Staying profitable and acquiring in a post-Brexit landscape

Ian Fishwick, chairman of Adept Technology Group, provides a guide to the future based on what he has learned during his long career in the industry

I was an MD/CEO for 29 years. I finally became part-time chairman at the end of 2018. I had the honour of reporting 29 consecutive years of rising EBITDA. What is the relevance of that? Well, those three decades saw massive changes in technology.

I have just finished reading Nine Crises by William Keegan, the long-time economics editor of The Observer. He looked back over his 50 years as an economics journalist and identified nine crises, or periods of economic uncertainty, over the last 50 years. I was curious to understand how much of my 29-year tenure were years of economic uncertainty. As the ‘boss' I survived...

• Black Wednesday in 1992, when the UK crashed out of the European Exchange Rate Mechanism
• The financial crisis of 2007 to 2009
• Osbourne's age of austerity from 2010 to 2016, and
• Brexit 2016 to 2019

In all, thirteen or 14 years of my 29-year tenure were characterised by economic uncertainty.

■ You must never allow economic uncertainty to be an excuse not to grow the profitability of your business. If I had done so, almost half of my 29 year legacy would have gone.

Instead, you should concentrate on understanding the impact of economic uncertainty and plan your business accordingly. Let's take a look at some of the potential impacts of uncertainty.

■ From a historical perspective, Brexit is merely the 9th period of economic uncertainty in the last 50 years.

UK companies are now relatively cheaper because of the fall in the dollar exchange rate. Does this mean that we are likely to see a big rise in acquisitions by US companies? I would argue no. The dollar exchange rate in May 2016, just before the Brexit referendum, was $1=69p. Today the exchange rate is $1=76p. The change is only 10 per cent. Reducing the price of a business by 10 per cent does not suddenly make a bad business worth buying. It merely makes buying a good business a slightly better deal.

Most acquisitions of SMBs are funded by debt. The amount banks will lend - best expressed as the EBITDA:net debt ratio - often determines how much a buyer can pay. I can see no evidence that these bank ratios are changing. I still think that no-one will be brave enough to raise interest rates immediately post-Brexit because of the uncertainty surrounding the economy. Acquisitions are therefore likely to continue to be funded by debt when interest rates are at historical lows.

■ In 2016, net lending by SMEs was ￡3.3bn. In 2017 it fell to ￡700m and in 2018 to ￡500m.

When SMEs borrow money, they tend to use that money to either buy capital equipment, hire people, or acquire other businesses.

It was highly predictable that companies selling capital equipment or large one-off purchases would suffer much more than those that have a recurring subscription-type revenue stream.

This is why we only acquire businesses that obtain 75 to 80 per cent of their revenue from recurring products and services.

In years of economic uncertainty it can be hard to grow revenues. That is why you see more acquisitions of companies that can be merged with another to create economies of scale. You can still grow profitability even if you cannot grow the top-line revenue.

Let's take a look at specific vertical sectors.

■ The mega trends affecting technology are nothing to do with Brexit.

Online shopping is killing the high-street retailer and the lack of footfall is knocking onto restaurant chains. Whether the UK stays in the EU or leaves, this will not change. When we are buying businesses we don't just look at what products and services the company sells. We also look at who the customers are. I met a company that had built an impressive market share in a specific vertical market. This is fairly unusual for a small or medium-sized company. However, they were one of the largest suppliers of technology to the retail sector. As they say on Dragons' Den, I'm out.

The decision by Openreach to close the UK telecoms network as we know it and no longer provide voice services by 2025 will play an increasingly important part in deciding who we find desirable acquisition targets and the price we are prepared to pay. It is no accident that calls and lines are now only 25 per cent of our revenue.

We shy away from any companies where they, or their customers, are affected by foreign exchange currency fluctuations. We want as much certainty as we can get in uncertain times.

Be wary of believing economic forecasts. I think Ronald Reagan got it right when he said, "If Trivial Pursuit had been designed by economists, there would have been 100 questions and 3,000 answers."

I hope that I have convinced you, at least in part, that in times of economic uncertainty, some things are more certain than others.