When we learnt the lesson and understood that panic wasn’t a good approach to the pandemic, the temperature in the Norwegian transaction market rose again, and we now know that 2020 and 2021 have been very busy years in M&A’s.
New stock exchange listings
The number of newcomers to the Oslo Stock Exchange has been at an all-time high. Just before Easter last year, when the interest rates dropped, we experienced a strong liquidity in the market, both from domestic and international investors. However, these days, and not surprisingly, it seems as if we are experiencing a downward correction.
The importance of sustainability
The pricing of clean tech gave an extra boost to the market, and we have seen a correction towards more understandable pricing of the industry. However, it is proved that you need to have a very clear understanding of your ambition of being sustainable. Targets with no clear policy on environmental issues is not a target anymore.
So, whether you are on the selling side, or the buying side, sustainability is now a lot more than just a fancy idea. The EU Taxonomy is hard law in Norway as of 1 January 2023, and all enterprises will in some way need to prove their level of sustainability. So, if you are looking for a transaction, you are also looking for evidence that the target is sustainable.
It is of vital importance that the target can document that they indeed are a sustainable company, as it can be a pivotal factor in acquiring funds from investors within the finance sector. A lack of documentation, or a failure to prove sustainability, can be reason in and of itself to being denied work on public procurement or a loan application. With the increased public focus on operating business in a green and sustainable manner, it can severely hurt a purchaser’s brand to invest in “brown” companies.
Download free guide: Environmental certifications in Norway
Please note that “sustainability” is not limited to the emission of greenhouse gasses, but also encompasses the physical and mental health of the employees, a safe working environment and the internal guidelines and principles of the company, amongst other things.
The market for small and medium sized businesses
At the same time, in this somewhat confusing picture, we see a different trend that we are welcoming. A market for small and medium-sized businesses is developing. The major players on the M&A advisory industry are historically focusing on transactions with a price tag of MNOK 100 or above. Some smaller players will accept transactions down to MNOK 50, but very few are focused on the market between MNOK 5 and MNOK 50.
However, our experience is that there is a growing market for transactions in this range. Both domestic and international investors are looking to buy smaller enterprises on multiples in the range of four to six times EBITDA, to add volume and profitability, to sell on multiples of eight to ten, or even above, on an increased EBITDA.
The last few years we have experienced such consolidations in a range of different industries: dentists, accountants, tyres, and electricity, to mention some. Actually, when working in this segment we have experienced that a small business we would consider to be unsaleable only a couple of years ago, now is attractive to the right buyer. There could be buyers looking for volume, special skills, market, or product segments, or simply a management buyout motivated by the opportunity to take the necessary steps for the business to become an attractive target for interested investors.
But, in both ends, whether you are selling or buying, there is a race to find the right target or the right owner. These smaller enterprises often experience the same set of challenges. They are often good at sales, but not as good at running the business to make sure that turnover also create a decent surplus. They do not have a clear strategic view on their own activity, and they do not have a setup to ensure good corporate governance. That is where an investor, of course in addition to the advantage of simply being bigger, could add value to their targets.
As an investor working to consolidate within an industry, you are looking for well run businesses with key personnel interested in creating value for both parties. So, in this segment we experience that the sellers need to be motivated to continue developing their enterprise and to be willing to reinvest or accept a solution where they can’t sell out 100%. Thus, it is important for you, as an investor, to know your market and identify the right targets.
The traditional channels are of course the M&A consultants. If they know their market, they can point you in the direction of good targets to buy. These consultants are usually more focused on selling and to find possible targets on the buying side. However, in the recent few years we have seen digital platforms being developed. One of them is nobema.no, a platform where enterprises looking for new investors can introduce themselves to the market. If you are looking to find good targets to buy, that might be a place to start?
You are welcome to contact us if you have any questions.
Published in February 2022, updated with regards to taxonomy in January 2023.