Competition Drives up M&A Valuations for UK Businesses

Market competition driven by an increase in available capital and a slowdown in the number of businesses being offered for sale in the UK is driving up enterprise values, says James Waterhouse, chief executive (CEO) of businesses for sale website dealconnections.

According to data from the site, which monitors information and big data on market trends, says healthcare, business services and technology are three very strong sectors where values and multipliers have been steadily increasing over recent months.

This is also driving private equity (PE) firms – previously seen as more conservative – to start to look at more difficult deals in the mid-market.

Among the ‘challenging’ flags are businesses that, although profitable, are not performing well in terms of benchmarking against their peers. These include ‘buy and build groups’ that cannot demonstrate consolidation and businesses with complex technical issues like failing enterprise resource planning (ERP) implementations.

Waterhouse believes this opens up a range of opportunities for management buy-in MBI candidates and strong, proven management teams to step into PE-backed businesses and negotiate substantial potential returns based on their success.

“The dream of a corporate carve out of a non-core business making good returns with a strong management team looking to have more control and hold higher levels of equity is proving more difficult to realise,” he says.

“As a result, many PE firms are now looking to the pre-distress or MBI models that have felt out of favour in recent years.

“Interestingly, competition at the ‘safe’ end of the market is now coming from lending partners who see less value in working through a fund if they are able to secure a low-risk, high-return corporate carve out.”

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