There is no way to dress it up and sugar-coat things - calendar year 2024 was tough. High inflation led to rising costs, reduced demand, high interest rates, high stock levels, slow-paying debtors, tight working capital and difficulty raising extra funds. We saw the highest level of business insolvency events since the GFC, and there are likely to be more to come. The message of 'Survive to ‘25' was everywhere, but we believe things are going to get tougher before they improve. By mid-2024, we were telling everyone that simply surviving to 2025 was not enough; you need a plan to survive through 2025. Depressed yet? Fear not, read on…

Crisis breeds opportunity

Yes, it has been a tough reset, and yes, there is more to come, but our economy needed it. For too long, we had been living off debt in an environment of falsely high levels of demand and an extremely tight labour market. We have now entered the natural cyclical nature of an economy, so we need to cut our cloth to make ends meet. Things will improve; it is just a matter of time.

With every crisis, doors close - but many opportunities arise. You just need to be open to looking for them and be in the right mindset to tackle a project and create a competitive advantage. The opportunities will arise in many different forms, including:

• Trimming costs and right-sizing your organisation
• Renegotiating supply terms and pricing
• Speeding up your working capital cycle
• Picking up business from competitors as they falter
• Renegotiating banking arrangements
• Acquiring other businesses

Mergers and acquisitions: A key opportunity for growth

Mergers and acquisitions (M&A) have long been strategic avenues for growth in businesses worldwide, including New Zealand. Whether you're looking to expand market share, gain a competitive advantage or diversify products and services, M&A can provide transformative opportunities.

For the last decade, M&A activity has been high, particularly in the small to mid-market private companies, generally with an enterprise value of $3m to $50m. Valuations and multiples peaked during 2023 but sharply reduced in 2024, driven by reduced risk appetite from acquirers and difficulty in funding transactions, which narrowed the purchasing pool significantly.

We see 2025 as the year for M&A activity for mid-market businesses that have weathered the storm, built resilience and have the balance sheet to grow. Crisis creates opportunity - many businesses that simply survived to 2025 will now have thin balance sheets and may not be able to fund growth as the year progresses. This means selling becomes an option. With an increased supply of business opportunities and weak demand from potential purchasers, we are bound to see continued pressure on multiples, creating an opportunity for cashed-up buyers.

Proceed with caution

While we are excited about the opportunities coming through the pipeline (and we have already seen that pipeline growing), these opportunities come with complex financial and tax implications that must be navigated with care.

Before engaging in any process, conduct a robust strategic planning exercise and identify exactly where and how you want to grow. This exercise should be detailed, even down to compiling a list of acquisition targets. Be aware that those willing to sell are likely to have reasons for doing so. It could be succession or health issues, underperformance or seeing the writing on the wall. Don’t rule out any businesses - it’s about understanding what needs to be done to turn it around, support it with additional capital or integrate it into existing operations.

It all comes down to the deal!

Here are our top five tips on negotiating the deal:

1. Understand the quality of earnings.
   Earnings need to be sufficient and of ongoing quality to provide a return on investment and generate cash flow to repay debt. Vendors often focus on high multiples of earnings, but if those earnings are inflated or minimal, the business may not be worth what the vendor expects. Understanding underlying earnings and ensuring they will continue into the future is critical. Form a view on any normalisations the vendor or their agent may have made in the Information Memorandum.
2. Identify the risks early.  
   Identification of risks helps form a valuation view, but nothing replaces solid due diligence. This includes financial statements, outstanding liabilities, contracts and agreements and tax compliance. Failing to assess these areas can result in unforeseen challenges, reducing the merger or acquisition’s value.
3. Evaluate the opportunities and synergies.
   M&A often aims to realise synergies - cost savings or revenue enhancements from combined operations. However, not all synergies are immediate. Key considerations include cost synergies, revenue synergies and integration costs. Conduct a detailed analysis of expected synergies and integration costs to create a realistic financial model and avoid overestimating benefits.
4. Get the deal Structure right.
   Structuring the acquisition as either an asset or share purchase has different tax implications.
5. Understand your financial ability to complete the deal.
   Financing is critical in M&A activity. Prior to starting, run your business through a debt capacity financial model to identify additional debt capacity. Apply the same to the target business to determine the merged entity’s maximum manageable debt level. This ensures you’re financially prepared and aligned with bank lending requirements.

Navigating M&A with confidence

Mergers and acquisitions offer exciting growth opportunities but come with significant financial and tax considerations. By conducting thorough due diligence, understanding tax implications, carefully selecting financing options and planning for post-merger integration, businesses can position themselves for long-term success.

A window of opportunity is opening - be ready to take advantage. At Bellingham Wallace, we have extensive experience guiding New Zealand businesses through the complexities of M&A. Contact us today to discuss how we can support your M&A strategy and help your business grow.