Budget Busting - Rising Employer Costs and What They Mean for Mergers and Acquisitions

The recent UK budget introduced a number of changes that will have real consequences for businesses and, therefore, their M&A strategies. From the rise in National Insurance contributions to increases in the National Living Wage (NLW) and adjustments to the Employment Allowance, these new financial pressures can affect the value of a business and its attractiveness in the market. Let’s walk through the key changes and discuss how they impact M&A strategies in the current environment.

The bad news: National Insurance and National Living Wage hikes

For business owners, one of the most significant changes introduced in the recent budget is the increase in National Insurance Contributions (NICs) for employers. This is set to go from 13.8% to 15% from April 2025, and for many businesses, this means a noticeable rise in the overall cost of employment. 

Alongside the rise in NICs, the National Living Wage is set to increase by 6.7%, bringing the hourly rate up to £12.21. For industries like retail and hospitality that employ a lot of low-wage workers, this could represent a significant jump in outgoings.

For any buyer assessing a potential acquisition, these cost increases are factored directly into the valuation, which means there’s a heightened focus on how efficiently you can manage payroll expenses and what cost-saving measures are in place.

In labour-intensive, customer-centric sectors like retail and hospitality, where margins are often tight, this increase can have a significant impact on profitability. As you can imagine, buyers and investors looking at acquisition targets will be paying close attention to how these costs will affect future earnings.

The better news: Employment Allowance adjustments

It’s not all doom and gloom for small businesses though, the budget did introduce some relief through an increase in the Employment Allowance, which rises from £5,000 to £10,000 in April 2025. This reduces the amount of National Insurance small businesses have to pay, which is certainly helpful, but it does only apply to employers whose NI liability was under £100,000 in the previous tax year, so larger companies won’t see a lot of benefit from this adjustment.

For businesses that do qualify, this offers a bit of breathing room that could help offset some of the rising wage and NI costs, making your business more attractive to potential buyers.

Impact on valuations

So, how do these changes affect M&A valuations? The bottom line is that these rising costs are likely to push down valuations in certain industries. Labour-heavy sectors like retail, hospitality, and manufacturing are facing downward pressure on valuations as buyers factor in the increased cost of employment. On the flip side, sectors like technology and professional services are seeing steady interest because they typically have lower payroll costs relative to revenue. A technology company with automated processes and fewer staff is less affected by wage hikes, making it a more attractive target for investors. 

These businesses that are already operating with efficient, low-cost structures are suddenly more attractive because they’re better positioned to handle these increased costs. Similarly, acquisitive companies might embrace the opportunity to plug gaps in their portfolios or market coverage by buying up companies that start to struggle. In other words, if you’re a business owner with a well-run, cost-efficient operation, now could be a good time to consider selling, as you’ll be in a stronger position relative to competitors struggling to keep costs down.

Adjusting M&A strategies

With these changes in mind, how should business owners adjust their M&A strategies? First and foremost, it’s essential to demonstrate efficient cost management. Investors are scrutinising expenses more closely than ever, and showing that you’ve taken proactive steps to control costs can make your business more appealing:

• Streamline operations - Look for ways to reduce overhead and optimise your workforce. Buyers are drawn to businesses with lean, efficient structures that can absorb cost increases without significant impact on profitability.

• Consider flexible deal structures - Rising employer costs have made some buyers cautious, so exploring flexible deal structures like earnouts (where a portion of the sale price is contingent on hitting financial targets) can be a way to bridge valuation gaps and secure a fair price.

• Leverage the Employment Allowance if possible: For smaller businesses, taking full advantage of the increased Employment Allowance can improve cash flow and offset some of the new costs, making your business more attractive to buyers.

A challenging yet promising outlook

While the budget has undoubtedly made the M&A landscape more challenging for certain sectors, it’s also created opportunities for businesses that are adaptable and efficient. Buyers will continue to pay close attention to cost structures, and businesses that can demonstrate robust cost management will find themselves in a stronger negotiating position.

Moving forward, having a solid understanding of how these changes impact your business’s valuation and attractiveness to buyers will be crucial. For the M&A advisory world, the focus is on helping business owners navigate these shifts, ensuring they’re positioned to achieve the best possible outcomes in this evolving landscape. If you’re considering a sale or acquisition, now is the time to assess how these rising employer costs might impact your strategy.