A shift back to basics

In the face of ongoing economic headwinds, the M&A market is showing welcome signs of energy and we’re seeing a steady uptick in engagement. This is not a sharp rebound, but a more considered return to activity, with businesses planning earlier and approaching opportunities with greater conviction.

This isn’t because the headwinds have cleared. A volatile domestic political landscape, ongoing conflict in the Middle East and the longer tail of global trade tensions all continue to define the backdrop. The full economic impact of the Middle East conflict in particular has yet to filter through, and many in the market expect it to influence supply chains and pricing for some time to come.

Yet for most dealmakers, the unpredictability of the post-COVID years means that uncertainty has become a mainstay of the operating environment, rather than a reason to pause.

Businesses are embedding slightly lower growth assumptions into their models and taking a more pragmatic view on timing. Put simply, the days of waiting for perfect conditions appear to be behind us.

Back to basics

This environment has forced dealmakers to sharpen their focus on resilience. Buyers want to understand not just what a business earns, but how robust those earnings are when the world shifts around them. Supply chain concentration, energy pricing and shipping route exposure are all receiving far greater scrutiny in due diligence processes.

Perhaps the most notable shift we’re observing is in where investor attention is being directed. After a long stretch where technology and innovation have captured most of the headlines, there’s been a meaningful pivot towards more traditional sectors, such as manufacturing, engineering and industrial services businesses. These are businesses that investors can easily understand, with tangible operations and predictable demand drivers. And critically, they are largely insulated from the impact of AI, which remains one of the biggest unknowns in today’s market.

While AI presents a genuine opportunity for many businesses, particularly those that can deploy it to reduce administrative burden, its disruptive potential is creating real caution elsewhere. Software businesses, for instance, are seeing valuation pressure as investors question the long-term defensibility of their barriers to entry in an environment where competitors can spin up new platforms faster than ever before.

The net result is a growing appetite for businesses where AI represents a tailwind – enhancing efficiency in the back office – rather than an existential question mark over what’s actually being delivered.

Niche manufacturers, specialist engineers, industrial service providers and similar businesses where value is ultimately delivered by skilled people doing physical work that technology cannot replicate are all benefiting from this shift in sentiment.  We can expect that trend to have further to run.

Professional services also continue to attract steady interest alongside this shift, with legal practices, accountancy firms and wealth management businesses all remaining active areas of the market. Buyers value the recurring nature of revenues in these sectors and the relationships that underpin them.

Infrastructure and services remain resilient

A similar logic applies to infrastructure-linked transactions, which are attracting significant investor interest given the regulatory backdrop and the scale for committed spend over the years ahead.

Businesses serving the energy transition, water networks and grid upgrades are benefitting from substantial, regulation-backed spend commitments stretching over the next decade or more. This is a level of long-term demand visibility that’s difficult to find elsewhere in the market.

Amid ongoing geopolitical uncertainty, defence is another area where we’re seeing growing investor appetite. Government-led focus on strengthening domestic supply chains and bolstering spending is giving investors who may historically have been hesitant more confidence to explore opportunities across the extensive defence supply chain.

Demographic trends are reinforcing this further. An ageing population and growing pressure on public services are driving sustained demand across healthcare supply chains and these are structural shifts that will not reverse, regardless of short-term political or economic turbulence.

Changing deal priorities

From a deal structure perspective, the normalisation of valuations that began post-Covid is now well embedded. The gap between buyer and seller expectations has narrowed considerably but earn-outs and deferred consideration remain a common feature of transactions, which is helping both parties manage risk and bridge remaining differences in pricing.

We’re also seeing an increase in bilateral, off-market conversations, with buyers taking a more proactive approach to identifying and approaching targets rather than relying solely on formal processes. At the same time, corporate carve-outs are becoming more prevalent as larger businesses look to simplify their operations and rationalise portfolios. This is a trend that is accelerating in an environment where focus and clarity of purpose are being rewarded by the market.

For Owner Managed Businesses, periods of speculation around tax changes such as capital gains have caused short bursts of pause in recent years. In practice, however, succession-driven deals continue to come to market when the timing is right for the owner, largely irrespective of the wider business cycle.

Amid this context, the outlook is cautiously positive. The UK continues to be viewed as an attractive market by international investors, supported by favourable currency dynamics and relative stability in the regulatory environment. Domestically, private equity houses still hold significant dry powder, and deal flow remains constant.

Across all of this, preparation remains the differentiator. Buyers continue to favour businesses with robust financials, and credible management teams behind a clear growth plan. For owners considering their options, taking time to plan thoroughly and secure the right advice continues to be the most reliable route to achieving the best possible outcome.