What does 2023 bring for the M&A market?

We look set for another rollercoaster year for UK plc.

We don’t buy into the recession being sharp and deep but all indicators do suggest it will be prolonged.   Unlike previous recessions, where the economic downturn resulted from a specific issue and affected a small section of the economy, this time around the impact will be felt more widely.   Higher fuel costs, spiralling inflation and significant increases in interest rates to counteract this, will all impact consumer spending which could have a wide-ranging impact across a broad range of sectors.  

So how will the recession impact M&A?  There are always winners and losers in every recession. Picking the winners though will be far more difficult, with advisors having to scrutinise the drivers of profitability more closely prior to running a process.  Valuations will undoubtedly fall from their peak of the last few years, however, for strategic assets, where the business is performing strongly, multiples will remain strong.

The rising cost of money will have the largest impact on the market.  Large private equity buy and build platforms will no longer be able to solely utilise third party debt to fuel acquisitive growth.  Whilst this is unlikely to dampen private equity appetite for new buy and build platforms, there is after all still significant capital in funds to deploy, their current portfolios could be in for a rocky road being hamstrung by high levels of debt exacerbated by falling earnings.  We have already seen some high-profile casualties, such as Made and Joules, and we should brace ourselves for more bad news.

However, whilst all the short-term indicators are negative, we still remain optimistic about the year ahead.  In the owner managed market there is undoubtedly pent up appetite to sell.   The continued uncertainty surrounding the prospect of further changes to Capital Gains Tax rules is likely to weigh heavy in the minds of entrepreneurs, encouraging owner managers to bring their business to market.

We are undoubtedly in for a slow start to 2023.  Q1 will be quiet, but transaction volumes will recover progressively throughout the year and we could be in for an extremely busy Q4.