David Pattison, senior analyst at Plimsoll, has a clear view on this: “It has a great deal to do with necessity. Many of the larger players in the market, despite the downturn, are desperate to find new ways to develop their business, but with the current climate, costs are being cut and business development is being slashed. So they need options to help them protect their futures and tap into exiting revenue and profit streams. Financing a series of small acquisitions at key niche players in the market will give them two clear benefits:
- A quick route to increasing sales for relevantly low cost
- A foothold in the emerging sectors of the market
The facts are very clear say Plimsoll:
- For the last few years, the larger companies have been surviving on wafer thin margins, most only making 2.5% or less
- 100 of the UK’s top 1000 players are actually losing money at the moment. This is evidence that their strategy of chasing sales and volume compromises profits.
Meanwhile at the other end of the market, an emerging group 213 companies, are smaller, high focused players. These fast-growing companies have been able to carve out niche markets for themselves, some with premium profit margins. The best examples of these companies are reporting sales increases of well over 33.7% per year and margins of 7.8%
However, despite the excellent returns there now seems to be an eagerness to sell from many of owners. Several factors are at play here: a combination of their businesses now reaching a critical point in their development, twinned with the tightening of credit and a reluctance of the money markets to finance the next phase of development. In today’s market, selling their business makes sense for two clear reasons:.
- Brings the chance of stability and security to protect the business
- Accelerates the development of the company due to extra resources
David Pattison comments on these smaller companies seeking buyers: “It would be a pity of some of these exceptional businesses went to the wall, or do not get the maximum chance to prosper just through lack of funding.”