Big Four firms increasingly tapped for Initial Coin Offerings

12 September 2017

After a fork in Bitcoin recently led to the creation of Bitcoin Cash, a separate cryptocurrency, clients of the world's four largest professional services firms are expanding their interest in the blockchain sector. While the sector is currently in a state of flux, the recent explosion of experimentation is seen as too attractive a risk not to take as major firms bid to stay ahead of the game amid fears of increased competition and digital disruption.

Blockchain technologies have been threatening to break into the financial mainstream for a while, along with a number of other functions which the technology can adapt to. According to representatives from Deloitte, EY, KPMG and PwC, existing and prospective clients are beginning to ask questions about initial coin offerings (ICOs), the process by which public blockchain technologies can be leveraged to create custom cryptocurrencies that are subsequently sold to fund projects. The most famous of these is Bitcoin, a digital currency in which encryption techniques are used to regulate the generation of units of currency, and verify the transfer of funds, operating independently of a central bank.

Now, resulting from a “fork” in Bitcoin’s blockchain, Bitcoin Cash sees businesses presented with a new opportunity to enter the market. Instead of creating a totally new cryptocurrency (and blockchain) starting at block 0, a fork just creates a duplicate version that shares the same history. So all past transactions on Bitcoin Cash’s new blockchain are identical to Bitcoin core’s original, with future transactions and balances being totally independent from each other. For practical matters, all this really means is that everyone who owned Bitcoin before the fork now has an identical amount of bitcoin cash that is recorded in Bitcoin Cash’s fork. However, for new investors, it presents a separate chain via which future investment could reap rewards.

Big Four firms increasingly tapped for Initial Coin Offerings

According to Eamonn Maguire, who leads KPMG's Digital Ledger Services division, the firm has received a number of requests to work with entrepreneurs seeking to become the next Tezos or EOS, both projects that have raised hundreds of millions by selling cryptographic tokens. With the novel funding method continuing to make headlines, Maguire stated that due to cryptographic tokens’ potential to draw new investment across industries, “We've seen a definite uptick in the inquiries we are receiving. In the past month alone, we've probably gotten 10 inquires – for example from institutions in France, Switzerland, Russia and Austria."

Big Four rivals Deloitte and EY likewise indicated that they were receiving increasing interest on the topic, with the firms confirming to the press that new conversations with "wealth and asset managers" had taken place, on how they can begin managing cryptocurrencies and ICO tokens. However, others are pointing to the lack of pertinent regulation as a roadblock that is preventing newcomers from capitalising on ICOs.

The other constituent member of the Big Four, PwC’s representatives are taking a much more cautious stance. According to Ajit Tripathi, a Director of FinTech and digital banking at ‎PwC, "While the potential of ICOs in terms of transforming venture capital is indeed exciting for many of our clients around the world, the lack of regulatory clarity, particularly in the US, remains a concern.”

For this reason, such projects are "still relatively rare", owing to an uncertain regulatory environment. Meanwhile, the sales environment remains a harsh one for platforms like Bitcoin and Bitcoin Cash. While some exchanges have added the new currencies for trading, liquidity remains drastically low, leading to speculation that the price is being artificially inflated. Because most exchanges aren’t accepting deposits yet, the only Bitcoin Cash available to trade is currency that was credited by exchanges after the fork.

This, meanwhile, suggests that there is a large amount of Bitcoin cash waiting to be quickly sold off as soon as people can transfer it, as there is not much incentive to keep the coins, especially when people think they are overvalued and want to quickly cash out. This has already led to a price fall, down from a high of $680 to around $350 on Bitfinex, one exchange that is offering a market for the new currency. This suggests that while there is opportunity within the segment, firms and their clients would do well to remain cautious.


8 tips for successfully buying or selling a distressed business

18 April 2019

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.