Part 3 of 4: Value & Structure: Valuation Expectations and Deal Structures Today
This is Part 3 of our four-part conversation with Blaser Mills on the state of UK M&A. Parts 1 and 2 covered market sentiment, sector activity, buyer priorities and why deals fall over.
Are valuation expectations changing?
Edward: Valuation expectations are influenced by several differing factors not least of which are the price expectations of the buyer and seller regarding the target company’s future prospects.
Earn-outs are frequently used to allow buyers to offer more, with the certainty that the additional value has been generated. However, earn-outs are complex to negotiate, especially in connection with ensuring the buyer does not artificially look to reduce profit in the earn-out period.
Sellers often find it physiologically difficult to adjust from being an owner to employee so earn-outs for more than one year can be difficult to manage.
Valuations in certain sectors have changed, reflecting global economic and political factors and what is now “flavour of the month”. A good example of this is the decrease in multiples being offered for AI and Saas based businesses.
The use of Warranty and Indemnity Insurance can help to maintain or support higher valuations as they can cover off certain risk/value issues, particularly where deferred or contingent payments are involved.
In conclusion, valuation expectations are changing to reflect the general level of risk with earn-outs, warranties, insurance and risk allocation mechanisms playing a vital role in bridging gaps and addressing uncertainties.
Geoff: Yes, though not always in the direction owners expect. Headline multiples for genuinely high-quality businesses – recurring income, strong margins, low owner dependency – have held up well and in some pockets have improved, because outstanding businesses remain relatively scarce and buyers know it. For businesses without those characteristics, we’re seeing more conservative offers, with much more of the value pushed into structure rather than paid at completion.
That last point is where we spend most of our time with clients. A headline number is only ever half the story; what matters just as much is how much of it is guaranteed on day one versus contingent on future performance. We’ve seen processes where the highest headline offer, once you stripped out the earn-out risk, was actually worth less to the seller than a lower but largely cash offer from a different buyer.
Independent, evidence-based valuation before going to market is what protects owners here. Anecdotal benchmarks – “I heard a similar business went for X” – cause more damaged expectations, and more stalled deals, than almost anything else we see.
Are deal structures changing?
Edward: Yes, deal structures for transactions are changing, being influenced by various factors such as funding constraints, valuation gaps and buyer or seller requirements. The following are some of the key features of current deal structures:
From a buyer’s perspective they can pay more and cheaper if they pay over a period of time via earn-outs, shares in the buyer or a listed group company or vendor loan notes. So deferred consideration is common where buyers cannot or does not want to fund the full purchase price at completion or requires more certainty in relation to performance, to pay more.
W&I insurance is becoming more prevalent even in smaller deals, with very little difference between buyer and seller policies and with fewer exclusions. There are now products designed for deals below £5m and synthetic policies where little or no warranties are given e.g. by executors and administrators.
We have seen a move towards more Locked Box deals than Completion Accounts structures. Even though this method generally favours a seller, we think buyers are also valuing the pre completion certainty of price and risk it can bring.
In buyouts, private equity investors often implement management incentive schemes to align the management team’s interests with the success of the business post-acquisition. The private equity investors will not be keen to pay too much money up front for fear of the seller not needing to push hard for the future success of the business. These schemes typically include equity participation or performance-based rewards. Private equity investors in smaller deals typically adopt a buy-and-build strategy, focusing on operational improvements and bolt-on acquisitions to maximise value before exit.
Smaller deals often involve a mix of equity and debt financing, with private equity investors leveraging debt to improve returns.
Vendor loans are sometimes offered by sellers to facilitate the transaction, particularly where the buyer faces funding constraints. These loans are often secured and may include set-off rights to protect the seller.
Minority investments are less common in private equity-led buyouts and or trade sales but may occur in strategic acquisitions or where the seller retains an interest in the business.
MBOs remain a popular structure in smaller deals, with private equity providers often leading the process and working closely with management teams to structure the transaction and incentivise management post-acquisition. MBO teams generally pay less than a trade buyer but get less warranty protection but are buying with more certainty than a third-party trade buyer.
Geoff: Yes, and structure is increasingly where the real negotiation happens, often more so than headline price. Earn-outs, deferred consideration and rollover equity have all become more common as buyers look to bridge valuation gaps without overpaying on day one, and private equity in particular continues to favour structures that keep existing management genuinely invested in the outcome.
Our approach is to treat completion cash as the number that matters most, and everything else as a bridge rather than the base case. Where an earn-out is unavoidable, or genuinely right for both sides, we push hard for targets the seller can actually control – revenue or gross margin rather than metrics the buyer’s own group decisions could influence – and for a mechanism that’s clearly and objectively measurable rather than open to interpretation twelve months down the line.
We also spend real time preparing clients for what an earn-out or rollover period actually feels like day to day: reporting into someone else, adapting to new processes, no longer having the final say. Getting the financial structure right counts for little if a seller isn’t prepared for that shift too.
Part 4 is the final instalment in this series covers what to do now if you’re considering a sale in the next two to five years.
How We Can Help
If you are thinking about your exit journey and would like to find out more about how The MGroup Corporate Finance and Blaser Mills can help, please contact:
Geoff Pinder, Partner, The MGroup Corporate Finance: g.pinder@themgroup.co.uk
Edward Lee, Partner, Blaser Mills: edward.lee@blasermills.co.uk