One in five Scottish businesses suffering financial stress

KPMG, examining the filings of Scottish businesses with revenues in excess of £10 million, identified 21 per cent of Scottish businesses suffering financial distress, representing a 22% increase over the most recent five-year period.

However, despite the negative trend, Scotland compares favourably to the rest of the UK, where 24% of businesses are suffering financial stress and 4% of firms are facing acute financial distress (3% in Scotland).

The sectors bearing the largest numbers of firms in financial stress and distress, according to KPMG’s analysis, are business services, building and construction, consumer production, leisure and hospitality, and industrial manufacturing.

With the highest levels of stress, consumer production (one in four) and leisure and hospitality (one in three) have witnessed a marked increase in stress since 2017.

Meanwhile, business services and industrial manufacturing are showing stress in line with the Scottish average (one in five) and are tracking largely flat against previous year’s results.

Only the building and construction sector is showing a lower proportion of businesses in stress than the Scottish average (one in six) and an improvement from the previous year, with a year-on-year decline of 20%.

Blair Nimmo, head of restructuring at KPMG in the UK, said: “The analysis reflects our historical experience of the Scottish economy – namely that it doesn’t experience the same levels of volatility as in England.

"When we drill into the data, the population experiencing more acute financial distress in Scotland has remained flat across the last five years. Contrast this with the north of England and London, for example, where distress growth rates of more than 10% have been experienced.

“However, business leaders in Scotland can’t rest on their laurels. The more disappointing results experienced elsewhere, in combination with increased signs of distress in Scotland is concerning and businesses need to be alert to take early action to rectify issues.”

Alan Flower, head of KPMG’s restructuring advisory team in Scotland, said there was "no doubt" that Brexit uncertainty has had an impact but suggested that "well-run businesses that identify issues early and take action will always succeed despite macro-economic or sectoral issues faced".

Meanwhile, Scotland’s deals market is set to see increased activity in 2020, according to PwC which is expanding its deals team to cope with

PwC predicts an increase in the sale of owner-managed businesses while standout firms across all sectors are likely to be more attractive than a single dominant sector. It also predicts that while technology firms will continue to garner suitors from all asset classes, they could attract the attention of corporations seeking operational bolt-ons.

These trends emerge as investors and businesses adapt to a new world where rapid societal change has altered investment strategy across the board.

In this backdrop PwC is not only increasing headcount across its deals team in Scotland it’s also ensuring it has the relevant capability, with the firm’s wider investment in technology meaning 70% of the team have now been trained on and adopted new data and analytics tools.

Although deals volumes reduced in the last couple of years as the UK wrestled with the political and economic uncertainty that followed the Brexit vote in June 2016, the large Conservative majority returned in December’s General Election has boosted confidence in the market as it reduces uncertainty.

These findings were reflected in PwC’s recently published CEO Survey, which found that 90% of UK CEOs are confident to some degree about the prospect of their business growing revenue over the next three years. The survey also revealed that the availability of key skills is the number two business concern for CEOs in the UK, behind only cyber threats, which aligns with the prospect of technology-enabled bolt-ons.

Among the deals PwC worked on in 2019 were the acquisition of SSE's household energy business by Ovo Energy, the acquisition of Alexander Dennis by NFI, the acquisition of Wireless Infrastructure Group by Brookfield Infrastructure and the LDC investment obtained by Commsworld.

“There is a huge amount of capital out there," said Jon Shelley, head of corporate finance at PwC Scotland. "The challenge is that there is enough money, but not enough strong opportunities.

"Private equity funds are having to be far more focused on how to create value, as they are having to pay top dollar for good businesses and are subsequently doing more to make the returns work – that means that international growth strategies, rollouts, bolt-ons and transformational M&A, for example, are increasingly more important on top of a solid organic plan.”