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Path to high growth is to buy, buy, buy

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21st Mar 2005
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Business owners seeking high growth should have an acquisition strategy argues Alan Skinner, Menzies' Corporate Finance partner.

We are seeing the first shoots of recovery and confidence is returning to the economy, particularly compared with the EU and US. But although the economy is moving in the right direction, labour supply remains tight meaning that the recovery will probably be a gradual one. Businesses may find this limits the rate of organic growth they can realistically achieve, so they should also consider an acquisition strategy.

There are several reasons for this. A backdrop of low interest rates and low inflation means the cost of borrowing is still very low. And with interest rates throughout the EU even lower, the situation is unlikely to change dramatically in the foreseeable future. We see daily evidence of this in the number of pre-lending reviews we have been doing for the major banks."

However, low interest rates have brought another benefit. With the traditional money markets showing modest returns, investors have been looking further afield and companies that can demonstrate a sound business plan will find them to be a good source of finance. Although it is still difficult to raise equity for smaller transactions, the market for sums above £250,000 shows more activity and better prospects than at any time in the last few years.

In addition to economic factors, government tax incentives have stimulated growth in the mergers and acquisitions market. The Enterprise Investment Scheme and tax relief on goodwill both provide a tax-efficient route for investors and encourage investment in SMEs.

However, market conditions and a tax system that favours acquisition would tend to create a sellers' market, but there has been little evidence of this. We have seen as much interest in disposals and MBOs as we have acquisitions. This could well be due to tax incentives such as business asset taper relief, which can allow owners to pay as little as 10% capital gains tax on disposal of their business.

But this bright outlook is not being enjoyed by all. The economic downturn and weak stock market was felt strongly in the City, which saw a dramatic fall in the number of new company flotations. Even now, the AIM and OFEX markets are still sluggish. The good news, however, is that national merger and acquisition activity has remained relatively strong, reflecting a healthier, more stable SME sector.

More information on Menzies is available at:

www.menzies.co.uk

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