While much focus is on the large cap mega deals, the Kraft-Heinz $46bn merger in 2015 for example, we think it is worth looking at a company involved in smaller deals, of which there are currently plenty.

We give you advisory firm K3 Capital (K3C:AIM), a fantastic little gem that has already topped Thomson Reuters’ small cap advisory league table. It’s the market leader in UK small cap M&A and a company you may not have heard of, yet.

Being a market leader is not just about bragging rights either. Someone looking to sell a business will presumably look at the leaderboard as it suggests that the top name will have the largest supply of buyers as well.

Jeremy Grime, analyst at the company’s broker FinnCap, is certainly a fan. The company’s half year results to 30 November 2017 came in above his expectations across the board. Grime says: ‘The unique high margin, high return on equity and highly cash generative model is set to grow significantly over time while we confidently expect a re-rating’. The shares have jumped up since that comment, yet we think they’ve got much further to go.

DISRUPTION PAYS OFF

Unlike the well-known professional service firms such as EY and Deloitte, K3 operates a direct marketing approach to client acquisition using salespeople rather than advisers. This helps keep costs in check, with the average salary of the company’s workforce being £26,000 albeit with additional money for hitting targets and other performance-based incentives.

The company also uses a valuation database, accessible online. Using this, potential clients can enter data and receive a range of valuations for their business instantly. All those enquirers will receive a phone call within 48 hours to gauge interest in the sales process. This is both a rapid and efficient means of securing new clients.

LEGAL EAGLES

Another trick K3 has up its sleeve is a partnership with Gateley (GTLY:AIM), a legal services provider. This has been in place since 2013 and adds another tick to K3 and its subsidiaries’ offerings.

Gateley acts for 76% of the more upmarket KBS Corporate division of K3 and 59% of the smaller business vendor Knightsbridge.

The benefit to the client is that legal costs are 100% contingent on completion of the deal. The law firm holds the cash consideration of the deal so there can be no bad debts for K3.

K3 trades on 22.4-times 2018’s 10p of earnings using FinnCap’s forecasts. There’s also some income on offer with a 2.2% dividend yield.

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