With the automotive world experiencing rapid disruption of the status quo, many dealers are looking to M&A as a strategic tool to either prepare their businesses for a changing future or to crystallise an exit. The market has reflected this reality; according to MergerMarket, in the last three years alone there were 1,500 M&A deals in the global automotive industry totalling £250bn.
Getting your house in order
No two automotive deals are ever the same and, whilst automotive M&A is a well-trodden path with common themes that often follow and encapsulate market trends, each usually delivers up a slightly more nuanced flavour than the last. There is no cookie cutter but, from experience, one thing is clear – the less there is for advisors to untangle once final Heads of Terms are agreed and signed, the better, so preparation is key. Good advice at an early stage often flushes through potential snags before they have the chance to derail the commercials.
As with all M&A deals, there is a plethora of things to consider but get some key ducks in a row, and you stand a decent chance of a (relatively) smooth deal that hits a keen timetable.
Assets or shares and the hokey cokey
Much will depend on the target’s existing structure, and tax advice on getting the purchase price into the hands of the sellers as well as the wider commercial issues in play, but traditionally, share sales have been preferred by sellers to unlock the benefit of Business Asset Disposal Relief. However, share deals are, by their nature, more intensive simply because you are selling (and buying) the entire business, warts and all.
Sellers often have to be prepared to stand behind what they are selling. In diligence, automotive buyers may need to be prepared to take a commercial view on materiality and ought to understand their own appetite for risk. Alongside this, it can be helpful if they are able to identify any potential pinch points that may require specific focus: the property portfolio, the employees, health and safety/regulatory (including the need for FCA approval associated with a change of control), and any material non-manufacturer supply contracts. In theory, assets allow a buyer a degree of cherry picking – the buyer only takes the assets it wants – and not much in the way of liabilities. But with an assets deal, the buyer has the practical problem of transferring assets, contracts and employees from seller to buyer, including the re-issue of the ‘brand’ manufacturer agreement in favour of the buyer and any attendant financing arrangements. With a share deal, all of these things are already in the company whose shares are being acquired.
It sounds obvious but understanding exactly what’s in and what’s out of target as early as possible is crucial, particularly in respect of the often-significant real estate assets automotive businesses hold. On a share deal, where you expect to acquire (or indeed dispose) of the property assets, there are some rudimentary questions to ask at the outset: do they sit in target, subsidiaries of the retained group, or in a sister propco subsidiary?
If not, where should they be? Do they need to be moved pre-completion and what are the tax considerations for buyer and seller of moving them or, if not buying a group, the target in which they sit out of the retained group? Plenty of potential flies for the ointment, but one thing is clear: whether assets or shares, making sure that what you expect to buy (or sell) is where it should be is crucial and getting sound legal and tax advice on structuring at the outset will pay dividends later on.
Because of COVID-19 and latent demand build up in the supply chain, many automotive businesses now also hold significant forward orders. Agreeing in principle at the outset whether these are in or out of the headline purchase price and if in, how these will be valued (and they may simply be included in a larger goodwill payment, or not at all), will remove a challenging elephant in the room early on. To keep things simple, the parties might just agree a standard price per vehicle on order but undelivered due to supply issues.
A lot has changed since the early dealerships of the 1930s opened for business and the sector now finds itself subject to the plethora of rules and regulations affecting all businesses and not just motor dealerships; employment laws, GDPR, ABC, Proceeds of Crime Act etc. Buyers (particularly those larger dealer groups) will want to understand the target’s approach and assess whether this aligns with what the buyer group does, particularly the nuances of a target’s employee remuneration structure. Sellers ought to be prepared to provide complete transparency, on the understanding that anything one-off or discretionary will likely be scrutinised.
Be mindful of third party regulation
As the market sees increased consolidation of the top 100, existing dealer groups with high concentrations of marques will need to be mindful of market share and consider whether transactions are likely to attract the glare of the Competition and Markets Authority. If so, understanding what the process might look like and how best to navigate the rules as early as possible is crucial, not least from a timing and cost perspective.
A similar approach should be taken to any FCA considerations – likely required and experience of recent turn-around on applications has varied from a few weeks to three months plus. Whether the target is registered, or simply an authorised representative will make a difference so the earlier the parties can get a read on what FCA consent is required, the better.
As Zig Ziglar put it:
‘Success occurs when opportunity meets preparation’. Right now, there is plenty of opportunity for continued success in the automotive market; question is, are you prepared?