0:01
Welcome to today's webinar, which on strategic growth through M &A in food and drink manufacturing being brought to you by our professional affiliate members, RSM.
0:09
First of all, thank you to everyone for joining today. We hope the content will be useful for you.
0:13
We will be doing a few polls during this session, so please do put your answers in when they come up on the screen and we'll also be doing a Q &A at the end, so please put any questions that you have into the questions box and we'll do our best to go through as many as we can at the end webinar.
0:27
Following up for the webinar, we'll be sending you an article email in the next couple of working days which will contain a recording of the session and a copy of the slides along with the contact details of today's presenters.
0:38
So without any further ado, I'll hand you over for our host for this webinar, Stuart McCallum.
0:44
Hi, thank you very much Luke.
0:46
Appreciate that introduction and just the sort of background to the webinar and also some of the follow-ups. So, yep, onto the first slide.
0:57
So, yeah, we're going to go through today just a sort of M &A update in terms of what's been happening in the UK food and drink manufacturing sector and just some tips and insights in terms of how to approach a transaction from a financial diligence perspective and from a tax perspective.
1:14
So next slide, look.
1:18
Yeah, so we're gonna go through introductions, just an overview of what we do.
1:23
Got a sort of perspective on just some of the macro aspects that I'm seeing clients being impacted or considering in terms of UK food and drink, and also some of the economic drivers at a macro level as well.
1:36
We'll then dive into a section just on that sort of AM &A topic, and then we'll have a Q &A at the end.
1:41
So please feel free to put your questions into the chat function, and as Luke says, we'll try and cover as many as we can in the session today, and if we don't, we'll follow up with you thereafter.
1:54
So that's the RSM crew today, although we are Stephanie down, unfortunately.
1:59
Stephanie has been frantically trying every conceivable option to be able to access the GoToWebinar technology, but has been denied, access denied.
2:10
So I'm going to step in at fairly the last minute so please bear with me and I'll run through Stephanie's slides as well and then I'll pass over to colleagues Sam DL and then to Robert Puller and both Sam and Rob will give you a little bit of an introduction when they're running through their slides today. So if you can go on to the next one Luke.
2:34
Yeah so I'll just run through a little bit about who we are and what we're doing in a UK and a global context, you know, from a UK perspective, we are a large firm, we've got local, regional and national and international kind of positions and, you know, today you've got me in Glasgow, Rob, Glasgow maybe Edinburgh area Rob and Sam and Manchester.
3:04
So you know you've got a kind of spectrum of people from across our UK business.
3:09
We are regionally diverse and certainly from a food and drink perspective as you'll know there are you know many regional variations in terms of you know where the food or the drink is manufactured and made and many variations of regional products as well.
3:24
So you know we're very sort of dialed into that local economy.
3:27
We can in that national and international piece as well.
3:31
You may have read or seen in articles in the last 12 months there's been an avalanche of private equity investment coming into our world.
3:40
So some of our peers we sit alongside GT and BDO just below the big four.
3:46
So GT has taken on board private equity investment from Sunven.
3:51
Our strategy has been to I suppose just assess what's been on in the market but our view has been we don't need private equity, we don't see the driver at this stage for us taking private equity so what we've decided to do is we're merging our UK, Irish, Canadian and US business into transatlantic partnerships so that is coming to fruition and hopefully will be live on 1st of January next year.
4:19
That will give us a far bigger footprint and far bigger bandwidth to play in not just the food and drink sector but every other sector that we're involved in.
4:29
And certainly from a kind of food and drink perspective, myself, Sam and Stephanie have spent quite a lot of time with our US food and drink team.
4:37
And they're very developed in terms of their profile knowledge of what's going on over the other side of the pond.
4:43
So as of next year, we'll be an even bigger firm, bigger reach, more international reach and more joined up and we'll just see where the world goes thereafter with that.
4:55
A lot of what's driving also our world at the moment is use of technology and innovation, so digital tools and AI tools are coming down the track next year.
5:04
So as I say, that will give us more bandwidth and we'll be able to support this sector even more, I feel.
5:11
So next slide, Luke.
5:16
Thank you.
5:16
So just, I guess, some of the headlines in terms of what we do, we kind of go to market as audit tax consulting.
5:22
Audit, I always feel, is the easiest one to explain.
5:25
It does what it says on the tin.
5:27
In the external audit, we can help when we work with a large number of food and drink businesses in that capacity.
5:33
Tax is an area where Rob excels in, and he's got a massive team of every conceivable tax person that you could ever need, and ones that you never knew you needed.
5:42
He's got them in a UK context and in that international context as well.
5:47
And in the largest part of our UK businesses are consulting division, and that's where myself and Sam sit.
5:54
So that is really looking at where, you know, we can provide a solution.
5:57
So we're looking for clients problems, and then we provide a solution to that.
6:02
So if you can go on to the next slide, look, I'll just run through the six solutions that we've got.
6:07
So I guess in terms of my background, I'm qualified CA, have worked in an M &A role in industry, worked in M &A banking and have also worked in M &A advisory, so I'm reasonably competently qualified to cover Stephanie's slides today, but my focus at the moment is within, we term our finance function support solution, which is really anything within a finance function where there's a problem or a need.
6:34
We're looking to bring a solution or fill it with some form of support.
6:37
That's aligning very closely with the deal services, which is where Sam and Stephanie sit.
6:45
And that's a kind of classic FDD and M &A type support.
6:49
So a lot of the clients I'm working with, we're working, I'm working with them on a growth strategy.
6:54
Part of that growth strategy probably will involve some form of M &A at some point.
6:59
What I would do at that point is bring Sam and Stephanie in to run the transaction.
7:04
They're doing it all the time.
7:05
They know the process inside out and they add so much value, as I've seen in many occasions with clients.
7:12
But for me, we are looking at how do we help our clients to grow and guide them through maybe some difficult or first-time man needs in terms of particularly an M &A transaction.
7:24
So the other ones, we've got risk and governance, is very topical at the moment.
7:27
We've seen a huge amount of interest in cyber, and we also did a webinar with FDF a couple months back on cyber security and probably some of the headlines from the M &S and co-op cyber attack.
7:42
I think it's more a question of what do you do when you are attacked rather than you're going to get attacked because you are going to get attacked at some stage.
7:49
It's just how you're prepared. A restructuring solution has remained relatively flat-camish.
7:56
Some more turbulence coming through particularly as we head further south in the UK.
8:02
There are some distressed opportunities coming through.
8:06
That may be an opportunity for you guys on the call where some of the food and drink businesses get themselves into a bit more of a pickle.
8:14
I've certainly seen some locally some distressed whiskey transactions come into the market so again that presents opportunities in an M &A context as well.
8:24
Forensics investigation services is really looking at where there's been a problem or someone is looking to find something out again and that's using a lot of technology and has quite an international aspect to it as well.
8:36
And our business transformation is really looking at probably some of the corporate sized kind of attendees today are on.
8:44
It's looking at maybe their operational footprint, their strategic footprint, their IT footprint, or their people footprint.
8:51
So they tend to get involved in longer term transformational projects.
8:55
So that's the six solutions that we've got.
8:56
we work very closely as a consulting team to make sure that the client gets the right person from wherever it is within our UK or international business with the right skills and increasingly we're using that kind of industry knowledge to sort of supplement the technical knowledge in terms of how to deliver the solution.
9:16
So as I say you've got a great cross section on the call today who work closely together and you know have been involved with the food and drink sector for many, many years.
9:25
For me, I've been involved with food and drink probably since I started.
9:29
It was a hotel group that was in their M &A team.
9:32
So I first learned about the quality of UK food and drink in many global locations.
9:38
I've then been with a combination of RBS before they bought NatWest when they went a bit crazy and caused a bit of a problem in 2008.
9:46
And I've also been with Clydesdale Bank where I headed up their food and drink sector book.
9:50
So, you know, for a long time I've spent, I suppose, I had a strong awareness of what's driving the industry from, whether it was the funder's perspective or the client's perspective.
10:02
And last year I also joined Scotland Food and Drink as a non-exec director, which allows me to see how that organisation is certainly driving from a Scottish perspective to the kind of growth strategy, which, you know, I know from the meetings I've been is aligning very closely with the wider UK market in terms of the opportunities so hopefully that gives you a little bit of a background in terms of who we are and also why the food and drink sector is so important to us and that we put a lot of focus and a lot of skills into it to give you the right people for whatever needs you have.
10:36
So look if you can go into the next page that'd be So, yeah, what I've got here is just, I suppose, some headlines in terms of maybe what's on the horizon.
10:48
And these are very much from the conversations I'm having with clients, what I'm seeing in the market, what I'm seeing Scotland Food and Drink talking about in particular in terms of that strategy, in terms of where growth is going to come in the next couple of years.
11:03
I think health and function as a lifestyle is growing and will create opportunities.
11:10
Now, clearly, there's a bit of a tension there with aspects of food and drink being perceived as potentially not the healthiest, but that is something that the industry is very, very good at positioning, explaining, and articulating why food and drink is good on many different levels.
11:28
you know clearly I guess there was no major change in terms of a kind of fat tax that was brought in at the budget but that I think remains on the radar for the government potentially at some stage to do something potentially impactful to the industry but as I say we'll roll with that when it comes.
11:48
You know low and no alcohol certainly is growing in kind of profile and of volume.
11:55
I think you've got Budweiser converting one of their plants in Wales to a no alcohol production site, which I guess is a sign of the times.
12:07
You've got Guinness Zero, which seems to be flying off the pubs.
12:14
Clearly, there is a change in people's perception of what they're looking for, and that's where, again, the industry is very good at understanding what consumer trends are and what do you need to do to evolve to position your product or potentially you know acquire something that gives you a footprint in that space.
12:32
Value plus experiences you know again that whole experience you know the restaurant experience you know what people expect where they're spending money so again you know quality food and drink in a quality location is certainly seen to be very beneficial you know this side of the border the whisky sector has been fantastic you know given that whole experience in terms of, you know, visits to having the restaurant.
12:56
You know, Glend Turret, which is in between Glasgow and Edinburgh, has got a two Michelin star restaurant attached to it.
13:04
And they focus very much on the quality of the food and drink.
13:08
It's driving people to that location.
13:09
It's driving people to that area of Scotland, so a lot of food and drink businesses are benefiting from that.
13:17
I guess digital channels, that food on the go is picking back up you know certainly the the footfall in city centers is increasing so again making sure you've got products that are going to be resonating in that market as well and also grocery you know the kind of online delivery model is is is obviously increasing and remains very important to make sure you're you're aligning to that.
13:40
I think the final one which you know bodes bodes well is you know the the improved market access that the the government has been negotiating you know, so for example, certainly India looks an interesting market at a number of different levels for UK food and drink and just as other, I guess, trade deals are being considered and hopefully nailed down, it may open up wider markets for you all to consider.
14:05
A bit of an economic outlook, I think it's fair to say that we've still got weak consumer demand, you know, and the budget, I guess hasn't fundamentally shifted that I think everyone remains kind of aware of the weakness of the UK economy.
14:21
So that is going to be a challenge for you in terms of where people are buying and what they're spending their money on.
14:29
That fiscal drag, which is probably the biggest thing in the budget, just in consumer wallet over the next couple of years is going to be one to watch.
14:39
Food price inflation has remained high and is quite doubly high.
14:43
So again, that kind of perception of food being expensive or maybe people considering what they're going to buy or the volume sizes, packet sizes, I know is one that's been an option to do.
14:56
So again, just that's something that hopefully that will stabilise and normalise and start to hopefully come back down to more in line with general inflation would be good.
15:06
I guess the high operating cost environment and labour market pressures, you know, getting people to do the jobs that you need them to do can be difficult.
15:14
You've always got seasonality right now, or over the last couple of months, you've been working incredibly hard on the Christmas rush.
15:22
And that people cost, it just remains high with changes to minimum wage as well.
15:29
So again, that operating cost environment is just another challenge that you're having to deal with.
15:36
I guess the regulatory burden just keeps increasing in so many different levels, whether it's from a local council level, from a governmental level, and just keeping on top of that is just another thing that you have to balance and try and manage your way through.
15:51
So, that's some headlines.
15:53
So, we're going to the poll, I think.
15:55
Look, if I can do that. Thank you.
16:33
Thanks, Luke, for the results.
16:35
So, yeah, we've actually got probably, what's that?
16:39
53 per 54 percent have been within the last 12 months to sort of two years and others have done 23 percent more than five years ago.
16:49
So there's quite a knowledgeable attendee list today who've gone through some form of M &A which is good to just to understand so we can even picture our answers in a slightly more nuanced way.
17:04
So next poll question, look, thanks Luke for that.
17:43
So we've got 42% diversified product services and revenue, and then the next largest driver has been to enter new markets or expand geographic footprints.
17:53
So again, that's quite helpful to understand some of the strategy you've deployed in your kind of M &A approach over the last couple of years.
18:02
So thank you for answering the polls.
18:05
So we'll go on to Stephanie's slides now so as I say bear with me because I only found out about them about ten minutes ago that I was doing them.
18:15
So what we've got is just an overview of you know the food and drink volumes which you can see over the last couple of years.
18:23
You know the COVID pause, the COVID bounce back and just general election autumn budget last year.
18:29
I think you know 2025 has been relatively stable for UK food and drink with about 105 transactions closed to the end of September.
18:40
I think that's quite positive given the challenges the sector is faced with increased wage bills, supply chain challenges and the relatively high cost of borrowing, which I guess demonstrates the resilience of the sector.
18:54
Everyone has to eat and drink the opportunities remain there in the UK and beyond.
19:03
So I guess at the beginning of the year the number of transactions that closed in the space was at the lowest levels since 2022 which you know our view was that might have been driven by the I'll call it the US impact on tariffs and just the general fiscal uncertainty after the autumn budget of last year.
19:27
However, decline, this was expected to give an impact, as I say, over the autumn budget in October last year, which brought in immediate changes to CGT, and I guess we saw quite a few transactions pulled forward into early Q4, with shareholders looking to secure lower tax rates before the changes took effect and I guess that change to you know agriculture property relief and business property relief you know has been and may be a volume driver going forward.
19:58
And if you look at the rolling average of deals done in the 12-month period, deal flow is relatively consistent over the last 24 months.
20:06
So I think we've got quite a stable environment where there remains you know activity you know of all shapes and sizes. So next slide look thanks.
20:23
So a little bit on the market outlook and what we've kind of graphed over the previous slide is just that sort of food price inflation where that's sitting and also interest rates in terms of where they have gone and how they've moved and as I say well the volumes remain robust you know this bottom's budget hasn't brought any radical changes that may drive immediate behaviours.
20:51
And whilst activity is increasing, that inflation of pressure remains and regulatory changes are making buyers more selective, very much focusing on strategic rationale and synergy is rather than pure growth plays.
21:08
High borrowing costs early in the year constrained larger scale deals, but easing interest rates later in 2025 supported renewed activity, and that hopefully will continue with interest rates potentially coming down.
21:22
Certainly, Tom Peer, our economist, is predicting maybe an interest rate drop, I think, later this week or next week, and we'll hopefully see, I'd say, further activity as that borrowing cost gets a little bit cheaper. It might spark some further activity.
21:38
The rumoured changes to capital gains tax it didn't take place.
21:43
So I guess we're also seeing, you know, increased activity from founders looking to secure an exit before the next budget as this risk is increased.
21:53
And as I do, as I said, I think that APR and BPR may change some family businesses in terms of their succession plannings, which may present opportunities for Corpus and PEVACT or consolidation, please. So next slide, please, Luke.
22:10
Yeah, so just some of the headlines in terms deal volumes and mix between trade, private equity, and PE-backed trade buyers as well.
22:21
2025 has seen fewer mega deals compared to 2024's headline transaction, e.g. the Carlsberg Brit Vic at £3.3 billion.
22:32
Instead, the year has been dominated by mid-market and bull on acquisitions, often below £50 million deal value, reflecting a shift towards value-driven deals amid cost pressures and higher borrowing costs.
22:44
There's been increased activity for the UK-to-UK domestic market.
22:48
Some of this has been driven by increased activity from private equity in the sector, where we've seen a few more platform investments compared to 2024.
22:58
Buying-build strategies remain strong, which is demonstrative of the fact that the UK still has a significant level of capital that has not been deployed.
23:10
This is driving behaviour as we're seeing the process for new funds taking significantly longer.
23:15
With some houses failing to raise the falling on funds due to the performance of previous funds.
23:20
So these assets are being held for longer, which is driving more bolt on opportunities in order to get more capital out of the door.
23:27
Trade bars have been more focused on portfolio diversification, vertical integration and supply chain resilience.
23:34
Just next slide.
23:35
Thanks.
23:37
So just some headlines in terms of some of the activity across key sectors.
23:41
So, alcohol and meat, fish and poultry have been very positive and soft drinks and bakery.
23:49
We've seen a number of transactions clients in that space where we've supported as well.
23:54
So, again, you can see there's activity across the whole spectrum of food and drink.
24:01
Next slide, please.
24:04
So, yeah, just some of the, I guess, the key trends and deals in general.
24:08
We are seeing deals taking longer to take place and we can chat about some of the timelines we're seeing maybe later.
24:15
And the preparation is absolutely key.
24:17
So be aware of what you're gonna do and have a very clear plan.
24:22
Use of data analytics is vital in terms of a deal and I think just vital in business in general.
24:31
Investment in technology, whether it's in your production side of the business or within your finance and operational aspect is something that you will be doing and will be considering.
24:42
And also how AI can help across the businesses is important to run rate performance.
24:49
And if there are adjustments, that they are robust and credible adjustments and can be supported and backed up.
24:56
And the role of ESG in transactions is increasingly important as well.
25:00
So that's just some of the key trends and I guess key aspects in terms of what we've seen in terms of some of the data on M &A in the last 12 months.
25:09
So on to the next slide, look, another quick poll.
25:31
Oh, apologies, I think this poll hasn't seemed to work for some reason, so we'll have to move on to the next slide, sorry.
25:37
All righty, okay, no problem.
25:39
Next slide then, look.
25:41
Yeah, so we'll just go through a little bit more, I guess some of the, maybe the drivers for M &A and then you'll be very glad to hear that Sam and Rob will pick up the remaining session and I can get a little bit of a break.
25:54
So onto the next slide, look.
25:59
So yeah, I guess what trends might grow or might drive an M &A strategy for 2026, and just looking at what has been happening recently, and quite a few of these deals won't be in the stats that we had earlier.
26:11
Our stats were up to the end of September.
26:14
Quite a few of these have been done in the last month or two.
26:17
So going up and down that supply chain of broadening your product range, which was a fact you noted earlier, you know, LDC Group buying Gressingham, which Rob can maybe touch on later as well.
26:31
I think the impact of, you know, Azempec and other weight loss drugs on consumers, will that increase the appetite for healthy snacking or different types of snacking?
26:44
You know, Graze has been sold by Unilever to Catches in the last couple of weeks.
26:49
So again, just a potential trend driven by that, health and lifestyle and consumer choice.
26:58
Banging into innovative product or brand, which again, I think you touched on is diversifying your range.
27:04
Local one to me that again, we've got some help we've given them.
27:09
AG Barr bought the Turmeric Company, which is a Turmeric shot business, which again taps into that consumer choice and health lifestyle.
27:20
Again, tapping very much into that health trends, Premier Foods bought Merchant Gourmet and Fuel 10K.
27:28
Merchant Gourmet was a fairly recent trend action.
27:31
So again, they're very much tapping into that consumer interest in a more healthy eating style.
27:39
And then that impact on business property relief and family businesses, probably more opportunities for corporates and PE-backed consolidators.
27:47
Lola's was bought by Finsbury Food, which again, we can maybe touch on later as well.
27:53
So that's some of the trends that we've seen that I definitely think might be a factor in 2026.
27:58
I'd be interested if you get any feedback later on in terms of what is driving your strategies, whether some of these points are ringing any bells or there's any other aspect that's making you look at M &A for 2026 in terms of growing your food and drink business.
28:13
but as I say that's some some headlines and I will now pass over to Sam.
28:21
Thanks Stuart and well done on effortlessly breezing through Stephanie's slides like a seasoned professional you are, well done.
28:29
Hi good morning everybody my name is Sam Diehl, I'm a partner in RSN Steel Services team focusing on financial due diligence largely in the food and drink and consumer products sector.
28:41
And I work a lot with Rob from a tax perspective.
28:45
So we have separate teams that look at the financial and tax aspects on the deal, but at the end of the day, work very closely to give our clients a combined report that considers both things thoroughly.
28:58
Stuart's touched on some of the specific drivers we've seen inspiring growth through acquisition.
29:05
In recent times in the sector, I'm just going to go through that again.
29:10
I appreciate that judging from the earlier poll, more than 50% of you have recently undertaken acquisition.
29:17
So some of this might be fairly, not knowledge that you already have, but for the rest of you considering it, it's useful to just recap why.
29:26
Growth through acquisition might be preferable to trying to do it organically.
29:30
And it's also worth just reiterating that in our job as financial DDE providers, we do work on both the buyer side and the sales side, probably 50-50 currently, but today's session is tailored from the perspective of a buyer side, so our audience being the buyers.
29:50
So just to recap on some of the advantages of acquisition, growth through acquisition, so obviously speed to market and diversification, organic growth requires building capabilities from scratch, developing products, hiring teams, establishing distribution channels, And this can take a long time, whereas acquisitions allow immediate entry to those markets and those geographies, which just bypasses that slower pace of organic expansion.
30:17
Access to established relationships, so building trust with customers and suppliers organically can take also a long time, it's uncertain, whereas buying a business provides that instant access to their customer base, their supplier network, and the brand equity, and you inherit those relationships with the acquisition.
30:36
Synergies and economies of scale.
30:38
So combining operations often creates the cost synergies that you'd be looking for, revenue synergies, that organic growth can't match quickly.
30:48
So this often means larger and better bargaining power, lower unit costs, improved profitability, and combining your operations with a target company can unlock cost savings.
30:58
So shared overheads, consolidated procurement as examples, and revenue synergies.
31:03
So for example, cross-selling products to a combined customer base.
31:08
Talents and expertise.
31:09
So building specialized skills internally can take years and requires that significant immediate investment in recruitment and training.
31:17
But when you acquire a business, you gain immediate access to its experienced workforce and their technical know-how.
31:24
Competitive advantage.
31:25
Staying competitive often requires innovation, differentiation, buying a business with advanced technology, intellectual property, or a strong brand accelerates transformation and strengthens your market position without waiting for that internal development.
31:41
Interestingly, I saw on the poll earlier that nobody had selected that they'd made the acquisition to acquire technology or IP, so that was an interesting result.
31:52
Lastly, on this being a product where geography involves uncertainty, understanding local regulations, consumer behavior, it takes time to build brand awareness, but acquiring that established business mitigates those risks because the target has already had that market knowledge and tested their product, most likely aligned with regulatory compliance.
32:21
You don't obviously want to take that, We'll get to that and has the customer trust.
32:26
And this obviously lowers the probability of making costly missteps in your own organic journey.
32:34
All of those things being said, I mean, acquisition is not without its risks or challenges.
32:39
And there are the integration risks that you'd expect from a cultural systems perspective as well as process alignment, which can be quite complex and costly.
32:50
High capital requirements, so to make an acquisition requires an upfront investment.
32:56
So either cash off your balance sheets if you've got it or involvement by a lender which comes with its own complexities.
33:04
Regulatory and compliance hurdles, so there will be all the legal things that need to be considered from a competition perspective, food safety, labelling, packaging, environmental, ESG and that sort of thing which you'd look to cover through a due diligence.
33:17
And then of course any unexpected post-deal issues or liabilities that arise post-acquisition that relates to pre-acquisition, you really would want to have known about those before you entered into that acquisition.
33:30
And it's just where we kind of come in with comprehensive robust due diligence, because given those challenges, it's really, really critical that this area is not overlooked when making an acquisition, either internally where you feel you have the skills and the bandwidth internally to address various areas of DD that you need or by engaging specialist providers for the various due diligence streams such as RSM for financial and tax.
33:59
There's other due diligence such as legal, ESG, HR, tech. RSM's consulting team can cover a bunch of those as well.
34:11
What I'll do now, just given my own speciality, if you could just jump to the next slide please, Luke, is just talk about some of the things we encounter very commonly on buyer side financial due diligence.
34:23
And a lot of it would relate to the sell side as well, obviously, because when we look at the sell, when we work on behalf of sellers looking at a sell side deliverable, we really think with our buyer hat on, what will the buyer and their advisors expect to see?
34:35
And we try and preempt some of that and address it upfront, which is where the value of having sell side support pre you go to market is really valuable.
34:42
but I think that's probably another session.
34:46
What we see commonly in financial D &D in our market is unreliable financial information to start off with.
34:54
So we often see a seller who may be an inexperienced founder without a tech, you know, financial background necessarily or without advisors on board conveying a certain level of earnings to the buyer.
35:10
When that's tested in D &D, we often see that that's based on let's say management reporting which isn't updated for year-end adjustments.
35:18
There might be accounting treatments inconsistency such as cash accounting and the current trading might have dipped which is something we've been seeing quite recently over the last couple years you know headline numbers given but when you delve into the more recent trading you actually see businesses is pretty much stabilized those growth forecasts that were conveyed having materialized and potentially businesses even dropped off which is obviously quite concerning.
35:47
Sometimes we also struggle with the quality of the information, the granularity of the information, so you know having the ability to really interrogate the data at skew level so you can really understand the drivers is really important.
36:04
What we would advise on a sell side is have a data cube that really allows a buyer and their advisors to adequately drill into all of those drivers so they can fully understand what they're buying.
36:15
But often we unfortunately don't see that and we're therefore limited in terms of what we can analyze in terms of the buyer side.
36:24
The next thing is quality of earnings.
36:27
So it sort of links into the first point that I was raising about the headline EBITDA on which the deal's often based.
36:35
When you properly assess that during due diligence, it's often lower than the reported earnings.
36:41
Some of this is just an ambitious forecasting by the sell side, so it might be an out to number that they've provided that the deal's based on. When you actually look at current trading, it's not quite there.
36:52
It could be that the sellers failed to take into account year-end adjustments that might reduce EBITDA or appropriate accounting policies on revenue, you know, versus cash accounting, for example, which might reduce EBITDA.
37:06
And then there's the normalization adjustments, which really, you know, I think add their value in due diligence.
37:14
Things we see commonly there are around if it's a founder managed business and they take dividends rather than salaries, they have infected in a replacement cost of that going through the P &L.
37:27
So that's something that's kind of a very easy first thing that we look at and say actually if you just factor in what will the management cost be going forward, it already drops quite significantly.
37:41
And then as we delve through the DD, we often find provision releases and nonrecurring income, also nonrecurring costs and those sort of things we adjust and we get to what we think is the sustainable EBITDA on which the deal should actually be based.
37:57
Customer concentration, heavy reliance on a few customers or one major customer for a large portion of revenues is often a key finding.
38:06
It creates a significant risk if those customers leave or want to renegotiate terms post the acquisition.
38:14
Of course, you've always got to consider whether there's any change of control clauses.
38:18
And likewise with supplier concentration, So if there's a dependence on a small number of suppliers for critical inputs, there's vulnerability to supply chain disruptions or price increases.
38:29
Labour and staff cost instability.
38:32
We look at high staff turnover, just to ensure that's just sort of within industry norms, as well as considered wage inflation, which we would have seen recently with national minimum wage and national insurance increases.
38:46
And then also reliance on temporary labour is something we look at, and that often links into tax in terms of IR35 and the impact of that on the deal.
38:59
Credibility of forecasts, sometimes simplistically unrealistic.
39:06
We find the forecasts provided to us, especially when they you know, not had any third party sell-side support in terms of their preparation.
39:16
So overstated growth expectations obviously can mislead the initial valuation and the financing decisions.
39:22
So DD would include a robust assessment of the assumptions underpinning those forecasts and the reasonableness of there are, you know, based on historical trends or robust commercial data.
39:33
So we'd look at the order book and those sorts of evidence that can support the forecasts and making our assessment of how reasonable they are.
39:44
Working capital issues, so poor management of receivables, payables and inventory can lead to cash strain on the business.
39:52
So it's really understanding how will the business generate cash going forward, but also working capital has a direct impact on the deal price that one pays because there's often a working capital adjustment in the SPA and so it's really important that due diligence properly interrogates working capital to a flush out what is a normal trend and then help you agree on what that target is set in the SPA so that the price adjustments in the end is fair and appropriate.
40:26
Integration risks, so useful to understand early on any potential cultural misalignments or incompatibility with systems that might come to bear after the transaction.
40:38
So if you can understand that before the transaction, you're better prepared to how to address them as well as factoring in any costs that you as a buyer would need to incur to remedy that into your valuation. Cash flow weakness.
40:51
So often we see a positive EBITDA number, but much less positive cash flow generation due to, for example, a data stretch. And then there's often other things that reduce cash like high capex.
41:07
So those sorts of things are considered in our analysis and should be considered in your analysis when assessing the business that you're looking to buy.
41:18
And then the last thing, so that I can still hand over to Rob and leave us some time for questions, is undisclosed debt-like items.
41:26
So we'll find hidden obligations such as unpaid taxes, litigations or guarantees that relate to a period pre-acquisition and shouldn't be for the account of the buyer.
41:36
So ideally those would be identified during due diligence, quantified and agreed as a net debt adjustment in the purchase price that you pay.
41:45
These can extend to things that aren't immediately obvious or maybe even immediately considered debts such as management bonuses transaction costs, transaction related bonuses, capex backlogs.
41:56
So for example, where a business hasn't spent sufficient money to maintain its fixed base, we would call that a capex backlog and it shouldn't be for the account of the buyer because it's not going to generate any additional revenue other than the price they're agreeing to pay for.
42:13
Delapidation provisions on leases is another one.
42:17
And then where we often see the bigger and more numerous exposures at least, and whether they eventually are negotiated to be a debt adjustment or not is another story, but we at least raise it in respect of tax.
42:34
So because there's just so much to consider in tax, there is often quite a few different things which could potentially be an account, costs that could be considered debt-like adjustments factored into the purchase price so that it's not for the buyer to pick up once they own the business.
42:55
And this is the point where I'm going to hand over to Rob, who will talk you through some of the things we commonly see in tax due diligence in that respect.
43:02
That was a flawless segue, Sam.
43:04
Hi, everyone.
43:05
I'm Rob Pooler, I'm a director in RSM's M &A tax team.
43:10
That means my main job is to lead the tax on due diligence both buy and sell side, acquisition structuring, carve outs, reorganisations, everything like that, preparations for sales.
43:23
RSM, about a third of our sale, a third of our M &A has an international element so that's working with overseas teams, that's working with overseas clients and that can be pretty important in a in a sector that has such sort of complicated supply chains like food and drinks.
43:43
In terms of industry experience, I've worked on the Lupa foods deal last year with Sam and I just finished aggressing him's duck deal last week on their acquisition, on LDC's acquisition of them.
43:56
I was asked to give you a bit of an overview of what we see in tax diligence, what sort of pops up, what causes problems.
44:03
I think take a quick step back, what's a tax diligence? A tax diligence is slightly like the financial diligence.
44:09
We the information on a very basic level, we identify risks.
44:13
However, take a step forward, what's a good tax diligence look like? A good tax diligence is risky as identified.
44:20
How do we still get the deal done?
44:22
I think no clients will thank you for just throwing a big risk grenade in there and not sitting down and working through how do we still get everything across the line when there's sort of risk, tax risks being identified.
44:34
And the solutions sort of cover broad ranges, but fall to sort of two main categories.
44:39
There's legal protections, if I am HMRC or come knocking, that's indemnities, warranties, escrows, and then the other sort of bucket falls into is something's objectively wrong, and it needs to be a price chip or a derelict item, and then there's a spectrum in between where you may start with a escrow and you do further work to figure out where it sits.
45:01
So that's sort of what we're looking for in And there's some areas that sort of crop up time and time again in the food and drinks sector and so sort of drawing out five and sort of quickly canter through those.
45:15
I think these are equally applicable if you're looking to make acquisitions or you're looking to sell your business or part of your business.
45:23
These are likely to be topics of conversation.
45:26
As a tax diligence provider, if I sit down with a food and drinks business, I can go the accounts and I could probably quickly circle three or four numbers you know whether it's capital spend R &D relief and the tax note that's going to cause us you know some concern and we need to get the bottom off.
45:44
So this first one is R &D relief I think this causes a couple of problems firstly HMRC as much as they've put it forward and it's something the government's designed to incentivize such development, HMRC are very rigorous in enforcing it.
45:59
There's lots of investigations, lots of inquiries. It's a very high risk from HMRC challenge.
46:06
So part of our DD work, we'd look at the R &D claims and try and get comfortable.
46:11
So we'd assess the historic risk and, you know, is it suitable? Do we need specific indemnities? Is there holdbacks?
46:18
And then once we get past historic risk, there's lots of deal related issues that you have to look at, you know, firstly R &D claims, you've got two years to make them, you're doing a deal, you might still have two years of R &D claims put through, that can be significant value.
46:36
Do you give the seller that on value in day one?
46:39
Is that an asset on the deal balance sheet or do you say actually let's do it pay when paid, the R &D claim it's not ready yet, we won't give you value upfront but in years one and two when the money comes back from HMRC or the deductions are taken that's when the seller gets the value.
47:01
And something that's slightly knee-sharp but it's likely to become more of an issue is the R &D regime used to have two separate reliefs. One was the small relief, which came directly in the tax line.
47:15
The other was RDEC, which for accounting purposes came above the line and was supposed to be including EBITDA and sort of combined these regimes into the new combined R &D regime.
47:27
That again is supposed to be above the line in EBITDA, but when you come to a deal and you put your deal hat on, that comes a sort of controversial topic I must have only seen two times in the last sort of five years where an R &D claim recognized above the line in accounts was actually recognized as adjusted EBITDA in a deal and a multiple applied so it's very rare so that becomes one of those sort of discussions as does the true deal balance sheet does you know does the realities of the deal world reflect you know accounting norms and that's probably where it diverges and that can to quite heated discussions because it could be potentially quite lucrative for a seller in that position.
48:12
Next area that does cause a lot of concern for us or a lot of area of looking at is the supply chain and that revolves around VAT and customs etc.
48:24
You know in the food and drink sector you've got quite convoluted supply chains whether you're importing, exporting, selling directly to consumers overseas this create overseas VAT liabilities should you be registering for VAT in France and Germany as important to them.
48:56
These are areas that crop up time and time again and if you're going into a deal to sell your business I'd always think actually let's really get on top of our supply chain. Are we doing everything right? Is there any weaknesses?
49:09
Are we really confident on how the supply chain looks?
49:12
Because at the end of the day you want to be negotiating deals, speaking about interest in commercial aspects, you don't want to be sort of discussing the technicalities of that supply chains.
49:24
I think the whole purpose of preparing business for sale and tax EDs is just try and identify the risks and move on to the more sort of interesting commercial discussions.
49:35
The other area that pops up quite a lot is capital allowances.
49:39
So often food and drink businesses do have large cap expend.
49:43
I think just making sure the right amount has been claimed historically and actually who's getting value for future claims is recognizing deferred tax.
49:52
Are you going to give the seller, are you going to deduct the deferred tax liability of the seller?
49:57
It comes a bit of a debate. That's often a hot topic.
49:59
The more capital intense for businesses, the more sort of interesting a discussion point this gets.
50:04
It could be quite a big value item.
50:07
So you need to get your arguments sort of consistent and you need to decide how you're sort of playing this in the negotiations.
50:13
When you both, you know, agree a deal and heads the terms.
50:17
and when you try and get the lockbox completion accounts across the line.
50:22
I think slightly related to that capital allowances is, you know, property.
50:26
If you're buying or selling a business, are all the properties in the right place?
50:31
Do you have a factory sitting in a pension fund that you need to use?
50:35
Do you have that owned by a sister company?
50:38
Does it all need to be consolidated into a single target company?
50:44
If so, what's the tax implications of that?
50:46
How has that done tax efficiently? And if there is tax charges, who picks up the bill? Is it seller?
50:51
Is it buyer? That's an interesting point. And sort of fourthly, national minimum wage.
50:58
I think this is near, it does pop up in some food and drink businesses.
51:01
There's a lot of sort of technicality in national minimum wage. There's two aspects to it.
51:06
You can get fined and the fine can be a 200% penalty.
51:10
And you get named and shamed, which is often worse for businesses selling straight to the consumer and it causes issues if you want to sell into sort of some of the bigger supermarkets, Tesco, etc.
51:21
You really don't want to be naming a shaming list.
51:24
The rules are fairly complex and can be arbitrary so if you call someone a salaried employee and you're technically supposed to work out their wage over the year and some months get paid slightly more than minimum wage, some months get paid slightly less than minimum wage, sometimes that trips it up and even though over the course of a year someone gets above minimum wage you've not paid them minimum wage for, you know, a 30-day month and therefore it causes some issues that really shouldn't be caused.
51:53
As well as, there's often issues that pop up with temporary labour. You provide accommodation, you deduct a lot of their salaries.
52:00
Have you brought them below minimum wage? So there's a lot of things that you may think someone pays minimum wage.
52:08
There's no worry here, but there's just a lot of hurdles and traps there.
52:14
Finally, what I was going to cover is employee ownership trusts, and this expands to more any sort of seller's share structure.
52:23
Employee ownership trusts were brought in a few years ago.
52:25
Essentially, what they do is a tax-efficient way for a founder to sell their shares to the employees.
52:33
Prior to the budget, there was 100% tax relief, so the founder didn't pay any tax on the sale as long as it was sold to a qualifying employee ownership trust.
52:42
Post the budget, it's a 50% relief, so that reduces the tax in half if you sell to an employee ownership trust, opposed to selling to trade or P, etc.
52:54
Because it's been a thing for a few years now, we're seeing the outcome at the other side, and that's starting to cause difficulties.
53:01
So some of the deals that we're sort of starting to look at now, they were sold to an employee's ownership trust three or four years ago, but actually the trust is underwater, so the market value for the business our client would want to pay is 20 million, but the old owner sold it to the employee's ownership trust a few years ago, got valuation done, it was 30 million.
53:24
some of that's paid up front, if the employee ownership trust can borrow or it's sort of paid on a deferred consideration basis.
53:33
So sometimes you're trying to pull it by up an employee ownership trust but the employees will be under water and therefore you need to sort of think about how you structure the deal to allow the trustees to allow you to buy the business.
53:48
So if you're ever looking to acquire a business that's owned by an employee ownership trust I think you need a long sort of lead in to think actually these are some complications coming in both tax and legal and commercial let's have a good think about the structure a long time before the transaction to make sure all the options at the table and everyone gets this or the best deal and walks away happy.
54:10
So I think that's a bit of a whirlwind through tax so we have five minutes which is hopefully enough for questions.
54:18
Yeah and mugshots as well So yeah, there's a few questions popping through. So let me see if I can find them.
54:33
Good question. What trends are you seeing in valuation?
54:38
Is growing fixed cost national minimum wage impacting valuations, would you say?
54:48
Any challenges or issues with that?
54:53
This is where we really need Stephanie, don't we?
55:00
I think valuations definitely have been impacted by the staff cost, the fixed cost increase.
55:11
Not the only thing impacting it though.
55:16
Again, we've got another question about UK market valuations compared with equivalent EU US businesses.
55:22
I think that's one we'll pick up afterwards with the person who's asked that question and Stephanie can chip in because there clearly are different country variations and different country drivers.
55:36
So let's a couple more questions. How would you go about finding someone to buy?
55:43
What sort of approach would you to that? Have you guys got any tips in terms of how you would start that thought process?
55:54
I can pick that up.
55:58
So I guess understanding what your gaps are, what you're looking for is important.
56:05
Understanding who you already know in the market that might be open to acquisition and whether there's a relationship there so you could have an off-market conversation.
56:18
those sorts of deals are generally preferred because there's costs involved.
56:23
That being said, it's always helpful to have an advisor on board.
56:27
It's really helpful to get your name out there with boutique M &A advisors or M &A advisors that have a food and beverage focused team because if they know that you're looking for a specific type of asset and you keep in touch and you're high on their list, then they're very likely to bring something to you when it's relevant.
56:46
So, it's really having the connections with those intermediaries is critical, and then you could also engage at formal target search through an M &A provider, it could help you with that.
57:00
Yeah, okay.
57:01
And I mean, clearly, if anyone wants to register, we have a sort of deal continued if there are deals and opportunities.
57:06
We're looking to find people to match them up.
57:09
So, if anyone does want to register with that, we can put you on our database.
57:13
if we are seeing opportunities then you would be approached for them.
57:19
Just one bigger question just in terms of the funding environment for food and drink growth deals, from my own perspective I always viewed when I was with my banking hat on it was viewed as quite a defensible sector, it was asset rich, it was a bit positive in a number of cases but some of the comments you made, Sam, about that working capital management can be challenging, but from your perspectives, have you seen transactions you've been involved in that you've had, sort of, our clients have had positive funding support?
58:01
Yeah, I think it's just critical to have really robust due diligence supporting that, so that a lender can really get comfortable with the working capital profile and the business case.
58:16
Yeah and what's a kind of estimate of a length of a process if you're looking to buy someone, how much time should you kind of budget for, how long is a piece of string?
58:27
Yeah that's right, in a perfect world a deal could be done in three months I suppose from start to finish, a smallish deal with limited complexity with good quality information.
58:43
We do see, as you pointed out earlier Stuart, things taking a lot longer.
58:48
When a business is engaged, SolSight supports, so they have an existing either VDD report or vendor assistance report, which can be either a physical PowerPoint report or workbook, but gives a real headstart to a buyer, that's really helpful.
59:07
Likewise, when they have an advisor on board that understands the deal mechanics, and what everything means, it's a lot easier because you've got that person with the knowledge.
59:18
I think we struggle sometimes where we, on the buyer side, are dealing with a seller who hasn't got any advisors, is not financially minded themselves, and has poor quality of information, then it just takes a long time.
59:35
So I guess it's like anything is, make sure you've got the right team around you to support you, And you've also got a clear strategy plan in terms of why you're making the acquisition, what you need in terms of funders.
59:46
So getting your kind of ducks in the role will make a process more efficient.
59:50
And the earlier you do that, the better, isn't it?
59:52
The more options on the table.
59:54
So you'd say that from FSS, Stuart, wouldn't you?
59:57
Two years from the transaction, you could put in more systems than you can.
1:00:00
Three months or six months, and we'd say that from clearing up tax or getting rid of other issues.
1:00:06
Yep, yep.
1:00:07
Okay, well that says we're one minute over, one minute past 11, so I'm going to say reasonably to time and thank you very much for joining the webinar today and for those who are watching it and catch up, then thank you for watching it and catch up as well.
1:00:23
But we've been delighted to work with Food and Drink Federation over the last couple of years.
1:00:27
We deliver a number of different topics, kind of an M &A at least once a year is always a good update.
1:00:32
So thanks very much for joining.
1:00:34
We've got contact details in the slides so please feel free just to reach out, link in with us or email us if you can help in the future.
1:00:42
So thanks very much guys, thanks Sam and Rob for helping pull this together and yeah next time we'll definitely make sure Stephanie can join as well.
1:00:51
So look if you can just close the webinar that'd be great, thank you. Thank you.
