The macro-economic climate has not been short of shocks in recent years with the succession of Brexit, Covid and the Russia-Ukraine war. Each has come with its own challenges for business owners and the same can very much be said for mergers and acquisitions (M&A) across the South East. 

So what, asks Michael Gibbs, Director at EMC Corporate Finance, is next for owners looking to explore growth by acquisition or a sale of their business?

2022 review
Experian’s UK 2022 report recorded 1,159 South East (excluding London) based transactions, a marginal decrease from the record 1,209 recorded in 2021. The tally means 2022 remains the second busiest on record, and summ-arises the very busy deal landscape that we have seen following the Covid pandemic.

Perhaps unsurprisingly, March saw the most deals completed in the South East with 137, as the ever present threat of a change in capital gains tax (CGT) accelerated the sale processes. In the latter half of the year, the mini-budget or “Trussenomics” had the opposite effect – stalling deals in October, with the lowest number of completions at 75. Thankfully for business owners, the threatened alignment of CGT with Income Tax has not yet materialised and the new Prime Minister and Chancellor have somewhat settled overall market sentiment against a backdrop of persistent macro economic challenges. 

An uncertain climate
The monthly deal statistics paint a clear picture that the budget in late 2022 slowed deal volumes, with this trend broadly continuing into 2023. Uncertainty around base rates and a tighter lending market has had a negative impact on business valuations and affordability for buyers, though we are starting to see these ease.

Professional advisory teams have been gearing up for an anticipated busy end to 2023 and beyond. The polls for the next General Election, currently anticipated to be in Q4 2024, have Labour ahead and they continue to make their stance clear on the introduction of wealth tax measures which could impact CGT. This is encouraging owners looking to crystallise their business asset at today’s tax rate to consider their options now with deal processes generally taking six to 12 months to conclude.

Greater deal scrutiny
Despite transactions being subject to greater levels of scrutiny, particularly around forecast assumptions, and transactions taking longer to get over the line, we remain confident about the market for M&A in 2023.

For business owners who are considering an exit, it is more vital than ever to be prepared with your information and data management. A well-run set of books and management information will not only smooth the due diligence phase but also give greater confidence to a buyer throughout the process. Typically, due diligence will now cover a growing variety of areas beyond accounting, legal and HR, such as ESG and technology.

Valuation and deal structure
Valuations are coming under pressure, driven by the rising cost of finance and global uncertainty affecting forecast assumptions. That being said we continue to see sellers’ expectations being met, aided substantially by the volume of cash-rich buyers in the private equity sector. The post-pandemic period has seen record amounts raised by institutional investors which need to be deployed over the coming years.

We are seeing buyers including structure within proposals at an increasing rate which can be in the form of deferred or hurdle-based payments as part of deals. Where a business has seen above-market growth, these deal structures can be a bridge to meeting expectations on both sides. As ever, ensuring the legal agreements match the commercial expectation is a key area of the deal process.

Valuations remain sector specific with businesses in technology and tech enabled services generally fetching the highest prices. Understanding your business’s strengths and sector valuation metrics is an important part of any preparation for sale to ensure you are putting your resources to use in the highest value areas.

Opportunity for 2023 and beyond
Here at EMC, we are receiving a record level of buyer enquiries from the UK and overseas as investors and trade buyers alike seek strategic M&A opportunities. Despite the uncertain global outlook, we are anticipating a busy end to the year, facilitating retirement projects for owners who have weathered the Covid storm and growth projects for those looking to expand.

At the time of writing, we have completed eight deals in the South East this year with a further five projects currently under offer. With a pipeline of new mandates coming to market over the next three months we are gearing up for a busy end to the year.