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The SME market in 2018: M&A to the fore amid growing challenges

24 Apr 2018

Double-layered image of graphs and money travelling upwardsIoD Preferred Partner Avondale bannerIn early 2018, the IoD in association with Avondale surveyed the views and opinion of IoD members and users of Some of our key findings include:

  • Owners and CEOs are working harder than ever to drive their business forward
  • A stagnating economy is affecting turnover
  • Nearly two-thirds of IoD members say they would consider an acquisition as a conduit to growth
  • Brexit blues are beginning to bite

In 2018, gaining competitive advantage means working intelligently to make best use of the opportunities and resources at hand – and that includes M&A.  Above all, there is a need for strong leadership – people with the ability to look beyond the immediate challenges and spot long-term trends and opportunities. 

With all this mind, we present the key takeaways from our 2018 survey:

Which of the following factors has had the main impact on your turnover/profit?

A weak economy is the main drag on profit and revenues, attracting 37.4% of responses. Just over half of the SME leaders we canvassed expect conditions in the UK to deteriorate further in 2018. 

Meanwhile, 17.9% of respondents already see Brexit as the obstacle in their path. A further 11.4% cite withdrawal from the European Single Market as the biggest future threat to their business, while 13% most fear the repercussions of a ‘no-deal’ outcome. 

Avondale survey graph 1

Unsurprisingly, 40.3% of respondents report stagnant turnover over the previous 12 months (compared with 37.8% in 2016). A further 7.2% have seen revenues contract. 

There are other knock-on effects, with 22% of those surveyed noting a critical shortage of skills and labour, while 20.3% of the companies profiled suffer from poor cash flow. 

The IoD’s Senior Economist, Tej Parikh, said: “The macroeconomic environment has been particularly challenging for businesses across all sectors over the past year. On the one hand, high inflation has squeezed households which has held back consumer spending, and on the other, Brexit-related uncertainty has clouded investment decisions. With price levels on their way down and progress on EU negotiations, the picture will hopefully brighten up.”

Looking ahead at the next 12 months, what best describes your outlook?

As we move closer towards Britain’s March 2019 deadline for EU withdrawal, optimism is beginning to dwindle.

A total of 34.4% of survey participants see clear opportunities for growing their business over the coming 12 months – down from 45.9% this time last year. 

Avondale survey graph 2

Despite these uncertainties only 16.3% express outright pessimism regarding the future. With a dearth of traditional growth drivers at their disposal, today’s leaders are simply having to become more innovative and identify a different way ahead.

Elsewhere, a fifth of respondents say the opening up of new markets is having a positive effect on growth.

M&A, too, is becoming a key driver of mid-market growth with 64.3% of IoD members saying they would consider an acquisition as a means to expansion. 

Significantly, a growing appetite for strategic acquisitions and partnerships chimes with wider market trends: the Institute for Mergers, Acquisitions and Alliances (IMAA) recorded a 7.3% increase in UK deals in 2017, while M&A volumes rose by 2.9% globally. 

What do you need to achieve before you would consider a business sale?

Research shows that the most effective acquisitions are those that display the four corners of M&A economies of scale; synergy; shareholder value; and disruption. 

More than ever, effective deal making demands a knack for effective planning and strategic thinking. But with growing demands on their time, today’s top-level executives are struggling to find time for strategic leadership.

Avondale survey graph 3

Only a fifth of survey respondents manage to dedicate more time to strategy than to day-to-day managerial responsibilities during the working week. More than half spend over 75% of their time managing. 

A lack of strategy also presents a stumbling block for those exiting or divesting part of a business. Pre-sale preparation is critical to a strong outcome and deal value, and clear objectives must be set. Vendors must also put themselves in the mind of the acquirer.

Just fewer than 30% of respondents cite the necessity of an exit plan before pursuing a sale, though 60% admit not having one in place.  

What does the future hold for business leaders?

To be sure, the challenges facing small-and mid-tier companies are only likely to intensify through the course of 2018. In the UK, GDP growth is set to slow further this year, narrowing to just 1.5% according to IMF forecasts.

With a third of survey respondents now spending more than 55 hours a week at the coalface, owners and CEOs are working harder than ever to drive their business forward. 

But hard work alone is no longer enough. Complex markets require complex thinking and strategic direction. In 2018, leaders must be able to embrace innovation and new technologies, and make the most of the available skills and talent. 

If harnessed intelligently, M&A can act as a conduit to these growth routes. It requires strategic thinking, and a willingness venture outside of the comfort zone and into new sectors and markets. 

Sellers, too, must think strategically about how to position their business to make the most of the opportunities on offer. 

There is global demand – from Private Equity and Growth Equity investors as well as trade buyers – for well-run companies that can demonstrate a proven track record of success. Effective pre-sale preparation and a robust exit strategy have never been more important.

Brexit or no Brexit, with the right individuals at the helm, the future doesn’t look quite so daunting. 

Whatever your next strategic move - business growth, acquisition or exit - careful preparation and expertise is critical to success. Avondale, the IoD’s preferred partner of business sales, acquisitions and strategic services, provides IoD members with the expert services to ensure you are fully prepared to reap maximum benefit.

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