Scandinavian Buyers and the Changing Trade Sale Landscape

Evaluation and prioritisation of potential buyers is a core aspect of a sale strategy

For business owners formulating a value realisation or exit strategy, there are multiple considerations in arriving at a preferred transaction route and sale strategy. The trade sale route is often favoured over a management buyout where there is a shareholder retirement dynamic and there is not a full senior management solution to deliver a 5-7-year growth plan. It might also be because the business is operating in a sector less favoured by private equity investors, for example, manufacturing, engineering, building products and industrial services.

In establishing a list of strategic trade buyers to approach, ability to fund, acquisition history and available synergies are key areas of evaluation. Buyers’ qualifications must be balanced against the competitive risks of sharing commercially sensitive information with such parties and cultural alignment, with vendors rightly wanting a “good home” for their business. This buyer analysis shapes which parties are to be approached and how; the phasing of information being shared; and, ultimately, the messaging to all stakeholders when a deal is being consummated.

The UK is commanding increasing attention from Scandinavian conglomerates

The emergence of and increasing level of acquisition activity from Scandinavian diversified conglomerate buyers in the UK market in recent years has been striking. Their focus has been on private businesses in the more traditional industrial, engineering and B2B service sectors that operate in a defensive niche or with IP that will support long-term cash generation. In the UK, there are large populations of businesses in these sectors, and, in addition, valuations have long been modestly lower than European equivalents and well below North American metrics.

At DSW, we have acted on recent business sales to Scandinavian groups such as Bergman & Beving, Lifco, Axel Johnson International and Röko.

Many of the acquisitive Scandinavian conglomerates are listed on stock markets such as the Nasdaq Stockholm. In the UK, diversified conglomerates disappeared from public markets over 20 years ago, the sentiment being that they were inefficient and lacked strategic focus; conglomerates were broken up through demergers or sold.

In Scandinavia, investors are seemingly less sceptical of this model and are attracted by the strict acquisition criteria and process disciplines being applied, together with investment returns from a combination of high and rising dividends and the valuation arbitrage inherent in their deal terms.

Scandinavian acquisition criteria and process disciplines are strict

Acquisition targets must be well-established B2B companies that are cash generative, relatively asset-light, generate high EBIT margins of 15% or more and have pre-tax profits of at least £2m. Growth is less of a requirement than for private equity investors, and any synergies apparent with other businesses in the buyer’s stable are not “forced” or overthought but seen as an upside that might naturally evolve over time.

Management continuity, at least through a sensible period of succession planning, is of particular importance to the Scandinavian conglomerates with their diversified, devolved corporate structures. A small, retained shareholding by the vendor – with an appropriate exit mechanism – is a common part of deal structures to help facilitate this succession in the medium to longer term.

Changing buyer landscapes demonstrate the importance of considered and early exit planning

This sustained and increasing acquisitive interest from Scandinavian conglomerates has opened up a rich vein of potential trade buyers for UK mid- and lower-mid-market businesses that meet their strict criteria. Despite an apparent absence of synergies, they have proven to be highly competitive for the right assets and are tooled up as experienced acquirors to deliver completed deals expediently and generally with very limited commercial sensitivities.

More adjacent strategic corporate buyers sensing synergies or rarity value will, of course, very often prevail and have much more diverse criteria. Whilst deferred consideration and earn-out structures are very common in such deals, the timescales for a full vendor exit might prove shorter than for conglomerate buyers.

The trade buyer landscape is further broadened by the growing number of private equity-backed buy-and-build platforms which seek to generate value accretion through scale, synergies and value arbitrage.

Therefore, a properly researched and invariably international trade buyer list for a sale process in the current market will very often include these three types of buyers: strategic, Scandinavian conglomerates and private equity-backed buy-and-build platforms.

Exit planning includes evaluation of all relevant transaction routes, including private equity as well as debt-backed buyouts, equity releases and even EOTs. The broadening and more complex trade buyer landscape presents enhanced opportunity for business owners considering the trade sale route and warrants proper attention in the planning phase.

Addressing exit planning early allows rigorous evaluation but, critically, can enable the investment case, including leadership succession, to be shaped to increase appeal to the established audience and to then deliver maximum value for shareholders.