which things first began to change. Processes that were once the preserve of long-established professionals became accessible to buyers themselves. Suddenly smart buyers were able to educate themselves instead of placing their faith in those they paid to carry out their due diligence procedures.
This isn't to deny the huge amount of value in having professionals working on the due diligence of a business sale. But the option for the buyer themselves to understand the process has created a more transparent marketplace, where buyers have the option to shop around for prices or time scales that are more suited to their requirements.
But the crucial leap in the digital landscape here has been driven by developments in the technology behind data and security. The options available for both individuals and businesses when it comes to accessing and storing sensitive documentation are endless in comparison to the days of secure local servers and even physical files.
Companies such as Merril DataSite, a global 'virtual data room' (VDR) enables users to stay in control of their sensitive documents from wherever they are in the world. The company claims to be able to have a VDR up and running in under two hours, enabling users to “streamline [their] due diligence process, manage contracts, reduce legal risks and eliminate inefficiencies”. Compared to the days when contracts had to be physically signed and posted, or even scanned and emailed to all parties, the advantages of having everything securely held in one place are huge.
New funding opportunities
Buyers can find efficiencies but, ultimately, anyone buying a business is going to need the money to see through the deal! Anyone who doesn't happen to have the cash in place is of course going to be looking for some form of loan or investment to finance their business acquisition.
Not so long ago, access to this funding was almost entirely controlled by the big banks and venture capitalists. If you didn't meet their lending or investment criteria, that was the end of it. It's no secret that the banks still have a massive hold on finance, but for those willing to step outside the mainstream, digital has created new opportunities.
Equity crowdfunding and peer-to-peer lending have proved key to innovation. And new networks are springing up rapidly. The concept itself isn't exactly new. In fact, people have been lending money and donating to shared causes from which they expect to benefit for centuries. But the internet really levelled the playing field and by the late 1990s websites were springing up to arrange the donation of funds to support music, film and the arts.
But it wasn’t until April 2014 when the FCA formally introduced a regulatory framework for equity and lending-based crowdfunding operators that the marketplace became of real interest to businesses. The relaxation of the financial and legal legislation allows small investors to invest in early or growth stage businesses, without those companies having to issue complex prospectuses. Crowdfunding companies such as Crowdcube.com and Seedrs.com provide the marketplace to make it all happen. Peer-to-peer networks including FundingCircle.com, ThinCats.com and FundingTreee.co.uk allow lenders to choose which businesses they want to lend to, what amount they want to lend and the term that suits. The platforms perform due diligence on the companies requiring finance and allow lenders to spread their loan across companies to diversify the risk.
Without a doubt, this is a pivotal change in the business funding marketplace. Research from the University of Cambridge and Nesta, an innovation charity, found the alternative finance market – made up of peer-to-peer and crowdfunding sites – grew by 84 per cent in 2015 alone, to £3.2 billion. Furthermore, 13 per cent of lending to businesses with a turnover of less than £1 million was from peer-to-peer sites.
This is one digital trend that's brought about a massive change in operations and created an almost unrecognisable landscape of finance options for the business buyer. As Simon Toms, corporate finance partner at UK-based law firm Allen & Overy, told EY Capital Insights: “[Crowdfunding] has come into its own in an environment where companies are seeking out alternative financing to bank funding. It opens up new pools of capital and provides a platform for companies to access capital from a wider range of investors.”
Funding and due diligence form key stages of the acquisition process, but what about finding the prospect in the first place? Digital has had an undeniable impact here and, again, a lot of this has to do with increasing access to information.
Dealnexus director Tony Hill, a former investment banker and buyer-seller matchmaker, explained what he sees as some of the biggest changes being brought about by digital networks: “Cross-border and smaller deals will become easier to do, as there is less reliance on little-black-book-type contacts”.
This reduced reliance on personal contacts is the result of better online networks, but digital routes to acquisition sourcing have only recently started to show real promise as these networks have reached critical mass. According to research from Intralinks, 50 per cent of people on the sell side and 40 per cent of people on the buy side have closed a deal sourced on an online network, with further statistics revealing that 55 per cent of dealmakers have used an online deal network to help with deal sourcing.
It's an area the Business Sale Report knows well, working as we have done with business buyers and sellers for over 20 years. We've seen the industry change with the evolution of digital and welcomed the levelling of the playing field as more and more options for direct contact have become available.
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