• Richard Aston, Author |
4 min read

If you’re an ambitious private enterprise looking to take bold steps and grow through acquisition – now could be a very good time if you’re clear about your goals, research the market carefully and act decisively.

Without doubt, the M&A market here in the UK is absolutely buoyant. Activity is possibly as high as it’s ever been. This is especially the case for businesses that have fared well through the pandemic and are now seen as attractive targets for others to acquire to bolster their operations.

These businesses broadly fall into two categories. Firstly, there are those companies who haven’t been affected by the pandemic and have been able to carry on trading strongly. These are essentially B2B businesses providing business services including software and IT. In addition, in financial services there is ongoing growth and opportunities for the health sector, fintechs and new entrants to disrupt the market.  

Secondly, there are all the businesses that have suddenly found themselves in hot demand due to the COVID-19 crisis. These are mainly direct-to-consumer businesses across areas like food delivery, logistics, lifestyle and personal fitness, connectivity and entertainment, and anything healthcare related. Many of these businesses have pivoted their original B2B strategy over to a consumer model to address opportunities presented in this new normal. 

Regionalisation broadens the field

Another factor that makes this an attractive time to consider an acquisition is that the field of potential targets suddenly feels much bigger. I say this because COVID-19 has shown us that physical location is not as significant as we used to think it was. The remote working that we have all been doing over the past sixteen months or more has proven that technology works and colleagues can collaborate effectively no matter where they are. The pandemic has therefore done a lot for the regionalisation of activity, and this is making acquirers consider businesses across a wider geographical footprint.

To this we can also add the government’s well-established ‘levelling up’ agenda. The likely direction of large amounts of capital and incentives is into the regions to help rebase the economy. So, it’s a good time to be thinking more laterally and looking outside London and the South East. After all, the government is planning to move some 22,000 civil servants out of Whitehall into the regions over the next decade: the regionalisation programme is very real.

Changing motivations

An additional driver of change is a change in small business owner attitudes. The global pandemic has forced many to re-address their lifestyle and priorities. Retirement, future planning, and a change in work-life balance has seen many small business owners look to exit, creating opportunity, especially in the smaller end businesses, where the individual is key. 

CGT ticking clock?

An additional consideration making this a good time is that we have a ‘ticking clock’. Changes to Capital Gains Tax making it less favourable for founders and owners to sell their businesses are expected (although not confirmed) to come into effect in the coming months – perhaps this autumn, perhaps spring 2022. There was actually a belief that this might happen in spring this year, and the result was a huge spike of activity in March. If CGT does change, there could be a further flood of potential targets coming onto the market as owners look to sell.

PE active

Against all these positives, however, we do have to place some points of caution. Firstly, prices are very high. This is largely due to the huge wall of private equity capital looking for a home. PE houses have built up considerable reserves of cash and need to spend them. The competition this is creating naturally translates into higher price tags.

That said, if you’re an enterprise looking to de-risk and divest an arm of your business – as many corporates are – this makes it a good time to sell. That could then provide you with some of the funds you need to acquire!

Do the diligence

The second point of caution is that it’s really essential to do your due diligence thoroughly. When looking at any target, you have to be absolutely clear about how the pandemic has affected it and whether the underlying business remains strong. Many businesses have been propped up by government support schemes such as furlough and CBILS. Furlough is coming to an end soon and CBILS loans generally start to become repayable from October. So, you need to make absolutely sure you’re not buying something that artificially looks viable and may in fact turn into a millstone when support mechanisms are removed.

On the positive side of this, though, if you do identify dependencies it could become a strong lever for negotiating more attractive terms. And in addition, we are likely to see more distressed sale opportunities, particularly in sectors such as restaurants, leisure and hospitality, as government supports unwind.

Don’t forget the importance of IT due diligence too. Digital channels have really shot to the fore through the pandemic and they’ll continue to be an absolutely key route to market in most sectors. Look carefully at any target’s IT capabilities – have they invested in digital, are their systems fit for purpose in the new reality we’re in? What will be required to integrate their systems with yours?

Ready to Grow Again

These caveats aside, there is no shortage of opportunity for brave and growing businesses that decide their time has come. If that’s you, make sure you have considered all the issues and have the right advisors on your side!

Take a look at our new guide to acquisitions and investment, Ready to Grow Again. It should give you plenty of pointers – and hopefully some inspiration too. 

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