The ASX 2023 IPO data supports the capital raising experience of many business owners and managers over the past 12 months – it was challenging!
Global economic conditions and market uncertainty combined with increasing costs of capital have expanded the valuation expectation gaps between what investors were prepared to pay for acquisitions and sellers’ price expectations. These conditions can make achieving a successful public market IPO very challenging.
These same conditions, however, present opportunities for well prepared business owners to create a liquidity event via merger or acquisition (M&A) activity.
A private M&A transaction may be an attractive proposition for vendors of a mid-market business for a number of reasons including:
- Reduced complexity and transaction variable compared to a public market transaction
- Access to large pools of undeployed private capital (family office, private equity etc.)
- Potential for acquisition by a local or global trade buyer seeking expansion or access to complementary products, knowledge workforce, technology, or markets.
As observed in our M&A Annual Report FY2023 the past year has also been a relatively restrained period of M&A activity within the Australian mid-market segment. The report analyses Australian M&A transactions by deal volume, pricing and industry. Our report noted a reduction in the total number of deals completed (1,077 deals completed in FY2023 compared to 1,455 in FY2022) and also a reduction in the average transaction value ($92.97 million in FY2023 down from $121.30 million in FY2022).
While a number of transactions may have been temporarily postponed during 2023 with business operators deferring transactions until market conditions become more favourable, there were positive signs late in the year with a number of high profile transactions announced or completed including the public markets M&A transactions involving Newcrest, Sigma Healthcare, Allkem, Link, Healthia and Invocare.
There remains a significant amount of undeployed capital that has been allocated to private capital managers (private equity, family offices etc) that needs to be deployed in order to generate a return for investors. Combined with trade purchases looking for opportunities to diversify or expand their businesses to take advantage of emerging opportunities, there are many acquirers on the lookout for good businesses. To take advantage of these opportunities in 2024 and beyond, vendors need to be prepared in order to navigate the transaction process and reduce opportunities for deals to stall as a result of an increased due diligence focus of acquirers, looking to mitigate their risks.
Vendors contemplating an IPO or M&A can take steps now to proactively plan for a transaction which will maximise the likelihood of success, maximise the value of their business and provide optionality over the desired timing and pathway for a liquidity event.
While many factors contribute to a successful exit strategy, we have identified some key steps to improve the overall outcome:
- Early preparation: plan for a potential liquidity event well in advance. Adequate lead time allows for thorough due diligence, financial audits and documenting internal systems, processes and strategies. Consider and address potential risks. Become transaction ready.
- Develop robust corporate governance: A well-structured and transparent governance framework instils confidence in investors and de-risks the investment.
- Expert advisory team: assemble a capable team of advisers, accountants and solicitors to navigate the complexities of the exit event, as early as possible. Their expertise can optimise opportunities and mitigate risks.
- Sustain focus on core business: even if contemplating a transaction, maintain operational focus to prevent erosion of business value. Implement processes and delegate responsibilities to ensure business continuity during the transition.
- Explore diverse options and remain flexible: explore a range of potential transactions that align with your exit goals. Being prepared allows you optionality to consider a variety of transaction structures which enhance the likelihood of a favourable outcome.
Being prepared and taking action now will maximise business value and provide vendors with maximum transaction optionality, regardless of whether it is part of a well-developed long-term exit strategy or you have been presented with an opportunistic offer to exit/list your business for a value too good to pass up!