Following the seller analysis in our last article, we now focus on the availability of funding and review of recent transaction prices.
Availability of funding and review of recent transaction prices
Of course, cash is needed to feed the growth engine and we set out below our thoughts on the current funding market place.
- Generally we have seen an increasing appetite from the banks to lend to the sector for acquisition purposes commencing in 2013 and gaining momentum into 2014. The banks are now actively targeting their teams to achieve net growth in their lending book, particularly as they have made commitments to government that they will achieve this. The result is a continual softening of the banks stance with regards to lending multiples, ratios and covenants.
- At the same time, a return to a much more stable commercial property market is allowing surveyors to be slightly bolder in their view of property valuations for lending purposes.
- On the flip side, the increasingly competitive market together with a return to financial health for the sector is driving up goodwill multiples and absolute goodwill values. Goodwill is notoriously difficult to fund via debt and typically will need to be funded out of existing free cash resources. Whilst this may be palatable for a volume acquisition, affordability will be a challenge for any premium opportunity with goodwill as high as £7m being paid for a single site on various 2014 transactions. This can effectively exclude the smaller players from the race unless they have the strong support from the manufacturer who may be able to fund the goodwill through their own finance arm.
- Of course, the consequential impact of any heavily leveraged deal is the interest rate risk it poses. Bank of England interest rates are still at record lows but of more importance are the margins the lenders are charging which have continued to fall throughout 2014. Rate rises are inevitable however over the medium term and the funders are reflecting this in the sensitivity analysis they require over the future forecasts. In turn, buyers are looking to mitigate this risk via the use of fixed interest rate deals. These look expensive in the short term but do provide security over interest costs moving forwards.
The most important part – transaction prices
To summarise, we have a strong and growing appetite from buyers, particularly for prestige and well located volume franchises. Funding is readily available. However, the volume of quality businesses being brought to the market remains relatively low compared to demand.
Of course, and similar to the used car market we have seen in the last 2 years, this can only mean one thing – rising prices. Goodwill payments have been rising in recent years with some key highlights in terms of 2014 transactions as follows:
In 2015, we expect to initially see transaction prices being maintained at their current high levels although easing back as we head into the final quarter of 2015 as supply begins to equalise with demand.
For more information please contact Paul Daly, Partner at UHY Hacker Young Manchester, firstname.lastname@example.org or phone on 0161
This article by Paul Daly was originally published in AM Online, Franchise Dealer Report 2015.