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2024: a greater appetite for M&A

2023 was a busy year for Forbes' Corporate team and we expect 2024 to continue to see lots of activity in the market.

During 2024, it is generally anticipated that we will observe a continued trend in growth and improvement for Mergers and Acquisitions ('M&A') off the back end of 2023. With inflation falling and interest rates finally beginning to stabilise, it is expected that we will see a greater appetite for M&A, in particular management buy-out transactions ('MBOs'). Essentially an MBO is a form of acquisition by which a company's existing management team acquire all or part of the company they manage, from its existing shareholders. Despite the slow falling inflation, the current economic and political uncertainty and vulnerabilities remain, making MBOs an attractive acquisition option over an external trade sale because of their internal nature. Internal management teams possess a strong field of knowledge surrounding the business, its operations, history, customer base and culture, in contrast to outside buyers; and such expertise and knowledge of the target business often leads to better post-deal company performance, employee satisfaction, and provides for a smoother M&A process as a whole.

Effectively structuring and planning an MBO can also be a great incentive to the senior management team of your business; to improve on their future potential earnings, through handing the reigns to them, to responsibly guide the business further long-term. Additionally, this process means that the exiting shareholder does not need to market the business for sale and undertake and incur the additional costs and work associated with this, whilst maintaining the certainty of exit - as an internal sale often comes with much less complications and disruptions. Furthermore, it is anticipated that MBO's are set to become increasingly popular within the construction sector in 2024, especially within family run, small and medium-sized enterprises where the exiting shareholder is looking at succession planning, and their family is already working in the business.

Alternatively, smaller construction companies may also consider merging with other businesses to stabilise amid a period of rising raw material costs and the 'hangover' effect remaining post-pandemic and Brexit in the UK. Such consolidation in the construction industry has been prevalent and is expected to continue to increase in 2024, as large building firms and aggregates also continue to look at acquiring other construction companies in search of widening their geographical presence. These types of acquisitions are commonly used as a means of accelerating growth, reducing the effects of the construction 'boom and bust' cycle and as a pathway to entering new markets.

In terms of sector specifics within construction, despite recent economic headwinds, targets within the industry providing 'future-proof' and sustainable services such as 3D printing, construction management systems (also known as CMS) and automation services are set to stay busy and grow exponentially throughout the year, whilst becoming increasingly attractive to acquirers particularly through "bolt-on" deals as part of their growth and diversification plans to provide customers with more holistic experiences.

Financing your M&A

When it comes to financing and funding in 2024 for such acquisitions there are still plenty of options to consider including:

• Bank loans - however, there are several hurdles here, banks must approve the sector within the construction industry, request sight of the assets within the business, historical cash flow trends and seek security on top of interest rates remaining fairly high therefore, this may not be the most attractive option to some buyers.
• Private equity (PE) funding - it is reported that there is a significant amount of private capital available for deployment amongst PE firms in 2024, such firms will expect higher deal volumes this year, but will continue to be meticulous in identifying potential targets within the construction industry.
• Loan notes - which are a type of "vendor financing" used in transactions, where part of the consideration is payable post-completion, via a loan given by the seller.
• Earn-outs - which is a mechanism included in an SPA, which can be used if a seller is flexible on payment terms. This method allows for all or part of the purchase price to be based on the business' ongoing success post-completion, as monies are paid out of a proportion of the business' ongoing revenues post-acquisition; or
• Offering equity to seller(s) within a purchaser's company, in cases where there is little liquidity in the purchasing company, and particularly where the seller is interested in maintaining some control, is another option. A purchaser may offer the seller(s) equity in its company so that it will continue to have an interest in the target however, this doesn't provider a seller with the exit and monetary outcome they may require as part of their future plans.

What can we do?

If you're an ambitious management team or a shareholder looking for internal succession and believe that an MBO is an attractive opportunity for you and your business in 2024, our corporate advisors at Forbes can assist with the acquisition process; from drafting and negotiating the Share Purchase Agreement and ancillary documents to adopting new articles of association and shareholders agreements to reflect the desired post-MBO share structure. Moreover, if you are looking to acquire or sell a target business within the construction industry, we can also support you through the acquisition process from assisting you in preparing for a sale before you have even found a buyer, to completion and post-completion support. We can provide clear and comprehensive advice on due diligence, negotiations and drafting of your purchase agreements. We act on buy-side and sell-side deals of all shapes and sizes.

For more information contact Rebecca McCann in our Construction & Infrastructure department via email or phone on 0333 207 1140. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

Learn more about our Construction & Infrastructure department here

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