Across all sizes of deal and regardless of sector, the M&A market is busy across the region and nationally.
What trends that have emerged in the last year in the way these deals are put together?
The fundamental approach to M&A deals in the UK, regardless of size or sector, hasn’t changed significantly for 20 years. But a closer look does throw out some interesting recent developments. Here are some headlines reflecting our experience in the last 12 months.
Capacity issues and compressed timelines
The M&A market is very busy. Sheer volume of transaction activity, coupled with some after-effects of the pandemic, has led to much-reported bottlenecks in capacity, at a time when accelerated deal timelines have become the norm. We are seeing sizeable deals get agreed and signed in 5 weeks, but with material delays prior to this point in obtaining tax clearance from HMRC, and notably very significant delays where completion of the deal requires approval of the FCA – an increasingly common scenario.
A busy market is reflected in some very significant wage inflation currently occurring at professional service providers, in a market where recruitment and retention has been and remains challenging. This brings the threat of advisors seeking to pass increased fixed costs onto their clients. All this at a time when the consumer of quality professional service advice at corporate level has never been so diverse – our view is that the business-owner embarking on corporate activity should view themselves as very much in a buyer’s market at present.
Warranties, indemnities, limitations and insurance
The central negotiation on the vast majority of M&A deals revolves around the obtaining of warranties and indemnities from the seller and the limitations applicable to these protections. Recent trends in this area are of note:
- we are seeing more prevalent use of indemnities over warranties – a materially bigger ‘stick’ for the buyer to beat the seller if something goes wrong
- balanced against this, we are seeing a tendency for buyers to agree lower caps on liability than previously – the old norm of liability being capped at 100% of the purchase price is no more
- warranty and indemnity insurance is increasingly prevalent – offering an ability for the parties to insure against claims arising; over 30% of deals now feature some form of W&I insurance (leading, however, to some capacity issues on the part of W&I providers); there is no doubt that the structuring of deals around credible and affordable W&I availability does open up scope for deals to be done more quickly, and with lower risk, that was previously the case
- diligence now features a number of areas which are, as a matter of course, investigated in detail as a result of legislative changes – changes to the IR35 regime would be a good example of this
- earn-outs – an approach whereby part of the price paid by a buyer is determined by performance of the business after completion – are increasingly the norm; we rarely now see a deal without some form of post-completion price-adjustment mechanism, which itself entails a now well-trodden negotiation around conduct of the parties and management of the business during this earn-out period
- we are seeing an increased prevalence of split exchange and completion, notably where regulatory approval is required (and noting again delays in obtaining, in particular, FCA approval – a key challenge at the time of writing)
We can’t predict the market with certainty but expect to see some of the following in the coming year:
- continued high volumes of deal activity until at least the 3rd quarter of 2022
- the withdrawal of government-sponsored Covid support to business leading to an uptick in business distress
- uncertainty in relation to anticipated CGT increases continuing – the prevalent view at the moment being that increases will be shelved at least until the Autumn