You might have imagined the ongoing pandemic would have curtailed deal activity, but buyers and sellers still have plenty of reasons to transact. Whilst the economy has been plodding along, M&A business has been brisk. Adrian Howells, a director in our Corporate Finance team looks at the impact of the pandemic, who's been buying and who's been selling.
Greatly exceeding our initial expectations, at Quantuma around 75% of the deals that we were working on at the beginning of the pandemic have now been completed. Whilst progress was much slower as buyers were more circumspect about where they wanted to put their money, in the end the majority were able to overcome their reservations about buying a business during a crisis.
There was a rush to get things done before the Budget, where there was some expectation of changes to capital gains tax (CGT) but in the event nothing transpired. In those two weeks before the March statement, we are pleased to say we completed eight deals with a combined value of £130m.
As lockdown eases and a return to normality is in sight, much of the pent-up demand from owners looking to sell their business is starting to work its way through. This is particularly the case for those who were thinking of doing a deal in the last year or so but chose to hold off, many due to uncertainties around Brexit, others due to uncertainties around Covid-19. These sellers are coming back to the market and our view is that the autumn could be busier still.
Regionally, activity mirrors how it was pre-pandemic. London is the busiest part of the country, followed by the South East and then the industrial heartlands of the Midlands and the west country. Sector-wise, interest is pretty broad; whilst there is a lot of interest in 'pandemic winners' such as technology , healthcare and logistics, we are also starting to see traditional deals, such as manufacturing, more frequently.
We are seeing a wide range of buyers at the moment, split between trade and private equity. We should also differentiate between those looking to acquire strong versus struggling firms - those that have had a tough time through the pandemic and might present themselves as a relative bargain. Timing often determines what buyers choose. If you are looking to consolidate a sector as part of your strategy, can you really afford to invest the time in fixing up a broken business? Often the answer is no, buyers don't need the hassle.
Pricing is largely holding steady, with no significant increase observed to date. Sensible investors are following a rational thesis, taking account of the pricing of a given asset before the pandemic. But speaking with contacts in the private equity world, some are starting to lose out on deals where the bidding has just spiralled - time will tell whether this is a trend to come. Also worth noting is the money coming in from overseas; we see that the UK remains an appealing destination for investment. Two deals we completed in the last six months featured American and Danish buyers.
That appetite, plus the economic recovery we are seeing, explains the wide range of sellers. Owner-managers have had a mixed 12 months: some have flourished and want to carry on with their business, some have spent time with their family or been piled high with worries and have decided they have had enough and that now is a good time to exit.
For founders, we understand that this is a very human decision and we try to walk them through what their options might be. In any growing business it is often the case that the longer you wait the more value you will achieve, but ultimately an owner could end up waiting forever to realise their gains by following that logic. In the end every owner reaches their own decision point.
Whilst CGT was not equalised with income tax, the fear that it will has and will continue to drive behaviour and deal activity. With the public finances to repair, this policy measure might easily come back on the government's agenda. And with taxation in mind, founders are increasingly exploring employee ownership trusts (EOTs) as a method of exiting their firms efficiently. EOTs are politically popular because they make ownership much more democratic. There are significant advantages to sellers too; as well as being a tax-free method of sale, the seller has more control of the process than in a traditional exit route.
Whatever the deal structure, one of the key ingredients we bring is our ability to build relationships. We need to understand the minutiae of the deal and building a rapport with all parties involved is vital whether that is the buyer, the seller, advisors, lawyers, or lenders. Everyone must work together to get a transaction over the line.
We have produced a three-part video series called Building financial fortitude where financial journalist James Ashton talks with Adrian Howells, a director in our Corporate Finance team to discuss UK deal activity; the impact of the pandemic and who's been buying and selling.
To view this video series, please click the links below;
Building financial fortitude
To survive and thrive, businesses need to be resilient and robust. As a highly experienced business-advisory firm, Quantuma talks to hundreds of businesses daily and understands they need support to tackle issues proactively and move beyond the challenges. That's why they created Building financial fortitude, a programme designed to provide information, insight and support on the key issues businesses and professional advisers are facing now and will need to tackle in the future.
Find out more at https://www.quantuma.com/building-financial-fortitude
Originally published 12 July 2021
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