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28 Sep 2021

Flex Space – a view on market consolidation (and six things to think about on the legal side)

The demand for flexible workspace and new approaches to “the office” has raised many new questions for employers: what is the best way to enable employees to book spaces in an office? How do employees find the perfect meeting spot and book it this afternoon? How do you know how many people are in your building at any one time?

Fortunately, developers and entrepreneurs are working quickly to provide solutions.

However, it’s clear from the conversations that we are having that over the coming months and years there will be extensive consolidation in certain flex platform product categories. We’ve seen this before in sectors primarily driven by convenience, and it’s not likely to be very different here.

In previous articles we have explored how, on the property side, the shift to remote working patterns means providing and occupying space is becoming more akin to the hotels sector, with owner/operator management-style agreements instead of commercial leases.

However, on the operational, technology and platform side, our view is that the closest equivalents are food delivery companies and advertising agencies. In the first, the clear winner has been and is the platform with the most users and the greatest number of available products (i.e. restaurants from which to deliver and bikes on the road). In the latter, large companies such as WPP have, over the years, absorbed many smaller brands but have interestingly kept them distinct within their structure.

The benefit of this is that customers are able to select their desired brand almost without realising that the business sits beneath a large umbrella entity. As office space and branding are inextricably linked, the same principle may end up applying here. An employer which wants to give its staff access to a West End location or locations will have little interest in a platform which can provide space in, say, Hull. Rightly or wrongly, employees live in similar areas to each other and so relevant locations will fall within what we might term ‘Brand Bands’ as opposed to a scattergun of locations. As an employer you will want to sign up to one platform and provide access to spaces in your ‘Brand Bands’.

So what are the key points to consider if you are looking to buy, or sell to, a competitor? Here are six things to think about:

The approach. Confidentiality will be key for both parties so a confidentiality agreement should be signed early on. Is an offer a serious offer or is the buyer just fishing for details? The broad terms of the deal should be documented in the heads of terms; it is worth getting legal advice on these so that any major issues are not left off the list as negotiating these further down the line can lead to increased costs or fallings out. Sometimes an exclusivity period is negotiated; this grants the buyer a period within which to negotiate the deal.

Due Diligence. Once heads of terms are signed, the buyer will begin its due diligence process. As we have already touched on in our previous article (here), a well-advised seller may have already conducted its own pre-sale diligence so it is ready for a sale and aware of any potential red flags to a buyer and may have a solution prepared. Generally buyers will seek warranty protections, price chips or, more extremely, may abort a deal if and when any issues arise.

Management. Managing and negotiating a purchase or sale takes time and energy. Think about who in the business is going to be responsible for dealing with it. Remember you are already running your business so don’t drop the plates as it could fall through.

Funding. If you are a buyer, think about how you will fund the purchase. Will you take on debt, an equity investment or do you have sufficient funds already in the business? If you have already received investment, you should check whether the investors agree to the strategy. Will the purchase strain your business financially; how can this be alleviated?

Know what you want. Work out where you think the value in the target business lies. For example, in the case of an app based proptech platform, much of the value sits in the contracts with the space providers and the team which has built the business. Can these contracts be integrated into your own product, and how can you incentivise teams to stay post-merger (and how can you restrict them from leaving)? On the sell-side, what will incentivise you to stay?

Get creative with the deal. It can be tempting to think that a deal has to be the purchase of 100% of the target. As a buyer you may not have the funding or desire to do this. Alternative approaches include taking a minority percentage, requesting enhanced voting rights, baking in the option to increase your stake at a later stage, or even simply hiring a particular team or purchasing one particular asset.

If you have any questions or would like to discuss further, please get in touch.