Is now the right time to exit my business?

05/05/2023. The first quarter of 2023 has seen a slowdown in deal activity after record levels in 2021 and early 2022, and yet I can’t recall a period when I have been having more conversations with owner-managers who are reflecting on what to do next and whether now is the right time to transact. Why is this and what is driving owner-managers to consider their options?

What is happening in the market and why?

First let’s look at the data. Over the last two years we have seen record deal values and volumes, which were never going to be sustainable. Interest rates continued to be at historic lows during the majority of the period and PE funding was at an all-time high. This combination was always going to drive activity, particularly on the back of the market turmoil created by Brexit and Covid that preceded it. As the chart below shows, M&A activity gradually declined during 2022 and Q1 2023 was the weakest it has been for over 2 years.

Figure 1 source: Pitchbook

Figure 2 source: Pitchbook

So why if deal activity is down, are we seeing more businesses considering their options and asking whether now is the right time to transact? The first observation to make is that M&A transaction data can be misleading for two key reasons:

Data based on transaction value can be skewed materially by very large deals. For example, in Q1 2022 S&P Global merged with IHS Markit for c.£33bn which represented 40% of the deal value in the quarter. Without it, deal value would have been 66% lower. This is particularly relevant when looking at the owner-managed space, where transactions are often c.£50m or below, where any single deal is unlikely to have a material impact on the overall data; and
M&A transaction activity tends to operate on a lag. Most transactions take 6-12 months to complete and for businesses who are planning in advance, this can be longer, such that the gap between beginning to think about transacting and actually signing on the dotted line might be 12-24 months. Therefore, we won’t see the impact of the decisions being made now on the transaction data until at least Q4 2023 and potentially later.

But that still doesn’t explain what is driving an increasing number of business owners to reflect on what’s next. That, I think, is the result of a perfect storm of factors that impacts owner-managed businesses in a much more significant way than it does larger, listed businesses.

Financial challenges vs. Personal objectives

It’s fair to say that the past four years or so have seen an unprecedented level of turmoil in the UK and globally. Brexit, followed closely by Covid, and then the war in Ukraine have impacted the economic markets, and people’s well-being and life priorities in ways I don’t think we have seen before and certainly not in my lifetime. The widespread adoption of remote and agile working is testament to that change.

A number of specific economic factors, making doing business more challenging and increasing risks in owning a company, combined with the personal impact that the pandemic has had on families and the value of spending time with loved ones, has encouraged business owners to reflect on their priorities, the potential value of their business today (and in the future) and the timing of retirement and succession plans.

The perfect storm though has been the combination of those factors, alongside rising interest rates and the increased chance of a change of government (and what that might mean for tax rates and in particular Capital Gains Tax). This combination has, for a number of business owners, tipped them over from prioritising longer term potential value to prioritising crystallising value to protect both themselves and also their families. The “bird in the hand” is now deemed, by many, to be worth more than the “two in the bush”.

The increased cost of debt capital makes equity look relatively less expensive, the risk of a greater proportion of future capital value being taken as tax makes “locking in” today’s rate more attractive and the risk of a future economic shock wiping out years of hard earned growth means that many are now keen to at least consider what a full or partial exit might look like and the concept of converting at least a portion of their life’s hard work into cash is sounding increasingly appealing.

What does it all mean?

All this doesn’t necessarily mean that we’ll see new record volumes of M&A over the next 12 months – the headwinds, particularly for larger businesses, are still significant and the cost of debt capital is likely to make deal-doing more difficult. That said, now is a very opportune time to at least reflect on what is happening in the markets and broader economy, how your business is positioned and what the risks might be and whether the return on investment (hard work, long hours, stress, time away from the family) over the next few years is worth it. The answer may well be “yes” but for some people it will almost certainly be “maybe not”.