Creating a competitive advantage in the SME sector

In a previous blog, my far more cerebral colleague, Stephen Gregson, managed to weave French philosopher Voltaire and man of letters Michel de Montaigne into a discussion about strategic business planning, and assisting clients see through the fog of current business challenges.

I’ll now attempt to link colour-blindness, garden peas and low-cost digital manufacturing initiatives to building a sustainable competitive advantage and shareholder value…stick with me…

My career in accountancy and corporate finance is a quirk of genetics – throughout my youth I wanted to follow in my father’s footsteps and be an engineer. However, a session with my school careers adviser when I was making my A-Level choices cruelly pulled the rug from beneath my engineering ambitions with the news that as most engineering design drawings, electrical diagrams, gas/chemical charts etc are colour-coded, not being able to tell the difference between red and green could be a tad problematic.

My optical deficiencies had been identified some years earlier when, knowing my mum always wanted to impress the local Vicar when he made his occasional home visits, I ran into the house proclaiming his imminent arrival as he had just parked his red Mini a few doors away. 30 minutes later with tea and cakes at the ready, he hadn’t arrived – it turned out it wasn’t the Vicar at all, but someone visiting a neighbour …in a green Mini.

Numerous eye-tests later I was formally diagnosed, laying the foundations of my subsequent career decisions. My younger brother’s similar diagnosis a few years later was a much more straightforward affair when he innocently asked at the dinner table one evening “Mum, why are peas called green peas when they’re red” ?…he’s also not now an engineer.

But, years later, I am still a frustrated engineer and still fascinated by how engineering has historically found ingenious solutions to a vast range of industrial, commercial and business problems. This led me to recently watch a webinar arranged by the ICAEW and Cambridge University’s Institute for Manufacturing, entitled “Making digital manufacturing on a shoestring work.”

I recommend any business owners seeking to gain an insight into how digital technologies can now be implemented at extremely low cost, and to help move your business into the age of Industry 4.0, to visit the IfM website – https://www.ifm.eng.cam.ac.uk/insights/digital-manufacturing/helping-smes-towards-digitalisation/ where a number of SME business owners and academics address how this thinking is helping them tackle an interesting range of operational issues.

Both myself and most of the business owners I have talked to about strategically moving into an era of digitisation and introduction of AI, have assumed that the cost would be prohibitive and therefore beyond their reach. But, this no longer has to be the case based on the IfM’s approach which uses cheap, off-the-shelf technology and devices, and readily available open-source software to deliver significant operational and cost improvements for hundreds of £’s rather than tens of thousands of £’s.

The IfM’s primary focus sits perfectly alongside the approach we also take to assist SME client reviews and assess and challenge their historic busines models, with a view to improving the business and driving shareholder value.

A key part of the non-transactional advisory elements of our Corporate Finance teams’ approach to working with our clients is structured around constructively challenging business owners and management teams to break-out of a cycle of repeating next month, exactly what they did the previous month, and the month before that and the month before that, to open their eyes to alternative thinking.

With all of the competing pressures and challenges of running a business, particularly with the added difficulties and uncertainties arising from COVID-19, it’s not surprising that many businesses, management teams and shareholder groups tend to adopt a primarily inwardly-focused approach to “business improvement”, often missing the opportunity and benefits of exploring how wider thinking, alternate strategies and new technologies could perhaps help deliver significant operational improvements, cost reductions and long term competitive advantage.

In a commercial world dominated, at present, by the combined uncertainties of COVID-19, Brexit and wider global geo-political uncertainties, making your business more robust and more able to successfully take advantage of what will inevitably be an altered landscape of opportunities and challenges over the coming months, is perhaps no longer a choice but now an imperative.

A key take-away from the IfM’s “digital manufacturing shoestring” agenda is perhaps therefore that the adoption of strategic business planning and business improvement processes is not exclusively the domain of much larger multi-national businesses with the budgets to deploy and significant financial resources to take their businesses forward and improve their competitive position – these strategies and thought processes are available to every business.

We adopt a structured but flexible approach to strategic planning and business improvement – if you would like to discuss further, please contact Simon Carruthers, Corporate Finance Director or a member of the Corporate Finance team on 0161 519 5050 or email info@mooreandsmalley.co.uk.

PS – there’s a happy ending to the above story. As colour blindness is passed through your mother’s chromosomes, my daughters are both free of this visual impairment and guess what…the youngest is now a graduate engineer!

Is your business too lean?

The clocks have just gone back so the mornings are lighter but the nights are very much drawing in.  The supermarket Christmas catalogues have arrived and they are full of tempting things to eat and drink. 

No sooner have our thoughts turned to the lovely taste of warm mince pies (or whatever your cake of choice is at this time of year) than the harsher reality of tighter clothes, letting out the belt a hole (or two) and the weighing scales begging for mercy  also spring to mind.  We feel the pressure to become or stay lean (-ish)…..

Lean is good , better, more efficient, more economical.  That is what we have been taught to believe in relation to our economies and our businesses.  But what if that isn’t quite true?  Or, rather, what if it can be overplayed and thus what is a strength, up to a point, then becomes a weakness?

Some fascinating research on this topic in relation to regional economies has recently been published by Stanford University and the Santa Fe Institute in America.

The research was published in the journal Evolutionary Human Sciences.

Now this isn’t the usual place where you would expect to find relevant business advice and insight, but a key conclusion is that it highlights the weakness of lean economic systems in the face of uncommon but severe threats, such as the coronavirus. The most telling conclusion is perhaps:  

“One of the things we’re seeing right now is a world that has been optimized for efficiency and is extremely vulnerable to risk……..If you scale back organizations to keep them running at a mean level that’s high, and you don’t have a lot of slack, when a crisis hits you’re in trouble.”

And something very similar to this has been seen in relation to many businesses and those which are managing to weather the Covid-19 related economic storms and those which are struggling.  Businesses which had built up cash reserves and hadn’t spent them or distributed them to the shareholders have been in a better position to cope with the extremely rapid impact on trading and  cash generation brought about by lockdowns with the near collapse and then the slow and fitful regrowth of much economic activity.

Those businesses which had monetary ‘wool on their backs’  whilst perhaps not as ‘lean’ as those which were using debt to fund their growth were fitter (and in some cases, much more so).  That might sound odd; isn’t being fit the same as being lean?  No, it isn’t. 

Fitness is the ability of the organisation to continue and survive.  Having some financial ‘fat’ in terms of underutilised and ‘inefficient’ cash reserves  is the way to create that organisational fitness.  Having an employee base that minimises any dependency upon key individuals is another aspect of organisational fitness. 

But this fitness rarely occurs organically;  it has to be planned for.

It is the consequence of owners understanding what their businesses are there to do; what they want and need to achieve; where the weaknesses and faultlines are in their business and organisational models – and doing something to deal with these.

These are exactly the kinds of conversations which we have been having with a number of our clients over the lockdown period.  Some, with the ‘fittest’ clients, have been simply a continuation of the pre Covid discussions; for others, they have had to pivot from a focus upon leanness to fitness very quickly by both changing their internal organisational and cultural model and accessing external sources of support and help (such as CBILS and similar funding lines).

Business as with life is about survival and, if we can, flourishing and achieving our potential.  The period since March 2020 has perhaps shown ever more strongly than it is better to be fit and flexible as an organisation and a human being than ‘lean and mean’. 

If this resonates with you and where your business finds itself then come and talk to us;  wherever you want to go, we can help you get there.

To discuss the content discussed in this blog, please don’t hesitate to get in touch with our Corporate Finance Director, Stephen Gregson on 01772 821 021 or stephen.gregson@mooreandsmalley.co.uk

North West construction sector: stamina and persistence required to maintain Covid recovery

The construction sector can overcome the economic challenges of coronavirus but it is likely to be a long road to full recovery.

That’s according to a survey of 100 construction companies across the UK, compiled in association with Lancashire-based accountants and business advisers MHA Moore and Smalley.

The MHA Construction Sector Report 2020 found that while 71 per cent of companies who have used the Government’s furlough scheme planned to bring back all furloughed staff, 32 per cent of companies surveyed had been forced to make redundancies.

And while 44 per cent of those surveyed said coronavirus was having minimal impact on their business, 49 per cent claimed the impact was substantial, with 30 per cent believing it would be more than a year before business returned to pre-pandemic levels.

Joe Sullivan, partner at MHA Moore and Smalley’s Preston office said:

“The fact that the majority of firms using the furlough scheme plan to bring back all furloughed staff is a positive sign. However, the sector’s future is currently very uncertain.

“Government projects are now the most likely source of revival. Housebuilding, although buoyed by strong demand, is likely to suffer from a rise in unemployment. Commercial building is unlikely to thrive, with many companies questioning whether they need as much office space as before.”

He said with the stark contrast between companies who had felt minimal impact from coronavirus and those claiming the impact had been substantial, any future government relief must be properly targeted.

Joe added:

“Not everyone needs help and there is no blanket solution for the companies that do need assistance. In particular, the government needs to be mindful that big infrastructure projects tend to benefit larger companies the most, and even disadvantage small ones by sucking in materials and labour.”

The biggest concern, shared by 61 per cent of respondents, was economic uncertainty. Supply chain disruption also ranked high on the list of worries, mentioned by 45 per cent of respondents.

The vast majority of respondents have used of some form of Government support. 81 per cent have used the furlough scheme and 68 per cent have used the VAT deferral scheme.

However, take up of other schemes was much lower, with only 13 per cent making use of the Coronavirus Business Interruption Loan Scheme (CBILS) and 12 per cent taking advantage of the Bounce Back loan scheme.

The MHA Construction Sector Report 2020 can be viewed here.

Valuations in the SME sector in a post Covid world…

The news is full of negativity, be that due to COVID itself or the impact COVID is having on the UK economy, one would therefore assume that business valuations must ALL have also been negatively impacted by COVID.

Is it therefore all doom and gloom………?  Absolutely not. 

As in most cases, there will be winners and losers, but good progressive businesses will remain valuable, possibly even more so in the current climate.  On the flip side, ‘me too’ businesses may find that demand from trade buyers and private equity is more limited.

When looking at valuing a business, there are generally three key constituents to understand in arriving at an Equity Value:

  • What is the underlying earnings of the business now and in the future;
  • What multiple should be applied to those earnings; and
  • What is the net cash / debt position of the business.

For the majority of companies, earnings have typically seen a sharp fall in April, May and June with somewhat of a recovery from July onwards.  This profile suggests that the COVID impact is (on the whole) a temporary impact on earnings and a pro-forma ‘earnings’ for the COVID period could be substituted, leading to the fabled EBITDAC metric.

From a multiple perspective, the impact of COVID on the sector dynamics both now and in the future is likely to have a bigger impact on valuations.  Questions such as: Is there a % reduction or expansion in sector GDP anticipated?  Has there been a paradigm shift in operating models?

Moving on to the business itself within the sector, are supply chains robust and fit for purpose?  How much working capital does the business require going forward?  What is the potential exposure for bad debts and business failures in the customer base?

These are not unusual questions to ask when looking at business valuations, the issue is the answers are a little less forthcoming in today’s climate.

In Summary

The focus on the above questions clearly suggests more uncertainty and uncertainty tends to lead to ‘prudence’ in the valuation world.

There are essentially less businesses around where both buyer and seller are aligned as to the future trading potential of a business, hence valuations are now more than ever highly judgemental and with no single right answer.

For most business valuations in the near term, I would anticipate that EBITDAC will be a well-accepted metric, but it will not apply to all sectors.  Those businesses that have been impacted negatively by COVID, not recovered quickly and with a business model that remains exposed to any future (or ongoing) pandemic may indeed find both earnings and multiples lower, but more importantly will find less ‘buyer’ interest overall.

It has always been the case that strong management teams, contracted recurring revenues generating high margins and with a strong future outlook are all attributes that underpin high valuations.  It is no different now and those businesses that ‘tick’ the box should anticipate more interest and attract premium multiples with or without COVID.

For any further information on the content discussed in this blog, please make sure to get in touch with our Corporate Finance partner Andrew Feeke on 0161 519 5050 or andrew.feeke@mooreandsmalley.co.uk

Extension of Covid business loans welcomed but “approval rates need boosting”, says advisor

A leading corporate finance advisor has welcomed the government’s decision to extend the four Covid-19 business relief schemes, but believes action is needed to get more of the loans approved.

Andrew Feeke, head of corporate finance at MHA Moore and Smalley, says chancellor Rishi Sunak’s decision to keep the CBILS, CLBILS, BBLS and The Future Fund loan schemes running is the right move, but lending is still too restrictive.

In an announcement on Thursday, Rishi Sunak announced an extension to the four schemes to November 30.

Commenting on the decision, Andrew said:

“The four government Covid-19 loan schemes were due to wind down at the end of September. Pushing the application deadline back is good news for UK businesses of all sizes and definitely the right thing to do, especially with further lockdown restrictions being announced and potentially more stringent rules on the horizon.

“Hopefully, Rishi Sunak will take the opportunity to reform the schemes to improve the success rate of applicants. The overall approval rate is too low at 63%, and this number is skewed by the Bounce Bank Loan Scheme, which is running at an 82% approval rate, the most successful of the schemes in deploying liquidity.

“The Bounce Back scheme only provides loans of up to £50,000 though and the more substantial CBILS scheme, which larger SMEs desperately need access to, is only running at a 49% approval rate.*

“Access to funds up to £250,000 is relatively plentiful currently, but more needs to be done for those businesses requiring more funding.”

Andrew believes there are a number of options available to increase the understanding, flexibility and ease of access to the CBILS facilities.

These may include providing a framework leverage calculation, such as a fixed multiple of EBITDA. Flexibility over the ‘relevant earnings’ – and therefore debt serviceability, or indeed increasing the threshold at which personal guarantees are prohibited, may also help boost loan approvals. 

“Some or all of the above could increase the applications and acceptance levels of CBILS so whilst we welcome the extension, we would like to see more,” added Andy.

CBILS (Coronavirus Business Interruption Loan Scheme) provides financial support to smaller businesses across the UK that are losing revenue, and seeing their cashflow disrupted, because of the Covid-19 pandemic. CLBILS (Coronavirus Large Business Interruption Loan Scheme) offers similar funding support but for larger businesses.

The BBLS (Bounce Back Loan Scheme) allows small businesses to access loans of up to £50,000. The Future Fund is a funding package designed specifically to help innovative UK companies battling the coronavirus pandemic.

*Source HMRC Covid-19 business loan statistics.

Corporate finance team advises on MBO at automotive parts business

A company which designs and manufactures specialist automotive parts has been bought out by its management team, in a deal supported by our corporate finance division.

Bailcast Ltd, which distributes its rubber vehicle parts to over 40 countries worldwide, including Europe, the US, Canada, Australia and New Zealand, has been purchased for an undisclosed sum.

The company’s finance director Lorraine Alty, sales director Martin Calley, and operations director David Hartley have acquired the business from founder Philip Hayward who will retain a minority shareholding.

The deal team at MHA Moore and Smalley was led by corporate finance director Stephen Gregson and tax partner David Bennett.

Philip, who established Bailcast in 1980, said:

“The business has been in the safe hands of our excellent management team for the last few years and it is a pleasure to be able to offer them ownership in the business.

“This deal ensures a seamless transition and continued certainty for the many stockists and distributors worldwide who have come to rely on the quality of our products.”

David Hartley, operations director at Bailcast, added:

“The business has been successful because of its strong engineering pedigree, backed by excellence in research and development. This ethos has allowed us to provide great products and outstanding customer care to our distributors across the world. With Philip’s continued support, we will stay true to these values as we continue to develop new markets.”

Stephen Gregson commented:

“It’s been a privilege to support a longstanding client of the firm. Not only does this deal help the founder achieve value from a business he developed over many years, it means Lorraine, Martin, and David can build on the success they have already enabled, taking Bailcast forward to the next stage of its journey.”

Bailcast makes rubber parts for vehicle drivetrain, steering and suspension systems, primarily for the spares and repairs aftermarket.

Its patented worldwide products include market-leading CV joint boots and steering rack boots, as well as ball joint dust covers, fitting tools and accessories. The business employs 13 staff at its headquarters at Chorley North Industrial Park.

North West Finance Directors Webinar Autumn 2020

The NW FD Network is run in association with AFR Consulting and Barclays. Our mission is to help Finance Directors and Senior Financial Controllers to continue their personal development through:

  • Observing key note speakers
  • Expanding personal networks
  • Exchanging knowledge and ideas with peers
  • Receiving technical updates

What the webinar covered:

During the course of the webinar our presenters looked at ways businesses can adapt and thrive as we emerge from the COVID-19 global pandemic.

Sophie Wheeler-Traherne, Assistant Vice-President, Government Relations at Barclays opened the event with a UK Political update. Sophie has spent her career working in politics. Most recently she worked for the Secretary of State for Wales as his Special Adviser, working on policy, communications, legislation and political engagement.

Andrew Feeke, Corporate Finance Partner at MHA Moore and Smalley discussed how businesses valuations will differ in the post pandemic landscape.

Thirdly the presentations turned towards a focus on the workforce. Emma Swan, Partner and Head of Commercial Employment at Forbes Solicitors provided an employment law update. Emma works with clients of a variety of sizes in contentious and non‐contentious matters, and is a Legal 500 recommended lawyer.

Please find video below

North West Finance Director Autumn Webinar

MHA Moore and Smalley advises on vulnerable care acquisition

A Manchester-based healthcare investment company has acquired a £4.5m care and education provider as part of its ongoing growth strategy.

Tristone Healthcare, a subsidiary of Tristone Capital, has acquired Southampton-based Sportfit Support Services which offers care and education services to vulnerable young people including those with learning disabilities and requiring supported living.

The acquisition is one of a number planned this year as Tristone targets £35m revenues and £7.5m EBITDA in the next 18 months through its buy, build and hold strategy.

Tristone was advised by MHA Moore and Smalley’s Corporate Finance and Tax Advisory teams who provided financial and taxation due diligence support alongside wider deal advisory services.

MHA Moore and Smalley’s acquisition team was led by tax partner David Bennett and corporate finance director Simon Carruthers.

Simon Carruthers said: “The Tristone team are passionate in their plan to build a significant social care group delivering positive social change through the alignment of commercial returns with social impact.

“Assisting the team to shape and deliver a transaction that will help Sportfit progress to the next level and provide exceptional support for even more disadvantaged young people has been extremely pleasing.

“This is the second transaction in the social care sector that our Corporate Finance team has helped deliver from start to finish during lockdown, based on the team’s deep understanding of and strong credentials in children’s and young person’s services in particular.”

The deal increases the number of vulnerable young people currently supported by Tristone businesses to 98.

Tristone founder and CEO, Yannis Loucopoulos, said: “Sportfit is a fantastic business that perfectly aligns with our values and helps us further deliver on our purpose of providing safe, essential care, while enriching lives through education for vulnerable children, young people and adults.

“It’s an excellent example of our strategy of acquiring profitable social care businesses with a track record of success and a strong management team.”

MHA Moore and Smalley advises on PE-backed acquisition of personal alarm business

A leading field service management company has acquired a North West-based lone worker protection provider in a significant private equity-backed deal.

Lone Worker Solutions, which provides personal GPS and emergency alarm devices and apps for solo workers in high-risk environments, has been acquired by Belfast-based PE-backed Totalmobile for an undisclosed sum.

Totalmobile provides workforce management software such as cloud-based job management and data analytics platforms. The company is supported by technology-focused private equity firm Horizon Capital and says the deal will add scale to its end-to-end suite of staff management solutions as part of its ambition to further establish itself as the UK’s premier field service management provider in a range of sectors.

Lone Worker Solutions was formed in 2009 and is headquartered in Rochdale, Greater Manchester. It employs 18 staff and services clients including NHS Trusts, county councils and National Rail.

The company’s management team was advised by MHA Moore and Smalley. The team comprised Andrew Feeke and Ian Waddingham (Corporate Finance), David Hackett (Tax) and Joe Sullivan (Corporate).

Andrew Feeke, corporate finance partner, MHA Moore and Smalley, said: “Lone Worker Solutions has been our client for the past five years.  We were extremely pleased to be able to bring in our corporate finance and transaction tax specialists to negotiate and structure a great deal at an important step in the company’s progression.

“Our corporate finance team has been busy throughout lockdown and it is clear there is still an appetite for mergers and acquisitions in the North West. We have advised on a number of significant deals in recent weeks with more expected to follow over the coming month.”

George Stavrinidis, chief executive officer, Lone Worker Solutions, said: “We are very excited about completing this hugely significant deal for the company. Totalmobile is a business which is well-aligned with our own culturally and will bring huge technical benefits and scale to our current operations.

“We have had a superb relationship with MHA Moore and Smalley for a number of years and were able to call on the team’s expertise at various points during the transaction.”

Forbes Solicitors also advised Lone Worker Solutions on the deal. The Forbes team was led by Nick Pickup and included Pauline Rigby and Rebecca McCann (Corporate), Mohassan Mehmood (Commercial Property) and Abigail Lynch and Sal Chowdhury (Employment).

MHA Moore and Smalley advises specialist residential care provider on new investment

MHA Moore and Smalley is proud to have supported a Cumbria-based client in securing new investment which will help it expand its specialist support for children.

A Wilderness Way (AWW), a provider of specialist residential childcare and crisis intervention services, has secured backing from BGF to support its continued investment in providing critical care to vulnerable children.

BGF has invested for a minority stake in AWW which has a portfolio of 20 properties across Northern England and Scotland.

Founded by Geoff Jenkinson and Clare Houghton in 2007, AWW has established itself as a leading provider of high-acuity, life-changing residential care for children at significant risk from exploitation, violence, crime and abuse.

BGF’s funding will be used to develop AWW’s unique provision of individualised care which delivers trauma-informed therapeutic care with contextualised safeguarding to keep vulnerable young people safe. AWW’s approach promotes the focus on developing young people’s self-esteem and confidence through outdoor adventure activities and re-engagement in meaningful learning through AWW’s individualised education programme.

Geoff Jenkinson, CEO of AWW, commented: “BGF’s ethos and values are well aligned with those that we hold so dear at A Wilderness Way, allowing us to continue to put quality of care and education of our children at the forefront of everything that we do.

“Quality, creativity, safety and creating opportunity for some of the most marginalised children in society is what we have excelled in over the last 13 years, and we are confident that this partnership and investment will allow us to develop further in accordance with our values.”

MHA Moore and Smalley’s corporate finance and tax teams advised the shareholders of AWW on the deal.

Simon Carruthers, corporate finance director at MHA Moore and Smalley, said: “Having worked with Geoff, Clare and the team for many years, we knew their ambition, strong management structure and clear plan for growth would be a great fit for an investor like BGF. It’s been incredibly pleasing to help put this deal together and see Geoff and Clare’s and their wider management team’s hard work rewarded.

“A Wilderness Way provides strong outcomes for children because of its commitment to the highest quality care that has been at its heart since starting the business in 2007. The investment and additional expertise offered by BGF will help the management team take the business to the next level and provide that exceptional support for even more children across the region.”

Harry Jones, investor at BGF, said: “AWW has established itself as a truly differentiated provider that delivers exceptional outcomes for the young people in its care.

“As a business that focuses on delivering social purpose, we are delighted that our investment will help to mobilise additional services to provide for the overwhelming demand for these services.”

AWW will be joined by Fiona Lowry, who has been appointed as Non-Executive Chair. Fiona brings a wealth of experience to the role, having founded several successful businesses in the Healthcare sector, including The Good Care Group, a former BGF portfolio company.

As part of the BGF deal, AWW has implemented a new organisational structure, establishing a leadership platform that can continue to deliver services of excellence and a structure of governance that ensures the safety and progress of children, staff and the organisation. Under the changes, Geoff Jenkinson will remain Chief Executive and Clare Houghton will transition to Multi-Disciplinary Team Director (MDT Director),  responsible for setting the agenda in relation to the therapy model across the organisation and promoting the best interests of children in accordance with the statutory framework.

Robbie Burke, who has worked with AWW as a consultant and Non-Executive Director since 2015, will take on the role of Chief Operating Officer, to oversee quality throughout the organisation, establishing goals for care, education, outdoor education and therapy in partnership with senior managers.

Cheri Jenkinson, who joined the organisation in 2017 as HR Manager will take on the role of Director of People and Organisation. Cheri will be a member of the Executive Board and accountable for the performance of the P and O function, as well as providing strategic counsel on all people matters.

BGF’s investment will support the growth and development of more services to the most vulnerable young people across the United Kingdom.

BGF’s Pinesh Mehta led the deal and Harry Jones will join the AWW board. BGF was advised by Hill Dickinson. AWW advised Browne Jacobson.