In the lead-up to the Budget last October, it was anticipated there would be a flurry of corporate activity to front-run any increases in Capital Gains Tax (CGT). This prediction does not appear to have materialised. Deal volume values and multiples have remained flat versus the previous highs seen post-Covid in 2021. However, there have been signs of a pick-up in buy-outs more recently in part fuelled by falling interest rates, which has improved the climate for debt financing.
M&A deal volumes and value
Source: Factset Advisor Quarterly | Q4 2024
On a personal level, I have observed a few more employee benefit trust exits than I have seen for many years where founders have seeded their firms to management in exchange for a tax-efficient and modified payout over an agreed multi-year schedule. This continues to be an incentive supported by the current Government, which is a positive for growth.
M&A important for the UK economy
The importance of this market on economic growth should not be underestimated. The Office for National Statistics reported in September 2024 the value of outward M&A (UK companies acquiring foreign companies) in the 2nd quarter of 2024 was £4.2 billion and Domestic M&A (UK companies acquiring other UK companies) during the same period was £2.6 billion. To stimulate investment this improvement needs to continue. The question is whether we have the right climate in place for this to happen.
M&A deals flatline despite pre-Budget optimism
Source: Office for National Statistics
On the downside, there is business uncertainty about how the National Insurance (NI) increase will impact UK business confidence and the spectre of US tariffs potentially changing cross-border trade forecasts. However, there is now much more certainty around the future of CGT rates and increasing bank appetite to provide credit amid forecasts of falling interest rates and more moderate inflation in the coming months.
Key trends by country, sector and exit route
Source: Presentation to Weatherbys Private Bank from Clearwater Corporate Finance
By country
Corporate Finance observers point to a growing private equity ‘dry powder’ pot from the 150+ players active in the UK market and indicate that overseas buyers are still showing great interest in high-quality UK assets where the appetite to pay premium prices remains. The US remains the most prolific acquirer of UK firms with France, Sweden, Canada, Germany, Ireland and Australia making up the top overseas buyers list by number of transactions.
By sector
There continue to be many more areas that are hot rather than cold with education, healthcare, AI, information services, cyber, defence & security, and environmental and renewable energy raising interest. Cooler areas include high street retail, commercial property, construction, food services, and restaurants.
By exit route
There are some signs that the listed market in the UK still has merit for fast-growth firms (although with a different post-budget tax treatment for investors in respect of IHT) – the most popular route remains a private or trade sale or investment by HNWs, when set together, being slightly ahead of private equity investment in terms of number of transactions according to industry observers.
A business exit checklist
Whilst the outlook for business confidence in the UK remains debatable one thing is certain – economic growth prospects for a more positive future rely heavily on allowing our fast-growing enterprises the so-called Gazelles (high growth companies with a 20% growth in revenue for four or more years) to continue to scale up through business acquisition and continued investment whether from UK sources or overseas.
Whether a founder or a next-generation family business the true potential of any business to scale can only be achieved by investment in the business without sole reliance on the current shareholders. If you are looking for help in achieving this objective and would like to consider external investment, personal succession or even exit then the questions below are worthy of some consideration.
Business checklist
- Are you clear on the stage of the business life cycle to where your business stands – idea stage, start-up, revenue generative and on a track to profit, in growth, advancing/scaling, plateaued, hanging on, declining?
- Is the business capable of continuing or being scaled further and growing without you – is this something you have considered and planned for?
- Does your business have the right plans, sales performance and people to be able to continue without you and provision if something were to happen to you?
- Have you considered your exit and handed the reigns to others whether family, management, external investors or external buyers? Can you or do you want to move out of the way?
- Is the business ready for that transition? Does it have the right corporate structure, contracts and legal agreements (with customers & staff), compliance and are financials and tax matters clear?
- Do you know why you want to sell – personal reasons versus the right time to maximise value (market, sales forecast, future projections)?
- Are your expectations of selling a reality? Do you have the time and mental capacity to sell?
- Have you considered the best type of exit for the business – do you understand what type of buyer you are looking for or the route to achieving that process such as a management buy-in/out, employee trust, trade buyer, moving into public markets or a partial or full sale?
- Do you have a clear idea of the value of your business or the amount you would be prepared to accept to live the life you need post-exit?
- Are you surrounded by or in dialogue with the people you will need to help you make that transition – both to execute the transaction and also to live your life post-exit?
Personal wealth management checklist
With the NI, CGT and IHT Budget changes set to come in this April, it may prompt you to review your financial planning affairs. If this is the case, we would suggest taking the following steps:
- Review or make a retirement income plan – this is best done with a forward-looking cashflow tool to predict future expenditure needs with an inflation overlay.
- Review existing net wealth statements from an income tax and inheritance tax perspective – specifically, review your pension death benefit nominations and any life policy beneficiaries.
- Shareholder directors should review their remuneration approach and consider salary sacrifice and employer pension contributions.
- Take this opportunity to review the risk, performance and costs of your investment portfolio and ensure they are as expected.
- Consider utilising any carry-forward allowance for pension contributions.
- Make the most of spousal CGT allowances where possible and consider spousal transfers if necessary.
- Consider investing in assets that are exempt from CGT.
- Consider structures such as pensions, offshore bonds, and discounted gift & loan trusts that can align your risk and rebalance assets without crystallising gains.
- Consider the use of gifts as the opportunity to utilise ‘potentially exempt transfers’ which remains open as a legitimate planning approach; gifts out of income from pension income now have greater merit, for example.
- Consider the options for farm and business owners in terms of planning with a review of any debt or insurance solutions to tackle liability or liquidity issues
It is important to undertake good financial planning. The golden rule is to review your financial affairs including your will, wealth statements and investments every three years at least.
If you would like to discuss any aspect of this article, please do feel free to get in touch.
Nick Gornall
Associate Director, Weatherbys Private Bank
ngornall@weatherbys.bank
+44 (0) 7436 239 639
Important information
Investments can go up and down in value and you may not get back the full amount originally invested. The information contained in this presentation does not constitute financial advice and it is recommended you seek professional advice. Tax rules are subject to change and will depend on individual circumstances.