Hart Shaw had an amazing night at the South Yorkshire Dealmakers in June – scooping the Equity Deal of the Year for Ekspan, Emerging Dealmaker of the Year for Callum McLaughlin, and Dealmaker of the Year for Patrick Abel.

Patrick has been a close friend of our partners for over 20 years and we have enjoyed getting to know Callum a lot more over recent years. Now was a great time for me to speak to them and to get their thoughts on the future of the M&A market in the region, through their own unique, award-winning lens!

How would you describe the current state of the deals market and what trends are you currently observing?

Buoyant!

Over the past three to four years, market conditions have meant that our focus has been predominantly on the sell side: engaging in numerous disposals and retirement sales. However, in the last six to twelve months, this has begun to move more towards buy side activity and we have successfully completed a number of management buyouts (MBOs).

We are now seeing more of the following transaction types:

• Employee Ownership Trusts (EOTs) – Pratap Partnership knows all about these! They are not our main focus as we tend to advise clients to consider other structures first such as trade sale or MBO, but where the circumstances are right e.g. no logical buyer or potential change of ownership issues if sold to 3rd party then we are happy to take them forward. In the last 12 months we have advised on 4 EOTs.
• Acquisitions for PE backed manufacturers.
• Overseas transactions, most recently we sold to a French group and an MBO from a US group.

A noticeable trend over recent times has been a significant increase in interest from overseas buyers using platforms like LinkedIn and Dealsuite. Specifically, there is heightened activity in (M&A) from countries such as Sweden, Germany and the Netherlands.

Which sectors are currently seeing the most activity in terms of mergers and acquisitions?

While Hart Shaw may not be a barometer for the entire market, our diverse client base provides a snapshot of the current landscape in corporate finance. Located in a region traditionally known for manufacturing and engineering, we continue to see a strong presence in these sectors. However, our recent engagements reflect a broader spectrum of industries, illustrating the versatility and reach of our services.

One of our significant ongoing projects involves a proactive acquisition search for a £250m turnover Midlands based manufacturer of specialist industrial fasteners. Simultaneously, we are engaged with a food and drink business, exploring opportunities for a trade sale. This venture highlights our capability to navigate the nuances of the FMCG industry.

In the healthcare sector, we are working on a new mandate that will further diversify our portfolio. In addition we are seeking out targets for a listed group looking for electronics businesses.

What do you think are the key drivers behind some of the deals that you are seeing today? Are companies more focused on growth, diversification, or consolidation? What are the drivers behind the deals?

There is no easy or single answer to this question. All of the factors apply to individual companies and are often blended together.

We advise companies that are already large and are looking to double in size – targets that can not be achieved solely through organic growth. Buy-and-Build activity is a key strategic objective to deliver on profit targets. The majority of these companies (but not all) are private equity backed.

We are also seeing significant activity around retirement type sales. Many business owners, who have managed their enterprises for decades, are opting to sell. This decision is influenced by several factors, including the change in government and with it potential policy changes on capital gains tax as well as underlying market conditions and often a general sense of weariness. Even if these owners are not yet at traditional retirement age, they may decide to sell while their businesses are thriving, capitalising on the current favourable market conditions.

The post-COVID economic recovery has influenced the timing of these deals. Companies that endured poor trading conditions during the pandemic are now emerging with three years of solid growth, making them attractive candidates for acquisition. This recovery period has provided a favourable backdrop for M&A activity as businesses seek to capitalise on their improved financial performance.

How do you foresee the deals market in the next few years and how might the new Labour government have an impact?

The M&A market is expected to remain robust over the next two to three years. Barring unforeseen events, such as another pandemic, no significant disruptions are anticipated. The change in government is unlikely to have a substantial impact on this buoyancy in the short-term.

One notable factor is business asset disposal relief being 10% capital gains tax (“CGT”) on the first £1m of consideration, lifetime cap,  per individual. This no longer provides a strong incentive compared to the previous entrepreneurs relief regime, which offered 10% CGT on up to £10 million consideration. This previous relief created urgency for business owners to close deals to avoid potential tax increases, but this urgency has diminished. That said rumoured significant increases in CGT could reopen the floodgates if introduced in the October budget.

We will know very soon how the Labour government plans to change this relief. The incentive supports long-term shareholders, which aligns with Labour's goals of maintaining employment. Consequently, this relief is not expected to deter disposals or significantly alter the M&A landscape.

Succession planning remains a necessity for many businesses, ensuring ongoing M&A activity. A reduction in interest rates over the next few years could stimulate more management buyouts (MBOs). Currently, high interest rates make debt expensive, complicating traditional valuation techniques and requiring substantial deferred consideration. Lower interest rates could revitalise the buyout market, making MBOs more viable.

Another potential change on the horizon is the government's stance on Employee Ownership Trust (EOT) tax breaks. There is speculation that the government might align EOT tax breaks more closely with Capital Gains Tax (CGT) rates, which could be increased to match income tax rates. This adjustment could affect the attractiveness of EOTs compared to MBOs, potentially shifting the strategic decisions of business owners.

Finally, the Northern Powerhouse Investment Fund is expected to spur deal activity in the coming years. The allocation of a £600 million investment pot will likely drive significant economic development and opportunities in the region, contributing to the overall health of the M&A market.

What are the future impacts of emerging technologies in the M&A sector?

The buzz around AI is undeniable, and its potential to transform industries, including corporate finance, is becoming increasingly apparent.

Larger firms, with their extensive teams, are likely to be the first to harness AI's capabilities, using it to streamline processes and improve efficiency. For smaller teams like ours, the immediate need for AI may not be as pressing, but its potential benefits, particularly in areas such as due diligence, cannot be overlooked.

AI could prove invaluable when processing large volumes of information, helping to identify key details quickly and accurately. However, as promising as this sounds, the technology is still in its early stages, and its effectiveness in practical applications remains to be fully validated. Despite this, the inevitability of AI's integration into corporate finance is clear. As the technology matures, it will likely become an essential tool.

The pace of change is striking. When I began my career, we worked with rudimentary computers with green screens, and laptops were more like cumbersome "luggables." Remember the time when lawyers only ever sent legal documents in the post? Today, the landscape is dramatically different. Technology has advanced to the point where tasks that once took days are now completed almost instantaneously.

We have already embraced numerous technological innovations without fully realising it. The shift towards paperless systems and automated processes has streamlined our workflows significantly. Our audit teams now rely on advanced systems, moving away from the more manual processes of the past.

While the full impact of AI in corporate finance is still unfolding, the advancements in technology to date have already revolutionised our industry. As we continue to integrate new tools and systems, we must remain open to these changes, understanding that they are essential for staying competitive and efficient in an increasingly digital world. The future of corporate finance will undoubtedly be shaped by these innovations, driving us towards greater efficiency and success.

Can you both share one of your most memorable deals that you've worked on? What made it stand out for you?

Patrick

I often think about writing a book to share the many unbelievable stories and anecdotes collected over the years. These experiences, filled with unique challenges and successes, highlight the diverse nature of M&A transactions.

The most rewarding deals are those where all parties work harmoniously. When everyone involved gets along well, and there is a friendly rivalry with the other side, it makes the process enjoyable. One such memorable deal was with Diploma PLC, which acquired a seals and gaskets business in Sheffield. This fully listed company praised our team for running the best process they had ever experienced. The transaction was smooth and collaborative, exemplifying a successful two-way process.

In contrast, some deals are marked by conflict and daily firefighting. These transactions are far less enjoyable and more stressful. Nevertheless, they are part of the job and provide valuable learning experiences.

Another notable deal last year was Chapmans Agricultural. Despite the challenges posed by the sudden increase in energy costs during the process, which significantly impacted the profitability of the business overnight, due to the amount of energy the business uses, the process was ultimately successful. We facilitated funding for the buyer, recommending reliable contacts that ensured the deal's completion. The family owners of Chapmans, particularly the main representative and their exceptional FD, David, were cooperative and communicative, making discussions a daily routine. Despite the rollercoaster ride, the deal was beneficial for both parties.

These experiences highlight the highs and lows of M&A work. Successful deals, where collaboration and mutual respect prevail, stand out as professional milestones. They underscore the importance of effective communication, flexibility, and problem-solving in navigating the complexities of the M&A landscape.

Callum

The most fulfilling aspects of M&A work often lie in witnessing and contributing to true success stories. One such case was the management buyout (MBO) of Ekspan, which is now thriving under the young management team.

The team were presented with the opportunity to acquire Ekspan, which operated as a division within a large American owned group, when the group made the decision to divest in its bridge bearing operations to free up space for new projects. The management team were highly skilled in their respective areas of sales, operations and site installation services, but had limited financial experience. Therefore, it was extremely rewarding to assist and guide them through the MBO process and see the business go from strength to strength post deal.

This transaction not only earned the "Equity Deal of the Year" award at Dealmakers but also exemplifies the potential of young, motivated management teams to excel post MBO. I have maintained a strong relationship with the team and look forward to working with them again in the future.

You’ve both been at Hart Shaw quite a while. What make Hart Shaw a great place to work, or what makes it difference from other corporate jobs?

Callum

I've spent my entire career in corporate finance at this firm, joining at 19 straight from a building site. Initially, I was interested in a career in tax, but after a conversation with Pat about corporate finance, I decided to make the switch and never looked back.

What makes this job unique is a straightforward answer: our corporate finance team consists of just Pat and I, and we work exceptionally well together! Despite having a very small team, we handle a substantial volume of significant sized deals, often comparable to much larger teams.

Work-life balance and hybrid-working doesn't always align with the demands of our field. In corporate finance, you must be prepared for long hours and constant availability, but the job also has a great social side to it through the people you meet.

What advice would you give anybody wanting to join corporate finance?

Entering the world of corporate finance requires realistic expectations and a grounded understanding of one's abilities. Recent trends in job applications highlight a significant gap between applicants' perceived qualifications and the realities of their experience. This discrepancy is particularly evident in applications from individuals claiming Big Four experience; despite their impressive resumes, many lack substantial practical experience and demand high salaries, remote working and an ideal work-life balance.

This situation underscores the importance of training new hires in-house. By bringing in individuals and training them according to our methodologies, we ensure they align with our operational style and company culture. This approach not only fosters better performance but also promotes greater loyalty and staff retention.

Loyalty is key. You see candidates ‘job hopping’ for a couple of extra £’000s on their salary. This highlights no loyalty and can be a real deterrent to employers.

For anyone new to the field of corporate finance, it's crucial to understand that you cannot run before you can walk. Corporate finance is a broad and complex domain where true proficiency comes from experience rather than textbooks. Mastery in this field involves a deep understanding of various aspects, from assessment and interpretation to negotiation and communication.

Developing into a competent corporate finance advisor takes time. Books can act as a good mentor to guide you, but real learning happens through hands-on experience. Interpreting financial data, negotiating deals, and effectively communicating with stakeholders are skills honed over many years.

Real expertise in corporate finance is built through years of direct involvement in diverse transactions, not merely through the accumulation of credentials or participation in large, segmented projects. Understanding this distinction is crucial for both aspiring corporate finance professionals and employers seeking to build effective teams. By focusing on developing practical skills and gaining relevant experience, new professionals can better prepare themselves for successful careers in corporate finance.

What does the future hold for both of you going forward?

Patrick

I'm 57 at the minute so I'm thinking sure I've got to retire soon. I’d say I’ve got five years or so left in me though! By then it’ll be time to pass the baton onto Callum. Hart Shaw is a great business, and our strong reputation is spreading resulting in more quality projects. Callum is the perfect person to drive the business forward.

Hopefully we will have another member in the team, possibly a couple by then, and our department will continue to evolve. I am sure that Callum will be using artificial intelligence like we have never used it before!

Callum

Take Pat’s job… when he retires that is! I’m sure he will still stick around and have a couple of beers with me every now and then!

We have a strong pipeline to work through over the next 6 to 12 months, with plenty of new enquiries regularly coming in. As Pat mentioned, we plan on growing the team in the next couple of years to give us further capacity. Lead advisory work is manageable with just two of us, but when we have larger projects, such as due diligence assignments, it would be useful to have more boots on the ground. So developing our team is in the short term future plans.