Stealth Taxes set to Spark UK M&A Boom in 2023

With inflation hitting 11.1%, alongside rapidly increasing interest rates from the Bank of England and a global energy crisis, the UK has slipped into recession. Jeremy Hunt’s Autumn statement outlined measures aimed at bridging the financial “black hole” – put at anything from £35bn to £60bn – in the government’s finances. Among these measures is the cut to the tax-free threshold on capital gains tax (CGT), as well as the tax-free allowance for business owners who pay themselves with dividends. Corporate finance and M&A expert, Claire Trachet, outlines the likely impact this will have as founders and entrepreneurs will increasingly look to sell as the new measures undermine the attraction of owning a business in the UK – ultimately negatively affecting economic growth.

As CGT allowances are set to keep reducing up to 2024 – as interest rates make financing for businesses less feasible – potential M&A transactions for businesses looking to exit will accelerate to avoid these. Making matters worse, national research commissioned by business advisory, Trachet, has found confidence amongst British business owners is suffering with roughly one in three (34%) stating they are suffering from burnout and struggling to keep a positive outlook in the current economic environment. The research further found 62% of Brits state they’d be happy to compromise their business goals in order to avoid burnout, indicating a trend of British business owners looking to exit.

Claire Trachet suggests this is likely to create a bargain hunt among British and foreign businesses with an impending flurry of M&A activity in 2023, as many potential buyers seek to capitalise on cut-price deals for long-term investments. There will also likely be an increase in distressed M&A transactions as the impacts of rising energy costs and general inflationary pressures trigger recessions across multiple markets. Strategic buyers will aim to reinforce their ability to combat the current market challenges and will seek synergetic purchases and mergers. Investors with significant funding capabilities are likely to be more active as buyers, though limitations on available debt may mean they will be focused on limited quality opportunities, highlighting the importance for British business owners to be M&A ready.

CEO and Foundet of Trachet, Claire Trachet, comments on the steps business owners/sellers should take – from enlisting an advisor to carrying out flawless due diligence – to ensure the most favourable terms when embarking on an M&A:

1. Enlist the help of an advisor as a rule of thumb

“The majority of deals fall through at the due diligence phase. Most commonly, this is because startups have not enlisted expert advice early enough to help them identify and resolve any issues. Contrastingly, rather than a part of the process to be afraid of, experienced advisers can actually add value to a deal during the due diligence process, rather than have it slashed or thrown out entirely. The simple message here is prepare early, and bring in the right people to help you conduct ‘pre-due diligence’. Think of this like a dress rehearsal before the real performance.”

2. Being deal ready keeps you in control of the narrative

“I always stress to my clients the importance of being deal ready before heading into any potential transaction. If you have all the necessary documents in order before the due diligence process starts, you can provide these instantly upon request and it keeps you in control. If there are delays, this could lead to the potential buyer delving deeper into other areas of the business to try and find the information themselves. This could lead to a simple change in confidence that could lead to them getting cold feet and pulling out. What that means is you need to have done all the necessary preparation before negotiations have started, to ensure the deal gets over the line quickly and smoothly.”

3. Be proactive

“M&As tend to involve a significant amount of due diligence by the buyer, however, a seller can significantly improve their position and negotiating power by facilitating this process. Being transparent in terms of the obligations the buyer is assuming, the nature and extent of the company’s’ risks and liabilities, contracts, legal situations and IP concerns builds trusts and will ultimately help the deal come through. Buyers go through with deals on companies they know and trust.”

4. Due diligence is the pitch, after the pitch

“A seller shouldn’t only be concerned with demonstrating their current success and business activities, but also what they can offer a buyer in the future. They usually want to understand the extent to which the seller will fit culturally and strategically within the larger organisation. By highlighting products, services or technology the buyer doesn’t have or might need, the due diligence process can be an opportunity to further the organisations value proposition.”