Green shoots become solid roots

28 April 2017

Corporate finance activity is on a steady incline. Irish firms now have greater agility in times of crisis and can do more with less.

Irish corporate finance has seen its fair share of drama of late. "Uncertainty around the European political environment (French, German and other elections this year), Brexit and the protectionism concerns around the Trump presidency has certainly tempered activity in H2 2016 and Q1 2017 but deals are still getting done," explains John Bowe, managing director at Mazars Corporate Finance. “M&A activity, while not as strong as 2015 and HI 2016, remains at good levels.”

This positive activity is seen in a number of ways. “In an Irish context access to funding has never been as good with private equity, alternative debt and corporate banks actively supporting Irish businesses seeking funding solutions for shareholder reorganisations, growth capital and financing acquisitions," adds Bowe. 

While there are still challenges faced by SMEs trying to access funding from traditional banks where the funding requirement is below €3m, alternative solutions are entering this market space taking the form of debt funds, invoice discounters, royalty funding, mezzanine finance, etc.

"Private equity groups are also constantly pursuing opportunities in the Irish market and Mazars would deal with all of the major players within the space," says Bowe. 

Tightening belts through tech

Fintech and the Internet of Things (IoT) are now ubiquitous in the corporate finance landscape in 2017.

The growing level of data available to CFOs from multiple sources and data gathering points has the potential to overwhelm some more mature board members. When harnessed correctly though, this data allows CFOs to measure and monitor business performance while also having the ability to make decisions or take corrective action (if necessary) quicker.

“The key issues for CFOs is that the data which they are receiving is timely and targeted to their requirements,” explains Teresa Morahan, partner and head of audit at BDO. “The power of technology allows this data to be gathered in real time. For example, online retailers can have information available as and when they need as to the level of sales and specific product demand."

Once the big data tech is mastered, new challenges must be faced. The tech is still in its infancy so getting the relevant data for one's required purpose is not guaranteed - whether it be forecasting and budgeting or investing decisions. It is also hard to ensure that it will be easily accessible from the large volumes of information generated through the IoT. “This is why the ability to use data mining tools is so important to allow the relevant targeted information to be retrieved and for potential trends or risks to be identified early,” says Morahan. “There is also a greater uptake by external auditors in the use of data analytics/data mining tools as part of a more targeted risk-based audit approach.”

Rolling forecasts are back

There is significant value to CFOs in the data being generated through technology platforms and Morahan alerts that this tech trend is “only going to increase in the future”.

Growth in the sector has come at a cost, albeit welcome in the long term. Companies have had to introduce various new business approaches to ensure projections and strategies for future investments are predicted and designed with as much information as possible.

“Rolling forecasts are becoming a more common feature within organisations as they provide management and decision-makers with up -to -date information with respect to expected out turns based on actual events to date and expected future revenue and costs,” says Morahan. “A rolling forecast allows new information to be incorporated into the forecast which may not have been known at the time the original budget was prepared.”

This approach has its limitations though. “A rolling forecast can also hide specific revenue and costs variances as the rolling forecasts incorporate the actual variances which have incurred to date,” says Morahan. “Many organisations who prepare rolling forecasts will also track actual results to date against the original budgets in order that specific variances can be identified and investigated as necessary by management.”

Employee reward schemes

Rolling forecasts are notoriously time-consuming to maintain for companies which are dependent on the reliability of known information currently available. “This includes, for example, current product costs and customer contracts won or lost, and the impact which this information may have on projected revenue and costs,” says Morahan.

Increased focus on management reward schemes are making sure senior management are appropriately locked in and secure in their positions. High-growth businesses and various other organisations might have key individuals critical to the business that must be incentivised to remain part of the team. “We do a lot of work tailoring schemes to ensure key players stay loyal,” says Morahan. “They are very complex to negotiate correctly, however.”

Management buyouts: attractive on account of potential rewards

Management buyouts or MBOs refer when a company's management team buys the assets and operations of the business they manage.

While financing required for an MBO is not without risks - it is often quite substantial and tends to combine debt and equity frequently derived from a combination of buyers, financiers and sometimes even sellers - it is an attractive option for professional managers on account of the increased potential rewards from being owners of the business rather than employees. 

"MBOs are favoured exit strategies for large corporations who wish to pursue the sale of divisions that are not part of their core business, or by private businesses where the owners wish to retire," explains John Bowe managing director, Mazars Corporate Finance. 

"MBOs are very much on the agenda and Mazars Corporate Finance are working on a number of them in 2017, he adds. "In an Irish context we are now three years out of a recession which impacted every business in Ireland. Transaction actively slowed during this period and natural succession planning for owners in terms of exits slowed. Now we are seeing management having the confidence to step up to ownerships and existing owners happy to facilitate the succession of their business to management."

There are numerous funding options available to management in assisting with this process, such as private equity, debt, alternative debt and also seller loan notes used to bridge funding gaps.

"From a seller perspective it is often easier to sell to management given they know the business best and therefore due diligence process, warranties and indemnities given can be less onerous," says Bowe. 


Originally published by the Irish Times.