A busy year behind us and another to follow

Katharine Byrne, Partner and Head of the BDO Corporate Finance Team, recently featured in the Business Post to discuss the need for Irish SMEs to have access to funding so they can weather the ongoing challenges posed by rising inflation, continuing supply chain disruption and labour shortages.

As Ireland's leading advisers to entrepreneurial and growing owner-managed businesses, BDO Ireland helps clients to generate, protect and enhance their wealth. It was established by entrepreneurs for entrepreneurs, so the firm is well placed to know how businesses across the sectors have coped over the past year.

And partner, Katharine Byrne, says that Irish SMEs have shown real resilience since the start of the pandemic and have continued to do so. "I would say that nearly all companies have had to rethink their strategy and quickly adapt to the new environment they found themselves in," she said. "Over the past two years, we have witnessed the strength and innovation of management teams as they repositioned their businesses in spite of the disruption and uncertainty brought about by Brexit and Covid.

"The tech sector and business services have performed remarkably well through this time and were the most active sectors in terms of M&A and fundraising. In contrast, the retail and leisure sectors were hit the hardest by Covid, but the government supports that were put in place really helped sustain these businesses during lockdown."

However, despite the positivity, the head of BDO's corporate finance team believes all sectors now face significant challenges with rising inflation, continuing supply chain disruption and labour shortages – and says an emphasis needs to be placed on financing.

"It is imperative that we move quickly to support Irish SMEs at this time by providing quick access to funding supports and enabling access to international markets," she notes. "The spread of funding options for Irish SMEs has significantly increased over the last few years with increasing amounts of international capital looking to invest in good businesses with strong management teams. But the fundraising process is time consuming, and many SMEs don't know where to start. "

"In addition, to this, there is still a perception that government funding can be hard to access, and many companies are not meeting the criteria for supports provided by Enterprise Ireland or Isif. So, the funding landscape needs to have a more joined up approach between banks, government bodies and equity investors. We also need to incentivise private investment in early-stage Irish companies by providing more accessible tax reliefs. This should include review of criteria for EIIS, broadening CGT reliefs for owner entrepreneurs and extending share option schemes to help companies attract and retain talent."

 Katharine said there were many financing options available, and an equity gap should not be an issue.

"Private equity has been the biggest driver of M&A transactions over the last number of years with record-breaking levels of funding looking for investments which will generate a return," she said. "The ever-increasing number of PE funds, family offices and high net worth investors has created significant levels of competition for high growth companies resulting in increasing valuations and a lot more flexibility in terms of deal structures.

"With so much funding available in the market, it's hard to understand why there may still be an equity gap. But many SMEs do not want to dilute their equity too early in the life cycle of their company – while for tech companies, founders are very aware of the dilution impact of multiple funding rounds and often utilise different convertible instruments to achieve the best result."

Similarly, for other high growth companies, the benefit of EIIS and alternative debt funders has enabled businesses to obtain funding with increased flexibility on repayment terms and no equity impact.

"At BDO we focus on first understanding the shareholders' objectives and what they define as success. We then consider the level and type of funding available which would help them achieve this success and provide them with options on how to bridge this ‘equity gap'."

Katharine says many companies underestimate the M&A or fundraising process which can lead to unrealistic expectations in terms of time frames or valuations, and poor preparation resulting in delays and potential impact on value.

"Our advice would be to engage good advisers and ensure you define what success looks like. Preparation is key, as is being realistic on outcomes. Efficient project management of the process is vitally important to protect the business and avoid lengthy protracted negotiations and it is wise to retain some flexibility in your approach. But also ensure you have clear understanding of final agreed terms and set these out clearly in the legal contracts to protect the business."

According to Katharine, due diligence is an extremely important aspect of any corporate transaction and extends beyond the financial, tax and legal into various streams of commercial, operational, technical and environmental due diligence programmes.

"For companies looking to sell (in whole or in part), the completion of vendor due diligence enables them to identify any issues at outset and retain control of information while also maintaining a competitive auction process," she added. It is also important for companies which are fundraising to do their own due diligence on the funders – and asking for references of previous investee companies can be invaluable in terms of assessing their approach.

"So, as we approach 2022, we expect continued high levels of corporate activity which will cover across succession planning, funding for growth, sustainability and restructuring."

To discover how BDO’s Corporate Finance team can help your organisation achieve corporate objectives and grow shareholder and personal wealth, click here.

Content adapted from Business Post.

Subscribe to receive the latest BDO News and Insights

Please fill out the following form to access the download.