Assessing the State of UK SME Sales in Q1 2024: Trends and Insights
As we traverse the first quarter of 2024, the UK's small and medium enterprise (SME) sector continues to evolve, presenting unique challenges and opportunities for business owners looking to sell. This analysis seeks to provide a clear view of the current trends affecting business sales, offering insights that are crucial for making informed decisions.
Market Overview
The beginning of 2024 has not followed the traditional surge in mergers and acquisitions (M&A) normally seen in the first quarter of previous years. Instead, transaction numbers have shown a slight increase from 296 in February to 346 in March, according to the latest data. This figure remains far below expectations, indicating a cautious approach from buyers, likely influenced by the global economic climate and recent hikes in interest rates. The devaluation trend, which correlates strongly with rising interest rates, has led to an increase in UK companies exiting the market.
Key Players and Transactions
The landscape of buyers in the UK SME market is dominated by a 90:10 split between trade buyers and private equity (PE) firms, a ratio that has remained stable. LDC stands out as the most active PE firm in the UK, amidst considerable interest from US investors in UK assets. However, international buyer activity has slightly decreased over the last quarter, while Swedish buyers have gained prominence, indicating a shift in market dynamics.
In the SME sector, particularly companies with an EBITDA between £2m and £10m, there is significant transition. Only 40% of the 10,000 such companies remain under private ownership, with the remaining 60% having been acquired by PE firms or other entities.
Valuation and Investment Trends
The UK is currently experiencing a buyer's market scenario, with multiples eroding and companies fetching lower than historical valuations. For instance, while global technology companies are being valued at up to 8-9x turnover, many UK SMEs are trading at significantly lower multiples of profitability, highlighting the disparity in market perceptions. Moreover, there have been instances where certain internal divisions of companies that have been carved out have attracted higher valuations than the entire entity, underlining the nuanced and often unpredictable nature of current market valuations.
Future Outlook
Looking ahead into 2024, the deal lifecycle has prolonged, with many transactions expected to close in last year, still continuing to drift into the current year. Buyers are becoming more accustomed to the new interest rate environment, which could potentially speed up transaction processes in the latter half of the year. Due diligence is also becoming protracted as buyers are requiring more demonstrable performance before they finally commit.
It is also anticipated that PE firms might increasingly rely on internal capital rather than external debt, given the current economic climate and availability of credit. While it is unlikely that the market will reach the highs of 2021 and 2022, it could align closely with the activities of 2023, possibly showing slight improvement.
We receive these insights from MarkToMarket.io, a premier data analytics platform, significantly enhancing our understanding of the SME valuation landscape. The detailed market data they provide is instrumental in shaping investment decisions and understanding valuation dynamics.
Conclusion
The UK SME sale market in Q1 2024 reflects a complex interplay of lower valuations, cautious buyer sentiment, and shifting buyer demographics. Despite the subdued start to the year, there is cautious optimism for a mildly improving second half, provided economic conditions stabilise. We also may see a change in Government this year which, irrespective of your political leaning, historically generates a bit of excitement around the change of party. Companies and investors alike must stay agile, adapting to the evolving market conditions to capitalise on potential opportunities.
Self-Test Section
- Reflect on Valuation: How does your SME compare in terms of valuation multiples to those currently observed in the market? Are there areas where you could enhance value?
- Buyer Identification: Considering the current market dynamics, who would be the ideal buyer for your business should you decide to sell?
- Interest Rate Impact: How have rising interest rates impacted your business planning and potential for sale?
- Future Planning: What steps can you take now to better position your company for a potential sale in a market that may improve in late 2024?
These reflective questions aim to assist SME owners in thinking strategically about their exit or growth strategies within the current economic framework, ensuring a well-timed and beneficial sale of their business.
What next?
In an ever-evolving market landscape, staying informed and proactive is crucial for SME owners considering a sale. If you are contemplating selling your business or seeking to enhance its value, now is the time to leverage expert insights and market data. Contact us today for a comprehensive consultation and discover how we can help you navigate the complexities of the current market, ensuring you achieve the best possible outcome for your business.
