In association with Avondale
This year, the IoD in association with Avondale surveyed the views and opinion of IoD members and users of IoD.com.
The results were highly illuminating. Against a challenging economic backdrop, nearly 46% of executives taking part in the survey said they saw clear opportunities for growing their business over the year ahead. However, in a slow-growth, low-interest-rate environment, today’s leaders clearly understand the obstacles to organic growth and the need to look for alternatives.
These are our key takeaways from the survey:
Earnings coming under pressure
Having out-performed the majority of major Western economies over recent years, the survey highlighted an increasingly challenging UK growth environment, which is clearly being felt by leaders across most industries.
Nearly two-fifths of respondents (37.8%) reported seeing no increase in turnover over the previous 12 months, while nearly one in ten (9.1%) said revenues had fallen over the period. Profitability had also clearly been affected, with just over half of the executives surveyed expressing either a fall in profits during past year (17.3%); or no change (33.7%).
Change in turnover respective to previous year
A third of respondents (33.7%) highlighted economic conditions as the number one reason behind the recent change in turnover and/or profits, with 11% identifying Brexit as the principle cause.
A lack of growth is not for want of trying, however, with 33.7% of respondents admitting to working longer hours week to week than five years ago. As one executive expressed their aim for 2017, there is clearly a need to “work smarter, not harder”.
It’s the economy: leading factors cited in reduced turnover/profit
A further 20% of respondents highlighted cash flow as the principal obstacle to growth. Nearly a quarter of executives (21.6%) said their company was reliant on external funding for cashflow. Bank and non-bank lending were selected as the primary source of finance in just 21.7% of cases.
However, the fact that nearly half of company leaders (45.4%) in our survey stated working capital as their primary source of finance suggests that balance sheets are actually in extremely good shape.
Finding new paths to growth
Despite the growing economic and political headwinds facing leaders, most leaders are approaching the coming months with optimism. 22.4% of respondents were quietly confident that conditions would improve, while 45.9% forecasted clear opportunities for growing their business.
In most economic eras, this optimism, coupled with robust company finances, would be rocket fuel for growth. Yet in the current environment, companies have fewer channels to grow than they have typically had in the past.
Leaders are having to come up with alternatives to the traditional organic routes to growth. Along with availability of finance (10.2%), 17.3% of respondents identified the opening up of new markets as the main driver of turnover/profit growth over the preceding 12 months. A further 19.4% pointed to developments in their sector, while 16.3% identified technological advancements as the root cause of their success.
M&A provides a vehicle to accessing this array of new growth opportunities. Indeed, of the executives taking part in this year’s survey, nearly two-thirds (64.3%) said they would consider acquisitions as a means to expand their business and build shareholder value. With the UK M&A market thriving, it’s a strategy that’s increasingly being played out in boardrooms across the country.
A fertile ground for M&A: leading factors cited in positive growth
However, to achieve their goals, companies will need to develop smarter thinking around acquisitions. Rather than the big-ticket, scale deals of the past, buyers will need to focus on strategic acquisitions that display the four corners of M&A: economies of scale; synergy; shareholder value; and disruption.
Yet strategic thinking is often in short supply. With the intense time pressures facing today’s leaders, many are clearly struggling to achieve a balance between managing their organisation’s day-to-day operations and overseeing its strategic direction. More than a third of respondents (33.7%) admitted to dedicating twice as much time to managing than to directing strategy; in only 27.5% of cases did respondents spend more time on strategy. This imbalance must first be addressed if leaders are to plan and deliver successful acquisitions.
As the demand for acquisitions grows, sellers have an opportunity to strike while the iron is hot. However, a lack of clear strategic thinking can be a hindrance from a selling perspective as well as those looking to buy companies. Pre-sale preparation is key and clear objectives need to be set. To achieve the best exit package leaders must put themselves in the mind of the acquirer: does their company provide a pathway into a new market, or a chance to harness a new or disruptive technology? Will the deal generate recurring revenue?
However, close to half of respondents (48%) admitted to not having an exit plan in place, despite more than a quarter (26.5%) identifying an exit strategy as a critical requirement before considering a sale.
Looking for the exit: principal requirements before a sale
A new era of M&A-led growth?
With Brexit and a slowing economy casting a growing shadow over the UK business environment, the need to “work smarter” is a theme that clearly resonates with executives across many industries. Rather than relying on traditional, organic drivers, companies are having to look increasingly to innovation, technological advancements and cross-sector opportunities as vehicles for delivering growth.
The recognition of the need for mergers and acquisitions highlighted in the survey suggests a desire to harness these opportunities; however, many leaders are struggling to develop a clear strategic pathway needed to do so. Organisations will need smart, agile thinkers in place in order to adapt to an evolving environment. Leaders capable of identifying – and seizing – new and emerging opportunities for growth can help their businesses to thrive.
The views expressed in blogs such as the above are those of the author and do not represent the views of the Institute of Directors.
Strategic M&A Conference
This IoD conference, in association with Avondale, is a perfectly timed to harness the power of Strategic M&A and create competitive advantage in today’s complex and rapidly evolving global marketplace. Join us on 5 July 2017 at 116 Pall Mall.
In an ever-changing corporate landscape, successful leaders recognise that M&A is critical to business strategy – whether acquiring, creating shareholder value, merging or selling.
IoD members can access discounts from Avondale, the IoD’s preferred provider of business sales, acquisition and strategy services.
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