Case Study of a Recent Acquisition by an Overseas Acquirer
On 30 August 2016 Japan’s Trust Tech Inc completed the acquisition of MTrec in the UK. They acquired 85% for consideration of up to £17.1m marking their entry to the UK market. Here we explore some aspects of the transaction with Philip Ellis of Optima Corporate Finance, who initiated the transaction and advised Trust Tech throughout the deal.
This transaction was notable for a number of reasons, but in particular the fact that completion came shortly after the Brexit vote, which came as a surprise to many including Trust Tech. They were then faced with the decision as to whether to withdraw from the transaction or proceed. The Board concluded that given the specific characteristics of MTrec’s business, there was unlikely to be any significant impact and so, with some adjustments to the terms which de-risked the deal in certain ways, the deal went ahead.
This was regarded as a strong indicator that overseas businesses would continue to see the UK as a secure place to invest, so pleasing not just for the deal teams but also the wider UK recruitment market.
Exchange Rate Impact
MTrec were quick to point out that the fall in Stirling following Brexit made the deal cheaper for Trust Tech. However this failed to recognise the earnings will be in Stirling and therefore unless the exchange rate reverts to pre-Brexit levels (and who knows if or when that may happen) the earnings are effectively reduced too.
Relevant Matters for all Business Sales
MTrec is a well-run business with strong presence in its local market in the North East of England, which was privately owned prior to this transaction. Most businesses will not achieve its scale, but nevertheless some interesting lesson can be drawn from this deal which will have some relevance for all recruitment business owners hoping to one day sell:
- If you wish to attract an acquirer, your business needs to be sustainable and not entirely reliant upon you the owner. This is an even greater factor for an overseas acquirer, who may not have any local management and need to feel secure in the knowledge that their asset is in safe hands, spread across a skilled management team.
- Compliance is crucial. Using exotic tax planning arrangements may yield some short term benefits, but in the long term will damage value. Overseas acquirers may not be familiar with the intricacies of all areas of compliance and will look to their advisors for comfort. Any risk areas will reduce the chances of a deal completing, so consider carefully whether your focus should be on short term gain or medium term value.
- It is unusual for owners to sell their businesses outright and receive 100% of the value on completion of the transaction. This transaction included management retaining 15% of the equity and an earnout which could represent approximately 33% of the overall deal value, depending upon future performance.
- Ensure that there is growth left in the business when you are selling. Acquirers want to achieve a return on their investment, which was part of the attraction of MTrec. If a business has reached its peak and the profit curve is flattening, this will be reflected in the multiple when negotiating value.
One of the key aspects of a successful sale is to find a strategic buyer. In this transaction, Trust Tech had a stated acquisition plan and were keen to enter the UK market. Many of MTrec’s clients operate in the automotive sector in North East England, so the Japanese connection is expected to play an important role in the further expansion of the business. Trust tech were therefore prepared to offer what they regarded as a full price to secure this deal, which ultimately proved to be the case.
Owner Optima Corporate Finance
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