Mergers and acquisitions activity, what lies ahead?

A positive start to the year

Having worked on some high-quality sales and acquisition mandates for clients throughout the 2019 and achieving a record year, the Corporate Finance team at Larking Gowen were feeling positive going into 2020. The trend continued with a busy start to the year, with new transactions coming into the pipeline and then…Coronavirus struck!

A recent report from Mark-to-Market titled ‘April 2020 valuation barometer’ painted a positive picture in terms of deal volumes and values achieved across the UK mergers and acquisition markets (M&A) for the period 1 January to 31 March 2020 (Q1). Deal volumes in March were in fact up by 15% on March 2019 and were consistent with the trailing 12 month average of circa 300 deals per month. So, no impact from Coronavirus? Unfortunately, this is not the case.

Nearly all completed deals in this timeframe would have been a long way down the track before Coronavirus really hit home and the effective “lockdown” since 23 March. Most of these deals completed in early March before Coronavirus, there was a perfect storm of circumstances that led to an acceleration of deals in the period to early March which has inflated the deal numbers.

So why was that?

There was a flurry of deal activity in the lead up to the Budget announcement on 11 March with lots of speculation around potential restrictions or even the abolishment of Entrepreneurs Relief. We were operating in a marketplace where the single biggest tax relief for business sellers was under threat. Therefore several deals were accelerated to complete prior to 11 March 2020, to make sure Entrepreneurs Relief was “banked” whilst it was still available.

The relief previously applied to a lifetime limit of capital gains of £10,000,000, but post Budget this was slashed to £1,000,000. With potentially significant sums of tax at state it was important for advisors to get deals done for their clients before the Budget announcement. At Larking Gowen we had two transactions complete the week before budget day, with one completing on 10 March. As a result of the changes made the next day, we saved the sellers hundreds of thousands of pounds in Capital Gains Tax.

So what now?

Many transactions that were about to go live or were in the early stages are either now on hold or have been abandoned all together due to the current uncertainty. Speaking with peers across the board it would seem as though Q2 could be slow for transactions being completed. M&A deal sourcing specialists, Dealsuite, recently issued a report titled “Impact of the corona outbreak on the UK Mergers & Acquisitions mid-market”. In the report dealmakers were surveyed about what they felt the impacts of coronavirus would be on deal activity going forward. This painted a bleak picture with four out of five respondents thinking the market would take three-six months to stabilise again and almost two thirds of advisors expecting at least a 25% reduction in activity.

Is it all bad?

Whilst it might seem a bleak picture for M&A activity in the current climate, there will always be exceptions to the rule and deals will still be done. Some businesses involved in staple foods and goods, software and tech, and those involved in medical and care are still performing well and in a lot of cases better, due to the current crisis.

We’ve seen this firsthand with most transactions that are still actively in progress fitting the business sectors above and we completed a deal in the tech sector only last week.

Once we emerge from lockdown it is likely that there will be opportunities for those well positioned businesses to gain market share through acquisition of complementary businesses who perhaps have not managed the down-turn as well. So, we would expect to see some accelerated M&A activity moving into Q3. In addition, business owners will still need to retire, and corporate groups will still need to restructure and buy and sell subsidiaries, so this pent-up demand to sell will release again in due course. However, this crisis is likely to have a downward impact on business valuations and many business owners might be reassessing their aspirations against potentially facing another crisis or down-turn in the future.

What can we be doing now?

Regardless of whether you’re looking to buy or sell a business in the short, medium or long term, there are lots of things that can be done now. James Lay’s recent blog ‘Selling your business amid COVID-19’ highlights some of these and is well worth a read.

There is also some great content available from our business advisory team around surviving the current climate, adapting to the new climate and thriving once markets return which can be found here.

For acquirers, I expect that we will see accelerated M&A processes in the next few months as things start to transition back to normal and government support is withdrawn. Therefore, for successful businesses or serial investors there could be bargains to be had on the acquisition front. If you would like to be made aware of potential acquisition opportunities as they arise, please get in touch.

For potential sellers there is still lots that can be done in this downtime and preparing for the due diligence process would be time well spent. Likewise, if there are key members of staff that need incentivising to help bring the business value back up to what it was pre-COVID-19 then now might be a good time to get an exit focused Enterprise Management Incentive (EMI) scheme in place.

The Corporate Finance team are also highly experienced in advising SME business owners on business planning and exit services and profit improvement programs. If you’d like to explore any of the above in further detail, then please get in touch.

Call 0330 024 0888 or email corporatefinance@larking-gowen.co.uk. You can also find contact details on the Our People section our website.

Jack Minns