A sense of optimism?

The third national lockdown is in full swing, and daily coronavirus statistics are at an all-time high. This would not seem to be a time for optimism, but with more than one vaccine approved for use and a large-scale vaccination programme ramping up, there is now a good chance of avoiding a fourth lockdown and the restrictions we have all been living under being reduced through the coming year and eventually removed. Along with the Brexit deal, this means that confidence and certainty should grow through 2021 and these will be key drivers of increased M&A activity.

In many cases the commercial rationale for deals that may have been postponed or shelved will not have gone away and we are therefore expecting a recovery in deal volume as the year progresses.

Capital gains tax rises

The risk of a significant increase in capital gains tax in the forthcoming budget on 3 March 2021 will be driving the timetable on deals that are currently in progress, and which are likely to have started in 2020, and this may mean we see a flurry of completions in the first two months of the year.

However, if such a tax rise comes to pass there is also a risk to M&A activity for the remainder of 2021 as business owners may then decide not to exit but to retain ownership and continue to grow the value of their company to make up for the additional tax. Growing value takes time and the speed of the economic recovery following the worst effects of the pandemic will also therefore be a key consideration.

From a sector point of view, there is talk of a new normal that will endure beyond the pandemic with increased home working leading to lower utilisation of city centres and an acceleration of the move to internet shopping at the expense of the high street. However, there is another significant shift underway which is the increasingly urgent drive for decarbonisation and achievement of Net Zero 2050. Although there are different underlying drivers for each of these economic drivers, M&A activity in all of these areas is likely to increase, driven by the rebalancing of the economy.

For those business owners thinking of an exit in 2021, it would clearly be prudent to keep an eye on the budget in early March and the possibility of changes to the capital gains tax regime. It is likely too late now to put together a deal ahead of this so it is more about planning for a potential increase in capital gains tax and thinking about what impact this might have on their appetite for an exit.

It is also likely that the financial results of many businesses will have been materially impacted by coronavirus and the measures taken to control it. Lost or delayed sales would on the face of it suggest a reduced valuation but if the reasons behind the loss are properly explained and presented to buyers then some or all of this value might be recoverable.

EBITDA or EBITDAC?

A profit measure often used in M&A is EBITDA (being Earnings Before Interest, Tax, Depreciation and Amortisation) and one way of thinking about the impact of the pandemic is to consider an evolution of this measure being EBITDAC, that is EBITDA before coronavirus.

From a buyer’s perspective there is risk in accepting adjustments like this to the reported results but deal structuring can help here. An example is the use of an earn-out where some of the consideration depends on future performance, or a staged sale where only some of the equity is acquired initially and the rest in future years.

For sellers or buyers, dealing with the impact of coronavirus in an M&A situation is one area where a corporate finance adviser will be able to add significant value.

We work with UK SMEs and small-cap PLCs that have the ambition to grow their business by acquisition or are looking to sell. We often act as an outsourced Corporate Development team helping clients meet their strategic goals through mergers and acquisitions. Our value lies in helping clients build rigour into the M&A process. For a confidential, independent, no obligation discussion on how to buy a business, click the 'Let's chat' button.