A surprisingly active summer

One thing that strikes me this year is that it is far from a quiet time; we remain active on a number of transactions. This is in contrast to the start of the year, when the number of transactions was lower than had been seen in prior periods.

Drivers of increased activity

The reason for the uptick in activity is, in my view, twofold: the impact of the recent general election and a more stable economic platform with inflation falling and the prospect of lower interest rates on the horizon.

The general election and change to a labour government, brings with it a number of fears that Capital Gains Tax rates payable by business owners on profits made when selling their business will increase. It should be noted this is not a new fear as there have been references to changes in capital gains tax rates a number of times in recent years, all have which have created an environment for business owners to consider an exit. The election manifesto of Labour was silent on raises to Capital Gains Tax, perhaps ominously so considering the other mains taxes where locked in with no changes. The fall in inflation seen by reducing global pressures and high interest rates remaining in place have also led business to consider more positive action when it comes to M&A activity.

It is clear from my own experience with clients that the potential risks of increasing tax rates are a significant driver to them looking to exit now, ahead of a potential mini budget in the autumn, or the full budget in Q1 of 2025.

Strategic considerations for business owners

For some, exiting their business now is not achievable due to a combination of timing, current performance, or personal factors. For those clients, understanding what tax planning can be done now, if any, ahead of potential changes in tax rates is important. For others who were already closer to exploring their exit opportunities, the risks arising are leading them to consider their options and act appropriately now – hence the increase in activity being seen by my team.

Where a sale of the business to a 3rd party is not achievable now, other options being explored are both Management Buy Outs (a sale of the business to the exiting management team), or as part of a rising recent trend a sale to an Employee Ownership Trust (a sale of the business to the employees of the company). These can be quicker to complete but also tend to be on ‘softer’ terms than an external exit. It is also important to ensure that such decisions or any deal itself are not rushed, in doing so errors may be made that in themselves could cause as many issues as an increase in tax rates might.

I am no fortune teller, and the right approach for business owners varies on a case by case basis. However, as a professional working with clients, other professionals, and lenders etc., it is clear that having a proactive adviser working with a business is vitally important. Having this in place will ensure that they really understand the wants and needs of the owners future and can help and support, navigate and plan for potential changes. It is always a challenge for a business owner to understand when to get off the carousel and cash in on the value within their business.

Consider a business that is growing today such that its current value of £10m, might conceivably increase to £15m in the next three years. The net proceeds now would be in the region of £8.1m (assuming a single owner), however if the main rate of Capital Gains Tax were to increase from 20% to 30% at the point of sale the net proceeds would be in the region of £10.7m. For an increase in sales value of 50%, there is only a 32% increase in net proceeds. If you consider how those net proceeds can be invested with a sale today, then the decision to wait to achieve a higher price may not be so clear cut especially when the risks and unknowns of what the future may hold (with recent events such as Covid further bringing those unknowns into focus).

Ultimately, tax will always be an important factor in exploring M&A opportunities, however it should never, in my view at least, be the driving factor or create a last-minute rush to action. The role of a good adviser that is working for a business owner is to keep them updated with how the M&A market is at any given point in time and advise on when might be a good time to meet their personal objectives from a sale.

If you have any questions or are considering buying or selling a business, then please get in touch .