Jim Shaw, partner at Shaw & Co explains the top six key issues that he believes every SME owner/manager should be thinking about in 2021.
Barely a day goes by without forecasts predicting continued and significant challenges throughout the economy during 2021. Evolving financial support from the Government, the fallout from Brexit and continued business and unemployment woes in retail and other sectors, have hit SMEs particularly hard.
What options are available for business managers and owners to help them not merely survive but also to flourish in 2021?
When income is threatened, businesses naturally review costs. Many that were forced into making significant savings in 2020 found a new realisation – savings can be made without necessarily negatively impacting delivery. Efficiency is therefore a key theme for 2021.
For many businesses, the most significant cost is people related. Job rationalisation presents a risk to culture and morale, so it is worth considering carefully. With remote working a feature of the “new norm”, dealing successfully with personnel change presents a significant challenge.
This drive for efficiency is accelerating digital evolution which often requires investment. In times of challenged cash flow, this can be a barrier to achieving these long term benefits. Cost cutting or more accurately increased efficiency, from whatever perspective, is something all SMEs must address to compete in 2021 and beyond.
Maximise cash from existing assets
It is rare for businesses to carry significant unencumbered assets, but it is worth reviewing whether further cash can be extracted from property holdings or debtor ledgers.
Property assets such as offices, factories etc., may present opportunities for sale-and-lease-back schemes to free up capital, whilst retaining long-term certainty of occupancy.
Alternatively, if the current debt on the assets is relatively low, simply re-financing may release adequate capital whilst retaining ownership. Raising sufficient finance may not be achievable through traditional banks, as they reduce their credit appetite, but alternative lenders could well offer the desired solution.
Raising debt and ‘terming out’ existing loans
2020 saw net debt to UK businesses grow 5-fold, reaching nearly £0.5 trillion, of which over £70 billion came from Government emergency funding. Repayment holidays on most Bounce Back Loans and Coronavirus Business Interruption Loans expire in 2021, which together with deferred HMRC and rent liabilities, adds to the notable debt servicing burden carried by an average UK SME.
After the funding flurry of 2020/1, banks’ appetite for lending in 2021 is set to tighten. The alternative lending market is there to fill the gap with a plethora of well capitalised and resourced lenders seeing the opportunity to grow market share. However, given the very niche product specialism of most alternative lenders and wide pricing variances, SMEs would be wise to seek expert advice on navigating this market.
Alternative products do tend to offer longer amortisation terms (often 8–10 years), as well as bullet repayment features, thereby reducing the overall debt servicing cashflow burden. Many alternative lenders will seamlessly lend alongside mainstream banks, so are a viable option to fill the capital shortfall left by banks. The speed and flexibility of credit underwriting, higher leverage and not having to move business accounts from the existing bank may also appeal to many SMEs despite higher rates.
SMEs unable to fulfil their funding requirements in the traditional and alternative debt markets can consider an equity raise.
Raising equity is of course dilutive to business owners, but comes without, or with much reduced, interest and capital repayment, meaning that more of the money can remain invested for longer. This may be an attractive option to recapitalise a balance sheet, provide funds to capture an opportunity, or deliver resilience in weathering the remaining pandemic.
There is plentiful capital in the equity market from a variety of funds, family offices and private investors. Matching the specific opportunities remains the ever-present challenge. Businesses need to ensure that they are fully prepared for the rigorous scrutiny of the equity market where process demands significantly outweigh those of the debt markets.
Equity investment may come with additional expertise from the investor, which can support the growth of your business, or an acquisition strategy to take advantage of sectoral opportunities.
Mergers and acquisitions
Every crisis can be thought of as an opportunity, and every surviving business is best advised to look around for consolidation opportunities. Not least because that is exactly what your competitors are likely to be doing.
Most sectors can be said to be carrying too much central cost for the amount of revenues forthcoming in the near term. Therefore, it may make sense for the stronger players to grow by acquiring their competitors, upstream suppliers or downstream distributors and spreading the cost burden over a larger revenue base.
Tougher markets open minds to deals previously dismissed. This is particularly true of owners looking to retire who may now be more reasonable on valuation and terms than might have been the case pre-crisis.
Additionally, M&A is being driven by the need of many businesses to make a rapid and meaningful change in their business model. Acquisition is often the best way to do this and can present an opportunity to sell, or the rationale to buy, depending on individual circumstances.
For many SME owners exit is now higher on their agenda than it was pre-pandemic. Many anticipate choppier waters for some time ahead and question their resolve for the fight, whilst others have found themselves on the right side of the shift that was 2020 and want to crystallise that good fortune.
Despite being widely rumoured, the Chancellor’s Budget did not contain an increase to the Capital Gains Tax, which is now expected to come a couple of years later. This gives those owners with an exit on the agenda sufficient time to plan and execute, rather than being caught in the mad rush we saw in late 2020 and Q1 of 2021. Whilst the immediate threat is lifted, we do still expect the M&A activity to remain buoyant through the rest of this year.
Whether by way of a management buyout, sale or an exit to financial buyers, an exit could well be a winning formula. However, this strategy is only going to be realised with the right advice on valuation, sale process and deal negotiation firmly in place.