Why it’s important to take a holistic approach to dealmaking
When doing a deal, whether that involves early-stage fundraising or an exit, it is vital to get holistic advice that focuses on more than just the headline price. That’s the view of Adam Maitland, managing director and leader of the deals team at Hutcheon Mearns.
Hutcheon Mearns is a unique professional services firm, operating under the pillars of deals, people and insights, and has offices in Aberdeen, Dundee, Edinburgh, and Glasgow. Adam can draw on 17 years of international corporate finance and deals expertise, from investment banking to leveraged finance and in-house mergers, and acquisitions for a private equity-backed buy-and-build expansion.
Explaining the approach taken by Hutcheon Mearns, Adam says: “We saw a real gap in the market for providing a more flexible, value-driven approach to corporate finance, rather than simply just advising on sell side or buy side mandates.”
Adam teamed up with Craig Hutcheon, who co-founded the firm in 2017, having worked together in a private equity business. They decided they wanted to do things differently, Adam explains: “Larger firms are more structured in how they offer their services. Whilst we have a huge amount of respect for these organisations, we felt there was a need for more flexible, cohesive strategic support across the lifecycle of a business.
“Back in 2017, when the market had been through a lot of volatility, certainly in Aberdeen with oil and gas, I found that clients needed a different type of corporate finance support. Whether that was strategic planning, funding or smaller consolidation plays.”
Hutcheon Mearns is focused on being a long-term retained adviser to clients through that entire life cycle. Adam adds: “For example, with some clients, I have known them for 10-15 years and have built a strong relationship. This allows us to have a more honed conversation at the right time. What we do is ultimately trust driven.”
Adam has also identified key trends in deal structures, and believes clients should be helped in understanding the pros and cons of each. One fairly common deal is where some form of earn-out structure, or deferred mechanism, is involved. This is where some of the value of the deal is paid up front, and the rest delivered over time, based on certain conditions. Adam explains that a vast majority of transactions now have an earn-out attached and, at a high level, they are widely used mechanisms.
“First, you have earn-out mechanisms designed to protect a buyer and ensure the business stays in a steady state or grows. You tend to set either operational or financial milestones that the company needs to reach over a period of two or three years, or longer at times. If the seller achieves these, they get paid the money. That’s great if you have a young and driven seller who doesn’t want to exit the business, but wants to stay and drive it forward as part of a bigger organisation. But not if the seller is keen to retire and perhaps has less control going forward.”
Adam mentions that while an earn-out is an understandable mechanism for a buyer to mitigate risk, it’s vital to think through the benefits and disadvantages. He says one risk with this type of structure is that it can be difficult for the buyer to fully integrate the firms as there are potentially competing agendas.
Secondly, he says that a middle ground in terms of structure is where the buyer simply defers a portion of the proceeds, particularly to support funding needs. The full amount can be paid over two to three years, but without a large number of operational or financial milestones being put in place. Difficulties with this can arise when there are multiple shareholders in the business being acquired, with some wanting to remain and others keen to exit.
Adam points out it can also have impacts from a tax perspective, in terms of what is classed as employment income and what is capital in nature. Third is a type of deal more common with private equity-backed buyers. Known as an equity rollover, this is where shareholders give up some or all of their cash proceeds in exchange for an equity stake in the acquiring company following the transaction.
Adam says: “It can be a very neat mechanism that aligns all the parties at the right level. It can make integration easier as the seller is now a shareholder in the group and is incentivised to make things work and grow at all levels. But the buyer has to do their due diligence and consider how much control they will have over the business as they might be a minority shareholder.
“There is also always a risk the investment could go south rather than north.” He concludes: “If you’re a seller of a business, make sure you’ve sat down and really thought about your objectives. Depending on where you are in your stage of life, and what you want to do, all these routes I’ve described can be sensible ones to go down. If you’re a younger seller with an appetite for risk you will want to structure a deal differently from someone who is perhaps looking to reitre.
“Value ultimately wears many hats in a transaction – it’s not just the headline price. That’s where we can honestly and expertly guide people.”