The UK Tech M&A Landscape: Insights for Sellers

M&A in the UK's technology sector remains a buoyant, particularly for transactions under £100 million. Here is a roundup of some of the current challenges and opportunities:

Market Dynamics and Economic Considerations

The Budget has introduced economic uncertainties, leading to a cautious approach among investors. Notably, the reduction in inheritance tax breaks for AIM-listed stocks has dampened investor enthusiasm, causing some companies to delay flotations and mergers. This may represent an opportunity for smaller private deals as investor appetite continues to look to the private markets. Compelling value propositions (particularly strategic ones) are still attracting buyers.

The preservation of VCT and EIS reliefs means that there might be even stronger demand for early stage businesses in the coming months. These reliefs are one of the few remaining places that still allow investors to shelter from CGT.

Talent Retention

The competitive market for tech talent poses significant challenges. Smaller firms often struggle to match the compensation packages of larger corporations, leading to potential talent attrition. For sellers, demonstrating effective talent retention strategies is crucial, as the value of a tech company is often closely tied to its human capital.

Technological Valuation

Rapid advancements in areas like artificial intelligence and machine learning add complexity to valuations. Buyers seek assurances of scalability and integration capabilities. Sellers should be prepared to provide detailed insights into their technological assets to meet these expectations.

Private Equity Involvement

Private equity (PE) firms have shown increased interest in the tech sector, with PE involvement in UK deals reaching 42% in 2023. This trend offers sellers additional avenues for acquisition but also necessitates a clear demonstration of growth potential to meet PE firms' return expectations. Founders should to understand the consequences of selling to PE. It’s a different environment to what they are likely to be used to.

Environmental, Social, and Governance (ESG) Factors

ESG considerations are increasingly influencing M&A decisions. Companies with strong ESG credentials are more attractive to buyers. Sellers should integrate sustainable practices into their operations to enhance their appeal in the market.

Strategic Positioning for Sellers

To navigate this complex landscape, sellers should:

• Get their house in order: Ensure that internal records and compliance is all correct. You want to avoid having to undertake complex and delaying rectification action before a sale deal.
• Focus on Talent: Implement strategies to retain key personnel, thereby preserving company value.
• Articulate Value: Clearly communicate the unique value propositions and growth potential to prospective buyers.
• Embrace ESG: Adopt and highlight sustainable practices to align with buyer priorities.