The potential removal of Business Asset Disposal Relief (BADR) and changes to Capital Gains Tax (CGT) could have a significant impact on the UK events and exhibitions industry, especially mergers and acquisitions (M&A).
While these changes are still speculative, two industry experts offer insights into how they could alter deal structures, valuations, and the broader M&A landscape.
Effects on M&A Volume and Deal Structures
Connor Agnew, Managing Director and Head of UK Corporate Finance at Collingwood suggests that the immediate impact of scrapping BADR on deal volumes may be limited. According to Agnew, the maximum £100,000 tax relief available under BADR is a less relevant consideration for larger deals and businesses of scale, common in the events industry, where this relief ends up becoming a smaller proportion of a vendor’s overall return. And on smaller deals, the lower after tax amount, whilst less attractive to the vendor, may well be something they have to accept since vendors’ options are somewhat limited at the subscale end of the market (given the small buyer pool, among other factors).
Entrepreneurial Response
A significant increase in CGT could lead entrepreneurs to reconsider how and when they sell their business. Agnew – whose company, Collingwood, has just released its fifth annual Media Acquisition Report, a snapshot of the M&A market in B2B Media which surveys acquirers and investors across the Information, Media and Events sectors to understand what they are buying, why and how, including current prices being paid for these assets – outlines some possible scenarios:
- Dividend income becomes more attractive: Entrepreneurs may choose to take dividends instead of selling if the CGT rate increases and moves closer to the dividend tax rate (assuming the dividend tax rates themselves remain unchanged).
- Longer hold periods: Entrepreneurs might extend their ownership, allowing more time to deliver more growth in order to achieve a higher valuation that compensates for the increased tax burden.
- Deal structuring: Deal structures (where some element of the consideration is paid at a future point in time, contingent on future performance) may well shift towards vendors taking more risk (i.e. more contingent consideration), as a way to drive valuations. This in turn will lead to more complicated deals, protracted negotiations and greater execution risk.
- Employee Ownership Trust: Any potential increase in a vendor’s CGT liability might cause them to seek a different type of deal, including EOTs where, currently, no CGT is payable on a sale of shares to an EOT. These deals carry their own risk with the majority of consideration paid out of future profits.
- No deal: Indeed some vendors may view any changes to CGT as too punitive to consider selling and will put their exit plans on ice altogether.
Reinvestment and Funding Challenges
Mark Parsons, CEO of Events Intelligence, aligns with Agnew’s perspective but adopts a pragmatic view on the effect of tax changes on business value. Parsons argues that while entrepreneurs may see lower returns after tax, the fundamental value of businesses is unlikely to shift. However, adjustments to relief schemes like the Seed Enterprise Investment Scheme (SEIS) could make it more challenging for high-risk ventures to attract external funding. Established businesses with steady cash flows are less likely to feel the impact directly.
Still, they could be indirectly affected if:
- Raising equity funding becomes difficult as founders opt to hold onto their businesses, and not incur the higher CGT charge, thus delivering growth at a potentially slower pace than what could be achieved under private equity ownership.
- Equity incentives for key individuals become less appealing than salaries, as the tax cost gap narrows.
Short-Term Increase in Deal Activity?
Both experts predict a possible surge in M&A activity before any tax changes come into effect. Agnew refers to the period after the first lockdown in July 2020, where there were fears of an impending increase in CGT in the subsequent Budgets of October and March 2021. This led to a rush of deals as entrepreneurs tried to exit before any tax hikes. Of course, in the end, these threatened changes did not transpire. This year, as 30th October looms ever closer, we have seen a similar uptick in activity across the market.
For those vendors who feel they’ve missed the boat this time, it isn’t a bad idea to start gearing up for a potential exit in the near term – on the chance that any changes announced are deferred until the Spring Budget or start of the new tax year.
The Benefits of Being Ready
One finding from Collingwood’s recently launched Media Acquisition Report, is that deals are taking longer to complete and more are stalling / failing, due to a lack of robust and reliable information. Regardless of where businesses and their owners are in relation to a capital event, having access to quality information which management use to make informed strategic and operational decisions, is of critical importance. This also enables the business to be prepared to move quickly in the event of a change in circumstance, be that an impending tax change, or indeed an unsolicited approach.
Wider Economic Considerations
Agnew also echoes concerns raised by leading economists suggesting significantly higher CGT rates could affect the UK’s attractiveness as a business hub. A higher tax burden could lead to fewer deals and a disincentive for entrepreneurs to establish new companies, and impact the future growth prospects of scaling businesses through access to funding and attracting /retaining the best talent.
Conclusion
While the full details of the potential changes to the CGT regime are yet to be seen, both Agnew and Parsons agree the impact on M&A in the events industry will depend on the scope and scale of these changes, what other changes transpire, and how these impact on acquirers and investors alike, as well as on the options available to vendors seeking to create and realise value.
Author: Adam Parry
Adam is the co-founder and editor of www.eventindustrynews.com Adam, a technology evangelist also organises Event Tech Live, Europe’s only show dedicated to event technology and the Event Technology Awards. Both events take place in November, London.
