Mergers & Acquisitions and funding options for the SME Market in Ireland

In the recent edition of the Sunday Business Post, Gríana O’Kelly, partner in the corporate department of Lavelle Solicitors, looks at two options for business expansion via equity funding or mergers and acquisitions.

Mergers & Acquisitions and funding options for the SME Market in Ireland

Brexit and the falling value of sterling has made it increasingly important for Irish businesses to diversify into the wider European market. Expanding into the EU market has obvious advantage but how can Irish companies grow their businesses to achieve this?

In this article we will look at two options for business expansion via either equity funding or Mergers & Acquisitions. Each offers different advantages for business growth.

Equity funding
One of the main challenges facing Irish start-ups is working capital. Bank funding is often not available to start-ups at development stage as the company is not yet trading. Venture capital firms may offer investment to start-ups where they see a long term growth potential. Enterprise Ireland also offers investment opportunities to new companies in Ireland at varying levels of investment.

Management buy-ins can bring certain advantages too. This involves senior management or key employees subscribing for shares in a company in return for a cash investment. Sometimes the types of shares allotted to management may be at a discounted rate and will only give a return on a realisation or winding up of the Company. This can be attractive for both parties as the Company benefits from having strong buy-in from its management team to grow the Company. Usually a management buy-in will not dilute a founder’s equity too substantially.

Equity investment means that a venture capital fund or private investor will invest money into a company in return for shares. The main challenge for a small company in negotiating these types of deals is in maintaining control in the company and not giving too much equity away. Often the subscription shares will have stronger, preferred rights than the ordinary shares held by the founders so on a realisation or a winding up, their money comes first. If a company can successfully balance the level of control and amount of equity that the founders are willing to give up, such investments can offer start ups with a valuable cash injection to develop products or move into wider distribution networks. To line a company up for this type of investment, an emphasis should be placed at an early stage on making sure that key business contracts, employment and service agreements and company law requirements are up-to-date and available for any due diligence process that may be undertaken by the potential investor. This will streamline the investment process for the Company.

Mergers & Acquisitions
There has been a large upsurge in merger and acquisition activity in the Irish SME market over the past two years. This is unsurprising since Ireland was the fastest growing economy in the Eurozone in 2015, a trend that continued during 2016.

A merger of two businesses can draw together expertise and synergise companies operating in a common market. Senior management structure in the merged entity will usually be based on the day to day involvement of parties in the business. Contractual protection for shareholders can ensure appropriate controls are in place. If a larger business merges with a smaller business, generally the larger business will control the merged entity whereas a lateral merger of entities of a similar size may involve more shared control. A merger can often be a good move for small companies and their founder management team. As part of the transaction process, employment contracts for founders who are considered key to the progression of the merged business are negotiated. As well as receiving a salary, the owners of the business will get shares in the merged company with dividend or future realisation potential.

An acquisition differs from a merger in that the acquired business or entity will usually be absorbed by the acquirer. In an acquisition there is generally no long term continuance of cooperation between the two entities. Sometimes the acquirer will want certain key employees to remain in the Company for a set period of time to transition staff and customers. Generally an acquisition will be a clean break for the selling party. The result of the acquisition for the target company will often mean growth and movement into different markets.

Therefore while challenges exist due to the uncertain international political and economic environment, opportunity also exists for small and medium size Irish businesses to expand and diversify into new markets by taking advantage of funding options and Mergers & Acquisitions opportunities.

(This articled first appeared in the Sunday Business Post on Sunday, 27th November 2016)