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Merge, acquire, grow or expire

morphose_nick_athertonIn this article FMJ hears from Nick Atherton, managing director of Morphose about mergers and acquisitions in the FM industry. With questions still hovering over the national economy how do people in the facilities sector know when the time is right to buy and sell?

Should I stay or should I go…

Mergers and acquisitions (M&A) are always a question of economic reliability. Whether buying or selling, all parties involved need absolute assurance that the time is right. Without intimate knowledge this can be difficult to gauge, but occasionally checking the market pulse can give you a fairly good understanding. Naturally, when the economy is in good health and the market is stable, decisions are made quickly and terms are agreed with greater confidence. Currently, a question mark looms over the economic landscape, but fortunately for those in FM, the industry continues to be very resilient and FM weathers well in times of uncertainty. Despite the unprecedented nature of a ‘Brexit’ vote, and the doom-mongering that was forecasted preceding the vote itself, the market for mergers and acquisitions within FM is buoyant. Both buyers and sellers seem keen to ‘keep calm and carry on’ irrespective of what could happen in terms of legislation and economic peaks and troughs over the coming 12 to 18 months.

The good thing is FM remains an attractive investment opportunity because the industry is very dependable – the demand for services remains constant and thus profit potential remains steady. When you factor in that the FM sector itself makes up approximately 10 per cent of the UK economy, according to a recent survey from Sheffield Hallam, it is unsurprising to learn that it remains steadfast while other sectors see investors disappear and activity dry up. It is also encouraging to note that the first quarter of 2016 saw more than 20 deals made, representing a nine per cent increase on the previous year.

Not all FM is created equal …

FM as an entire industry is incredibly varied but certain sub-sectors of it are currently more desirable than others. Services such as guarding and cleaning present themselves as much leaner investment options as the margins for gain sit at the lower end of scale. This is not because they are simply unattractive business ventures – recently there have and continue to be good deals brokered in these areas, particularly in cleaning – but has more to do with the particular business model which many of these services adhere to – a model which limits the chances for extensive growth. For those operating in these sectors, managing expectations is key to brokering a good deal for everyone involved. On the other hand, energy, cyber-security and software related businesses are all exciting areas for investment, and the opportunity for future growth is considerable. For those looking to sell, exit multiples in these industries is currently at a peak and the market is primed for excellent returns on the sale of businesses. Beyond more superficial market trends, there are a number of reasons why these sectors are so desirable, but one of the key factors is that they are more straight forward to optimise. For example, improving software requires minimal outlay on workforce and energy consultation continues to improve as companies become more focused around saving on energy costs. Of course, with the advance of technology and its increasing use within the workplace – IOT, CAFM, ‘Smart Buildings’ – interest around software businesses will continue to grow, and with governments focusing more on digital threats, and environmental ones too, the same principle applies to cyber-security and energy. Essentially, if there is interest, and the business is sustainable or primed for optimisation, then the company will sell – M&A 101, you might say.

Niche …

While many larger companies will look to absorb a smaller competitor along with its clients, the need for specialist suppliers in FM remains. This is not something new to the world of M&A, or even FM, some businesses simply prefer the ‘niche feel’ of a smaller provider. The closer interaction and sense of bespoke service that often comes with a smaller operation offsets the larger expense they will have to charge in comparison to more established counterparts. This is an important thing to keep in mind when considering buying or selling any business, the portfolio of clients which a company holds need subtle consultation on their views regarding providers and their satisfaction with the scale of operation. It would be irresponsible practice to sell an organisation that has contracts with clients who prefer the feel of a smaller provider. This is especially important for FM, as the differences between providers and their suitability for different clients will vary considerably. While the aim of M&A is always to get the best deal for your money, client satisfaction should always be a top priority, neglecting this can mean disaster for any prospective deal.

Think big, think different …

If you’re an FM provider, it’s not difficult to ascertain the scale of an operation. The trends within M&A are usually very regular, as mentioned certain sectors may have their ‘moment in the sun’ and exceptional events such as ‘Brexit’ will interrupt the current for a time, but generally speaking the climate is fairly constant. Activity continues day-to-day on a number of levels, but larger-scale businesses rarely make an unexpected move, and if they do, competitors usually follow. This is not exactly ground-breaking news for anyone in business, especially when you consider the scale of work involved between buyers, sellers and other third party investors – massive deals take years to complete, and often the right moment, economically speaking, has passed to have made the entire process worthwhile.

However, market developments indicate that acquisitions through the medium tier of FM providers is primed for significant flurry of activity. These are the types of businesses – ones with a time-tested reliability, strong brand cultivation and developed client portfolio but haven’t yet accrued the revenue of a major provider – that look to be the next major play for M&A within FM. Again, this is hardly surprising because medium tier operations present themselves as strong investment prospects, they will often already be profitable, maintain a strong pool of talent and attain up-to-date compliance qualifications – there will be minimum work to be done to make a success of any acquisition.

In a more advisory capacity, particularly in my experience at Morphose, clients now seem to look for a more intimate working relationship through the brokerage process. Negotiations are more settled for clients when the working relationship has ‘bedded in’, typically with minor activity before any major suggestions or changes take place. This is only natural, and looks to be a trend that is here to stay. Particularly for those looking to sell in FM, this is a great development as businesses that are nurtured through an advisory process in this way invariably end up selling for more in the long-run. While it seems M&A is a fairly stable and unchanging process, the FM sector is currently poised for a bold move. Interesting developments do not necessary have to be risk-laden gambles, with the correct advice and knowledge an innovative proposition can shake up an industry can really propel growth.
So if you’re in the market for change, know the dynamic, know your clients and think boldly.

About Sarah OBeirne

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