Buyers and sellers both turn cautious
The number of management buyouts (MBOs) in the UK has fallen again over the last year as Brexit-related caution grows, says Moore Stephens, the Top 10 accountancy firm.
Moore Stephens says that only 80 MBOs took place in the year to June 30 2017, down another 7 per cent on 86 in the prior year, itself a 20 per cent fall from 2014/15.
The firm says that as uncertainty over Brexit grows, both potential buyers and vendors in MBO deals have turned more cautious. M&A deals thrive on certainty, as management need to be confident about market conditions in coming years to be comfortable taking on considerable personal debt.
The private equity backers of MBOs are also likely to be reigning in the multiples they are willing to pay as trading conditions in the mid to long term future remain in question.
Moore Stephens says that a slowdown in MBO activity risks affecting UK economic growth. The refreshment of management teams and their strategy is a key benefit of such deals, which often allow businesses to move to the next stage of their growth.
However the upward trend in productivity that fuelled so much growth prior to the financial crisis has remained relatively flat since 2007. In fact, productivity dropped by 0.5 per cent in the first quarter of 2017 taking it below the peak of Q1 2007.
Moore Stephens adds that growing caution among potential vendors is also playing a role in the falling number of MBOs. The firm explains that many MBOs are funded in part by vendors agreeing to allow buyers to pay some of the purchase price later, known as ‘deferred consideration’.
As uncertainty over the Brexit process has grown, vendors have become less willing to allow deferred consideration, viewing it as too risky to ‘leave money on the table’ for too long in a period of economic and political flux. This means that negotiations over deals between the vendor and purchasers are more likely to reach an impasse.
Moore Stephens says that sectors that rely heavily on labour from EU workers has been hit particularly hard by the growing caution in the MBO market. Industries including leisure, construction and the private care sector employ a high percentage of EU staff as part of their workforce. Uncertainty over their status post-Brexit has knocked the confidence of potential buyers, who fear a possible rise in employment costs.