Deadline Day Deals
How Rainmakers are coping during Mad October
Hello Rainmakers,
We’ve been calling round this week to check in on everyone.
Here’s our report, as promised, on how Mad October is shaping up…
Harry Redknapp is polishing his BMW, making sure the automatic windows are perfectly oiled in order to pull up beside Jim White. The tension is building as we approach the big day and the rumour mill is a whirr of half-truths, rumours and nailed on deals.
Welcome to Mad October - a time the corporate finance community will never forget. A period of intense activity, late nights in the office, copious amounts of coffee - and journalists asking annoying questions, the like of which is normally only seen on football’s transfer deadline day.
In the pre-Budget period only the fittest will thrive in the scramble to complete deals before Rachel Reeves announces changes to Capital Gains Tax (CGT) - or starts meddling with Business Asset Disposal Relief (BADR).
Who will be Mad October's unlikely hero? Who will make the big money move? Which deals will fall through at the last moment? And will the region's fax machines cope with the sheer volume of deadline day deals?
But hang on a moment. What we're forgetting here is that our rainmakers have been through all this before. And, yeah, while they're busy - they'd be worried if they weren't.
Let's drag them away from the mayhem of Mad October for a second to take the temperature of the deals market.
Mark Traynor, partner at the new Manchester office of law firm Harrison Drury says he currently has 46 live mandates, which he says isn’t uncommon, but that 18 have to compete by the end of the month in anticipation of a tax change in the Budget.
“We’re not seeing massive change to pricing, there aren’t lowball offers going in, but we are definitely anticipating buyers using that deadline to their advantage in coming weeks and potentially chip the headline price, getting a seller over a barrel. Maybe getting a bit more aggressive on the terms of a deal.”
Morgan Atherton, managing partner at Bishopsgate Corporate Finance, says he's "definitely busier than usual".
"The upcoming Budget has led to a spike in inbound enquiries from both new and existing business and shareholder contacts. There has also been a marked acceleration of deals we already have in process to complete ahead of October 30th.
"We have witnessed many similar occurrences over the years where increasing speculation (both press and industry experts) concerning changes to capital gains and inheritance tax have influenced buyer and seller behaviour, but this is the most intense we have experienced for a long time."
Atherton isn't the only one burning the midnight oil this October. Here's Stuart Sewell, KPMG head of M&A in the Midlands: “There’s certainly lots of speculation of policy changes on the horizon. For processes that are already live and at an advanced stage, vendors don’t want to leave anything to chance and are focused on closing deals ahead of the Autumn Budget."
How is this affecting the rainmaker supply chain, though? Has the rush to sell meant a domino effect, or is there a blockage in the pipeline?
"The market is busier than usual as some processes have launched a month or so sooner than is typical, given the budget date announcement in August and with a much shorter timeframe to completion," said Harry Walker, partner DSW Corporate Finance.
Walker's main worry is the availability of due diligence providers and legal teams to help get agreed deals over the line.
He added: "Their work tends to take a similar amount of time regardless of how short the deadline is!
"From our side as corporate finance advisors, we have seen a couple of deals gain firmer completion deadlines to be on the safe side, but these were already well-progressed and aiming to complete before the end of October."
Peter Terry, head of corporate finance at Grant Thornton says that his team haven't got any any deals on locally that are driven solely by potential tax changes, but says there are timetables driven by that. “We had things that were in train, and it would be foolish not to get it done before October, just in case.
He says it brings the skill of a good negotiator to what can be a tight process. “You do the best by a client to try and avoid any price chips. I mean, people don't have to do a deal. It's just, potentially more tax advantageous.”
Alice Rees, partner and solicitor at leading East Midlands law firm, Nelsons, confirmed that the legal eagles are working full pelt.
She said: "Our corporate team has certainly seen a recent influx of instructions. Many of these have come in the last couple of weeks despite the announcement being made at the end of July.
"As well as ongoing transactions we have seen fresh instructions with very tight timescales. These could be more challenging but reflect a feeling of real concern that changes from the budget will take immediate effect. We have seen these in a variety of industry areas ranging from agricultural to professional services.
"Where succession or exit plans go beyond five years there is a sense that these decisions can be held off for now. It is certainly an interesting time and there could be a lot of late nights this month!”
Resource is also an issue for Kaine Smith, partner at Rickitt Mitchell. He said: "Lack of bandwidth is proving to be a significant issue for diligence providers, which has led to eye watering fee proposals in recent weeks and instances where it has been almost impossible to find a provider.
“We’re also seeing buyers and investors pushing for abnormally high coverage of their costs if the seller pulls out due to changes in CGT. This is a highly contentious point and has been as hard to agree on as the deal structure itself in some cases."
Gary Hyem, corporate finance partner at Azets, isn't about to pack the sun tan lotion any time soon.
He said: "No holidays until November! Deal flow is currently strong and advisors across our region are focussed on getting deals over the line – but on the right basis."
Paul Kithoray at Cortus Advisory said that rumours of potential tax changes in the Budget are causing uncertainty.
He added: "With no clear indication yet of what these changes might entail and when enacted, businesses are accelerating deal completions they originally planned for Q4, fearing abrupt overnight tax reforms.
"This uncertainty has created a spike in demand for due diligence services throughout September. Despite the high demand, we have taken the decision to decline some of this additional work to maintain the quality of our service and outputs and not compromise on the health and well-being of our staff. Our team is working at full capacity, but we've seen a strong collegiate spirit emerge, with everyone pitching in to support each other."
Uncertainty is also playing on the minds of the clients of Sally Saunders of Provantage Corporate Finance.
"Potential increases in CGT are very much on the minds of sellers but given the time necessary to complete transactions, only those sellers reasonably advanced have been able to try to accelerate their processes to deliver a completion before the October Budget," she said.
"Whilst we will not know the true implications until the end of October, the old adage of 'not letting the tax tail wag the commercial dog' is being severely tested by the rumoured quantum of the potential impact and therefore tax is increasingly featuring in discussions around timing – in very simple terms, an increase in CGT of 10% to 30% would require a 14% higher gross valuation to achieve the same net proceeds."
Want someone who's completely chilled out about Mad October? Let me introduce you to Paul Bevan of Breeze Corporate Finance.
He told us: "Our collective minds are highly focused would be the Breeze view as we kick off October with three transactions all set to complete ahead of the Budget
"In fairness, all are strategic exits with a mix of UK and overseas acquirers who are working well together, rather than adopting pressure tactics.
"For us, these transactions are well in the making rather than hurried and consequently it’s business as usual."
An opposing view comes from Ed Brentnall, partner at Dow Schofield Watts Transaction Services. His team are flat out.
“We’ve experienced a notable increase in FDD volume since the general election, and once it became clear a change in CGT/BADR was highly likely to be announced in the Autumn Budget," he said.
"We've experienced spikes in activity linked to rumoured changes in tax legislation in the past, but this has been unprecedented.
“Like others in the market, we received large numbers of enquiries for M&A processes requiring work during September and early October enabling a pre-budget transaction – significantly more than we could deliver, in addition to concerns over target businesses being ready for what would need to be an accelerated FDD process."
Brentnall is so busy that he's had to make tough choices.
He added: "We’ve had to make some difficult decisions – turning away work in some instances, extending capacity where possible and trying to prioritise our key recurring clients. Fundamentally, regardless of a streamlined timetable our work needs to be undertaken thoroughly and comprehensively so we can’t compromise that.”
So, how are our other rainmakers coping with this upturn in activity?
Atherton said: "Thankfully, we have invested in and built capacity both in our deal making team and our systems and technology, enabling us to cope with this increased activity and continue to provide high quality advice and support to our clients.
"In particular, in light of our confidence in the Bishopsgate brand and business model, plus the resilience of the regional SME M&A market over the medium to long term, and well ahead of even Rishi Sunak’s decision to call an election back in May, we made a strategic decision to double the size of the team, hiring experienced professionals with Big 4 and boutique CF backgrounds to support the growth of the business.
"Although we love being busy, we’re certainly glad in hindsight that we made that call earlier this year!"
Hyem is also all staffed up. He said: "Locally, we are expecting five corporate finance transactions to complete before the Budget and, nationally, we are seeing a similar picture. Having been consistently in Experian’s Top five most active CF advisors in the last few years, we have the resource as well as the deal and sector expertise needed to manage a strong deal flow, and we continue to work closely with our colleagues in tax and other service lines."
Max Perry, associate partner at Hurst Corporate Finance in Stockport, is turning to multi-tasking.
He said: “We're conscious to not rush deals through for the purposes of serving an as-yet-unknown change to tax legislation. Our approach is to favour ensuring our clients are paid the right amount and in the right way.
“Where deals have a chance of completing – especially ones involving overseas parties – we’ve sought to alert acquirers about the potential impact early on.
“We have found pragmatic solutions by having multiple workstreams running at the same time, such as having lawyers discuss the share purchase agreement in parallel with due diligence."
Not everyone is running scared of changes in CGT or BADR, however.
Perry says some of his clients are pretty laid back about the whole thing - and there's that tail/dog analogy again.
He added: "Regardless of the Budget, we're still seeing entrepreneurs wanting to sell their businesses. Ultimately, they must consider their legacy, their staff, and whether or not they want to retire – the tax will be the tax. Our advice is: ‘Don't let the tail wag the dog’.”
Meanwhile, Hyem is looking to the more gentler times, post-October.
He said: "Whilst there will be a surge in deals pre-Budget, we are still seeing plenty of transactions coming through the pipeline that are for later this year and into 2025. There remains strong demand for good businesses from both UK and international buyers and I expect “business as usual” after the end of October."
Walker is preaching patience if a deal simply can't be done pre-Budget.
He said: "A deadline like this is helpful to firm up potential vendors’ decisions to sell their business and provide a timeframe, but in reality a well-prepared process is still a better option than rushing to market in the hope of securing a quick deal, as the negotiating power is then largely in the buyers’ hands, especially if you are getting close to Budget day and key points are not yet agreed on the deal!"
Kithoray agrees. He told us that not all clients are rushing to complete deals. Some business owners are taking a more measured approach, focusing on what's right for their company's long-term interests rather than reacting purely to potential tax changes and - yes, there it is again, he's seeing clients "avoid letting the 'tax tail wag the dog’."
Bevan also has his sights set on next year. "On the new work wins recently, we’ve seen a pickup in conversations and engagements for 2025," he told us.
"What has surprised us most of all is the fact that these are not -surprisingly - motivated by potential tax changes
"It’s all about finding the ‘best home’ which takes time and the tax will be what it will be… the very best of pragmatism."
For Hayley Brightmore-Cox, corporate finance partner at Saffery in Manchester, her work is done. She’s seen the spike in enquiries for due diligence work, but says, bluntly: “We’ve done the ones that are going to get done, and if you haven’t started now, then it’s too late.” Her colleague Erin Berry adding that there’s talk now that changes will come in for the next tax year, so that creates another deadline to hit in March 2025.
“There might be a quiet time while everyone adjusts, then it will go again, because the world’s got to keep spinning hasn’t it?”
READY FOR MAD OCTOBER?
As the corporate finance community anticipates the end of a subdued and uncertain period, the upcoming Rainmakers Forum in Manchester on the 8th of October will explore the challenge of becoming deal-ready for 2025, and the deals frenzy gripping the current market.
Featuring insights and contributions from the winners of the Rainmaker Awards – Nicola Merritt and Catriona Lang (pictured) – the event will look ahead at where the deals are going to come from in the year ahead.
With a more stable policy landscape expected following the general election and some economic headwinds easing, the seminar will concentrate on several key areas:
Current market demand and appetite
Changing culture and practice in the Rainmakers community
Funders’ primary areas of focus
The increasing significance of factors beyond financials, especially ESG and data
Opportunities within the North West market and Rainmakers’ role in driving growth
Event details to come soon. As well as the winning duo, the speaker line-up will also feature Giles Chesher from Squire Patton Boggs and Matt Hodgson from Claritas Tax, with more to be announced.
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