Darren Hodson, Corporate Finance Partner based in our Birmingham office considers the impact of rising inflation on the UK deal market, and the impact this may have on those looking to sell:

Consumer price inflation more than doubled in Britain in April 2021 to 1.5%, up from 0.7% in March 2021, marking the fastest rise since the outset of the COVID-19 pandemic back in March 2020, possibly signalling the start of a likely increase in inflation as the global economy begins to recover from the pandemic.

The Bank of England has already confirmed that inflation in Britain is heading above its 2% target and will hit 2.5% by the end of 2021- a rise that was predicted by economists, as the UK economy begun to reopen further when restrictions lifted on 12 April, with consumer confidence boosted by the vaccine rollout. The cost of clothing and hotel bookings rose, whilst gas and electricity prices also rose sharply after the default tariff cap was increased.

Whilst this rise in inflation was expected, there are wider concerns amongst economists that we could see escalating inflation in 2021, concerns which are echoed in global financial markets, as demonstrated in the recent US stock market fall after consumer prices in the US recorded their biggest annual jump since 2008.

The impact of inflation on the deal market

Whilst there is no fundamental issue with inflation at the current levels, banks could be forced to raise interest rates to try and curb increasing inflation rates. It is therefore likely that the cost of borrowing will increase as inflation grows. Bank of England chief economist Andy Haldane said the rise in inflation could be a cause for concern, with the possibility that the Bank may need to raise interest rates to prevent inflation staying above target.

If the cost of finance goes up, it is likely that deal values and volumes will go down to compensate. Volumes will reduce as companies will want to avoid using expensive debt, and values will go down as returns will be impacted by higher rates of interest.

The Government could be under even more pressure to raise taxes in order to offset the increased costs of borrowing, through increasing Capital Gains Tax “CGT” and removing reliefs such as Business Asset Disposal Relief “BADR” (formerly known as Entrepreneurs Relief), for example. This could in turn have a further impact on the UK deal market and reduce net proceeds for vendors.

The risk of CGT rates increasing seems high given it has already been proposed in a report published by the Office of Tax Simplification (OTS), published in response to the Chancellor’s request for a review into CGT. The proposed changes could see CGT rates more than double in certain cases, with a possible increase in the top CGT rate from 20% to as much as 45%. Additionally, this report says BADR Relief should change to a retirement relief with much more onerous conditions on who can benefit from it.

The combined effect of interest rates and increased tax could have a significant impact on exit strategies and net proceeds for business owners.

What does this mean for those thinking of selling?

Taking into consideration the impact of inflation and increased borrowing on the deal market, if you are thinking of selling your business in the next two years, there is a strong argument to start the process as soon as possible, as the deal headwinds don’t look favourable in the medium term.

The M&A market today remains robust, with willing buyers and seller, cheap debt and strong liquidity. If your business is in the right position financially, now is as good a time as any I can remember for selling, something I never thought I would be saying so soon after the first COVID-19 lockdown.

Preparing a business for sale is initially a complex process, and there is no one rule that fits all. To optimise value, it is important to take advice from professionals well ahead of any sale process, so I would advise anyone looking to sell their business to not delay in seeking advice. This will ultimately ensure you achieve your aims and objectives, and also maximise the value of the deal.

Smith Cooper Corporate Finance specialises in the sale of companies, typically up to £50 million in value, on behalf of corporate clients, entrepreneurs and owner-managers.

It is never too early to start considering the sale of a business, so please do not hesitate to contact our specialist advisors for a confidential, no-obligation initial consultation.