UK M&A activity on the up - why now is a great time for acquirers looking at UK businesses

Following the slowdown of “big ticket” M&A deal activity since 2021, in the latter part of 2023 and the first quarter of 2024, we are seeing a notable increase in the number and quality of UK businesses coming to market.

As a result, we are seeing increased opportunities for acquirers who may be looking at the UK for long-term M&A opportunities.

UK business owners are telling us that they’re becoming tired of the economic pressures of recent years. Many are also looking ahead to what is to come in the rest of 2024 and taking the decision that now is a good time to sell.

If you are an active acquirer, or even a business looking to expand in the UK for the first time, in this article we summarise 3 key reasons why now is the right time to explore M&A deal opportunities in the UK.

1)   Capital Gains Tax (CGT) – potential increase in tax on sellers leading to increased willingness to sell

General elections typically shake up M&A activity and the next UK general election (expected later in 2024) is no different.

In particular, the rumours of an increase in the current 20% CGT tax rate following the election. This uncertainty is already leading to many UK business owners accelerating their plans to sell, in order to avoid the potential for greater tax liability. Uncertainty will also likely impact the type of deal, and potentially the purchase price, that they’re willing to accept.

All of this translates into increased opportunities for investment and acquisition in the UK.

2)   Settling UK Inflation and interest rates – more confidence for acquirers

The higher cost of debt (as a consequence of the sharp increase in interest rates early in 2023), and wider uncertainty around global inflation figures, contributed to the recent slow-down of the UK M&A market.

In 2024, inflation and interest rates in the UK appear to be settling. In March the Bank of England held interest rates at 5.25%, and have indicated cuts may be coming over the next 12 months.

This all means that M&A financing costs should become more certain. Allowing more acquirers to map out the likely cost of debt if that is needed to finance a transaction.

In recent years we have also seen disagreement on purchase price being a source of M&A deals not reaching completion. As acquirer and seller expectations have been too far apart. A more stable economic picture should also allow acquirers to more confidently rely on, and test, business valuations.

3)   Sellers embracing more flexible deal structures – greater options for acquirers

Less availability of funding and disparities in business valuations between acquirer and seller have resulted in acquirers being able to push for more creative deal structures. We have particularly seen this trend in our work with our international counterparts over the last couple of years.

UK M&A remains an acquirers’ market. So despite some early skepticism, sellers have come to realise that they may need to embrace a more “creative” deal structure if they want to sell their business for a purchase price they’re happy with.

In particular, we have seen an increase in:

• “earn-outs” – some including more creative metrics, not just linked to straight revenue or EBITDA;
• escrow accounts and/or deferred consideration – particularly among international acquirers;
• warranty and indemnity insurance – to give both acquirer and seller more certainty. This also helps with managing acquirer due diligence exercises, which have been more prominent and time-consuming in an “acquirer-friendly” M&A market.

If they are aware of these and other options available, acquirers are increasingly able to “chip” away at the purchase price payable on completion. This gives acquirers additional financial protection if there are any post-completion warranty or indemnity issues.

Sellers will also benefit from embracing this flexibility if it increases the pool of credible buyers looking at their business. Wider economic factors, including those covered in this article, also mean that UK business owners are more willing to explore these different deal structures in order to get a deal done.

Conclusion

There is currently a huge amount of opportunity within the UK M&A deal market for UK and international acquirers – both in terms of the businesses coming to market and the negotiation position many buyers find themselves in.

Looking further into 2024, we only see that trend continuing.

If you are thinking about acquiring or investing in a UK business and would like to find out how Geldards can assist you with the process, please contact Alex Butler for a confidential discussion.