Following a number of positive listings in early 2014 across various sectors — such as Royal Mail, B&M Retail and Poundland — there have been a number of subsequent listings that have been at lower-than-expected valuations or withdrawn at the last minute. In the latter cases in particular, these are often stigmatized by the press as failed exercises.
The root cause of the recent IPO disappointments has been the over-supply of new companies to the market, which have exceeded demand (from investors).
There is a valuable lesson here that can be applied to recruitment-business owners considering an exit with trade or private equity buyers.
Seeking a deal in the M&A market when too many other company owners are following the same course (as has happened in the IPO market) may significantly diminish valuation, or the probability of success, or both.
So then, how can one assess the level of deal activity and whether this represents excess supply over demand? Here’s how:
- First, listen carefully to the market for evidence of deals beginning and progressing, being careful to distinguish between fact and ‘noise’ (the nature of recruitment means that it will always generate high levels of misleading rumour).
- Second, think about your competitors and their exit intentions – because an excess of very similar businesses in the M&A market at the same time presents an even bigger problem for any company vendor.
- Finally, study the actions and statements of buyers, particularly those that are most likely to have a strategic interest in your business (as these are the ones that matter most when selling a business).