Entrepreneurs Once Again Spotting The Opportunities 

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uring these nightmarish times, some key business decisions regarding staffing and technology investment have been forced upon entrepreneurs by the necessity of survival. Other critical investment, growth, acquisition or exit decisions have been mired in unprecedented levels of uncertainty and have had to be postponed.

Some owner-managers took stock of what they had built, drew a line and opted to exit. Judging from the activity and pipeline of my M&A colleagues, the market has been very welcoming to those deciding to sell. Valuations have held to pre-pandemic levels or even raced ahead in sectors such as technology, professional services and food & drink. Larger acquirors are particularly keen to accumulate scale defensively or technology that can be leveraged across their platforms, also to protect from competition.

But what about owners that decided not to sell but stick at it? Over the past six months we have increasingly seen this group of business owners weigh up the still considerable uncertainty about what might be remaining of the pandemic risks and set them aside in favour of returning to their growth journey. From our client conversations as well as actual growth funding engagements, we increasingly see a reluctance on the part of entrepreneurs to postpone their business growth, and frankly life, any longer.

Motivations for this growth renaissance differ in each case. Importantly, no one is throwing caution to the wind, but we see worries about supply chain interruption, energy prices and inflation, outstrip concerns about new variants of Covid with decreasing levels of potency. Entrepreneurs are by nature an impatient bunch, and two years is a long time in their lifecycle. They are keen to get on with what they are naturally driven to do: find solutions to problems and innovate, rather than find themselves stuck in an uncomfortable defensive mode.

Debt remains cheap, especially in real terms where it looks to be eroded in value by inflation, whilst businesses acquiring scale or growing organically can increase their revenue base, which is inflation-linked. Specific deal rationale is case by case, but the risk appetite being expressed currently was missing or very nascent this time last year.

Manufacturers with disbursed supply chains are acquiring their key suppliers to ensure quality and priority for their own needs in the world of supply chain insecurity. Defensively accumulating scale, either organically or through acquisition, remains a key driver. Lockdown showed businesses how quickly technological or digital transformation can be achieved and adopted by customers if necessary. All sectors have taken the technology message on board and digital transformation is now a driving force behind growth funding requirements even in sectors such as waste management and forestry – in fact, I would struggle to name a sector unaffected by radical technological change.

Management buyouts (MBO) express owners’ decisions to exit at the same time as a significant risk appetite on the part of the management teams to take on debt and buy businesses to drive them forward. As a key bell-weather of risk appetite, MBO funding market has been running increasingly hot for at least the last 3-4 quarters.

Whilst funding for all this frenetic level of M&A and growth activity is generally plentiful, it is far from straightforward. Bank lending is still cheap, but credit appetite remains at very safe levels and mostly based on tangible asset collateral, which most modern businesses lack or do not have.

Alternative markets have grown up and are successfully filling this gap. Alternative SME debt products also tend to be longer term in nature and structured to leave more cash in the hands of SMEs for ongoing investment vs rapidly paying down the loan, aka ‘working for the bank’. However, most SMEs still haven’t learned how to get the best out of this fast-evolving market, how to blend bank and alternative lender credit, who the relevant alternative lenders are, and what they look for.

In this environment, the more ambitious SMEs that are well advised and get the best out of today’s funding market to support their growth plans, create a real competitive advantage over their competitors. And competitive advantages in the post-pandemic world of supply chain insecurity, inflation and rapid technological evolution, is hard to come by.

Alexei Garan is Head of Business Funding at Shaw & Co, a Bristol-based corporate finance advisory firm that helps business leaders and SME owners across the UK to buy, sell, or fund the growth of a business.