As confidence dips, M&A can be vital in helping UK SMEs to attain growth

With the UK's economic outlook seemingly worsening once again over recent months, highlighted by the recent Spring Budget, concerns are mounting that SMEs may put off plans to invest, potentially harming their growth prospects. With organic growth remaining a long-term challenge, M&A could be transformative for SMEs with a well-defined strategy and the financing to complete deals.

Chancellor Rachel Reeves’ first Spring Budget, delivered on March 26, has been broadly met with disappointment in the UK’s small and medium-sized business community, being described as a “missed opportunity” for the government to support the growth of UK SMEs.

Despite Reeves avoiding tax increases, there was little specific focus on providing support for the numerous challenges facing the country’s SMEs and the UK’s overall economic picture has become increasingly gloomy.

The Office for Budget Responsibility (OBR) recently downgraded the UK’s growth forecast for 2025 from 2 per cent to 1 per cent, while Reeves stated in the Spring Budget that geopolitical risk and rising borrowing costs had led to the global environment becoming “more uncertain than ever”.

Jo Morris, Head of Insight at Novuna Business Finance, asserted that this tone could have a significantly negative effect on SME sentiment, with a recent Novuna survey showing that 37 per cent of small business owners were most concerned about negative news on the UK economy. By comparison, 28 per cent said they were most worried about tax hikes.

Morris stated that Novuna’s research demonstrated that SMEs dislike “bleak economic forecasts” more than tax rises and that “modest” increases may have boosted confidence more than a negative economic outlook.

She added that “the way small businesses read signals on the economy at large can be the difference between working on growth initiatives or taking a defensive approach to consolidate their position.”

This will increase fears that SMEs may put off making investments in their business until economic fears ease, potentially impacting their short to medium-term prospects at a time when many are still looking to return to growth following COVID-19 and the recent economic downturn.

Theo Chatha, CFO at Bibby Financial Services, said: “The Chancellor’s Spring Statement will be a huge disappointment to the UK’s small and medium sized enterprises. We know 87% of SME business leaders are eager to invest and nearly half were deferring major investment decisions until after today’s Statement.”

Following the Spring Budget, Chatha stated that SMEs will “likely not” feel more confident and could “further delay decisions on areas of investment such as machinery, technology and recruitment – resulting in an economic lag for the UK.”

Chatha continued: “Off the back of an unpopular Autumn Budget and with increased employer National Insurance contributions and business rates set to rise, today’s statement was a missed opportunity to support the UK’s SMEs.”

Amid such concerns, it is important again to highlight the crucial role that M&A can play in driving potentially transformative growth at small and medium-sized businesses – especially at a time when sustainable, long-term organic growth seems increasingly difficult to attain.

While M&A may be seen as a risky, costly way to drive growth and expansion (especially for first-time buyers), a meticulously planned buy-and-build growth strategy can enable SMEs to secure rapid, sustainable growth while improving the resilience of their business.

Furthermore, with investors increasingly keen to deploy funds they have stockpiled over recent years there is potentially a greater chance for businesses with strong M&A strategies to secure significant financial backing.

Alternatively, in an environment where a growing number of SME owners say they are considering selling their business, there is likely to be a wealth of acquisition targets, as well as more scope to negotiate structures such as earn-outs that can help buyers avoid a large upfront consideration.

To find out more about how SMEs can secure acquisitive growth, check out our piece on demystifying M&A for mid-sized firms.

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