Increased MBO activity in the UK M&A market

08 November 2018

A management buyout (MBO), involves the purchase of a business by its incumbent management team, usually with a combination of private and external finance.  It provides experienced and knowledgeable managers with the opportunity to be business owners and reap greater rewards for their hard work. The MBO route can also present a sound alternative to a trade sale for existing shareholders. 

There has been a steady rise in the number of MBO deals in the UK in recent years. In 2017, the number of MBO deals rose by 20% compared to 2016, from 76 deals to 91. In the same period, the value of such deals grew from £2.6 billion to £2.7 billion. In assessing sector activity, technology companies were the most highly represented amongst last year’s deals, constituting 18 (20% of the total deals). Second place went to the industrial products sector, with ten deals (11%), followed in third place by the manufacturing sector, with eight deals (9%).

Why the recent surge in UK MBO activity? 

Despite traditionally having a negative impact on deal activity, political activity, including a sudden General Election in 2017, acted instead as a catalyst to deal activity, as business owners sought to offset risk in the event of a change in government. Such risks include the potential withdrawal of Entrepreneur’s Relief, a scheme that allows owners of companies to pay only 10% capital gains on the sale of their shares if they meet several criteria. The Labour Party has also already pledged to increase capital gains tax should they return to power and, even in the current government, it is being argued that NHS funding shortages and potentially large Brexit bills could also lead to higher capital gains tax rates.

Another contributor to the rise of management buyouts is the vast amount of equity and debt funding available, the latter from both traditional and alternative lending sources. Greater competition in the funding market has given a boost to transactions. Private equity firms are sitting on an abundance of dry powder, with some reports suggesting that this amounted to a staggering £1.4 trillion at the end of 2017.  With pressure to put this capital to work, there is a high appetite for deal making.

Current market conditions are in huge contrast to the events that took place almost a decade ago. Post the financial crisis, MBO activity slowed considerably, with funders exiting the market and business owners delaying their exits in the hope that more favourable valuation dynamics would return. The last couple of years appear to have provided these dynamics. Despite ongoing political uncertainty, the UK has shown favourable growth data.

In conclusion, 2017 and 2018 to date have been very active periods for MBOs. With Brexit drawing ever closer, and the medium to longer term future of the government still uncertain, the appetite for MBOs still remains healthy, with numerous funding sources available and market conditions continuing to be favourable for incumbent management teams who are ambitious and keen to buy the businesses that they currently run.

Contact us

So if you and/or any of your contacts would like to discuss funding options, M&A strategy, succession planning or business valuation then contact Corporate Finance Partners, Laurence Whitehead and Robert Kidson, or another member of our award-winning team, for an initial, no-obligation consultation.

Get in touch with our expertsEnquire now