Due diligence on deal targets should include Brexit scenario planning

In the world of M&A, advisers and their clients spend copious amounts of time trying to assess the value of businesses today. Perhaps more important are their attempts to identify a business’s future value once growth plans come to fruition and when performance improvements and any synergies have been delivered.

For both corporate and private equity buyers, this assessment of a company’s future value takes into account many factors, including changes in the market, shifts in technology and improvements within operations.

However, in the UK, this assessment has recently become more complex, says Tim Wainwright, an Operations Partner at EIGHT Advisory, an M&A consulting firm based in London. “It remains unknown what Brexit really means, and as organisations and the Government work to manoeuvre the UK through the impacts of separating from the European Union, clients and their advisers need to find ways to factor Brexit into their due diligence of potential targets. Given the uncertain outcomes and resulting impacts on trade and sterling, assessing the future value of any business that operate in Britain and trades across Europe, is undoubtedly more difficult.” It also means that new approaches need to be taken to diligence, he adds.

To help clients address these challenges, Wainwright identifies that “assessing value in these uncertain times requires we ask questions we may not have fully considered before. It also requires that we consider a range of scenarios that support our clients in understanding the range of potential impacts”.

From an operational perspective, this means looking more closely at supply chains and the origin of products and components. “In doing so it is important to assess the potential impacts on costs and time that may result from changes in tariffs, imposition of new or amended regulations or additional controls at borders. This makes the assessment process more complex. It also makes the range of factors to consider broader.” The partner at the M&A consultancy further highlights that a range of different skills is required to understand the variety of likely impacts. 

Therefore, in undertaking due diligence on potential acquisitions in the context of Brexit, Wainwright suggests performing scenario analysis. “Through the use of analytics (e.g, Microsoft Power BI) together with scenario-modelling techniques it can be possible to produce a range of risk adjusted answers that consider alternative Brexit outcomes and their potential risks. Creating these alternative views and assessing the divergent impacts under different assumptions results in the creation of different projections that can be assessed to ensure informed investment decisions.” 

“As a result, whilst the trade-flows that arise at 11pm GMT on March 29 2019 (midnight in Brussels) as Brexit happens remain uncertain, investors who perform appropriate due diligence can be assured that they understand the likely outcomes for their business and can plan accordingly to drive growth throughout this period of uncertainty.” 

Wainwright’s advice comes at a time when the M&A market is on a high. A recent study by a Big Four firm found that the value of deals in Europe has risen in the past year, and despite Brexit, dealmakers have been found to remain buoyant about market fundamentals.

Related: Heightened demand for transaction support sees Eight Advisory expand UK business.