UK mid-market M&A: fiscal pressures and tariff uncertainty shape divergent paths

Shifting fiscal, tariff and geopolitical environments have introduced a range of uncertainties, which has blunted momentum for mid-market M&A activity in the UK. Fiscal tightening, weak productivity and policy uncertainty risk stalling deal flow, as risk-off sentiment, margin pressure, and tighter financing hit SMEs hardest. At the margins, market upheaval may create selective distressed opportunities. Markets are now at an inflection point, with domestic and international forces giving rise to equally plausible – but divergent – outcomes for UK mid-market M&A.

Domestic catalysts: tight policy, weak margins, and uncertainty

The Spring Statement preserved fiscal discipline but did little to improve the trading outlook for UK SMEs. The Office for Budget Responsibility (OBR) halved its 2025 GDP forecast to 1.0%, downgraded business investment, and warned that employer national insurance (NI) hikes could drive job losses, lower real wages, and further erode company margins. Ahead of the effects of these policies, distress is already rising, blunting M&A momentum. The number of companies in critical financial distress has already risen 50.2% quarter-on-quarter in Q4 2024, according to Begbies Traynor.

Employer NI contributions are set to rise from 6 April to raise £25 billion over the forecast period. While larger firms may partially pass these costs to workers or consumers, many SMEs in labour-intensive sectors such as hospitality and leisure, retail, construction and care homes operate on thin margins, with limited pricing power and rising operational costs. According to the OBR, nearly a quarter of the total cost is expected to be absorbed by employers, pushing the profit share of GDP to a post-GFC low.

The Spring Statement offered no relief to offset the NI rise. The absence of mitigating policy – such as employment allowances, sectoral support or wage subsidies – leaves vulnerable SMEs exposed. Wage rigidity due to minimum wage laws may compound pressures. Appetite for distressed acquisitions will therefore be selective, with buyers wary of underwriting businesses facing volatile policy risk.

The monetary policy outlook provides little near-term support. Despite market expectations for rate cuts in 2025, the Bank of England (BoE) has signalled a pause in the ‘cut-hold-cut’ cycle amid sticky inflation. Economists now expect further easing to be delayed until Q4. Consequently, the prolonged high-cost borrowing environment will constrain debt-financed dealmaking, particularly for private equity buyers targeting growth-oriented businesses.

Taken together, these dynamics favour defensive, margin-accretive deals. The environment supports bolt-on acquisitions where larger corporates buy distressed smaller firms at a discount that can directly integrate into their core business, rather than strategic acquisitions aligned to secular demand drivers (e.g., technology, sustainability, demographics). To a lesser extent, in the mid-market UK segment, the environment may create a window of opportunity for corporates and low-leveraged PE buyers who are capable of optimising workforce-intensive target companies through automation, robotics, and artificial intelligence (AI). Discounted acquisitions are more straightforward to execute, especially where integration allows for workforce rationalisation and operational efficiencies. For corporates, such deals can strengthen margins and improve borrowing capacity. Low-leverage PE buyers may also selectively pursue businesses that can be optimised through automation or AI, particularly in workforce-intensive sectors. 

International scenarios: tariff disruption and capital redirection

Internationally, US President Donald Trump’s reciprocal tariffs will take effect on 2 April, unless deals to rebalance trade are struck beforehand. These follow targeted levies on countries (e.g., China, Mexico, Canada, the EU) and products (e.g., autos, semiconductors, steel, pharmaceuticals, copper and timber). While China is the primary target, measures imposed on allies limit Beijing’s ability to reroute exports.

In the near term, M&A activity is expected to stall as investors await clarity. Dealmakers in tariff-exposed sectors with complex cross-border supply chains or US exposure are holding off on transactions due to the difficulty of accurately pricing deals in a fast-changing trade environment. This risks creating new pricing gaps between buyers and vendors, especially for SMEs more vulnerable to demand and cost volatility.

Tariffs could trigger a wave of distressed M&A activity as trade friction hits profitability. However, well-capitalised buyers may target discounted assets for strategic scale or supply chain diversification. For services-based SMEs with minimal exposure to global trade flows, the environment may enhance their attractiveness as defensive or countercyclical acquisition targets.

Tariff escalation could also reallocate global capital flows, particularly from the US into the UK and Europe. This may generate tailwinds for UK mid-market dealmaking. Three scenarios could unfold:

1.      Full-blown global trade war: Risk-off sentiment dominates, limiting capital rotation into M&A dealmaking worldwide. The scenario is least likely, with the Trump administration now briefing that tariffs will be more targeted.

2.      Negotiated de-escalation with partial tariffs: Capital rotation is likely from the US into Europe, including the UK, as global institutional investors seek to diversify away from US assets.

3.      Markets stabilise post-2 April: Clarity on tariffs restores investor confidence. The longer reciprocal tariffs persist, the greater the reallocation of capital away from the US.

In the longer term, firms will adapt to structural cost shifts. This may create further distressed buying opportunities, particularly among export-reliant SMEs.

London-listed companies remain attractively priced for foreign buyers, particularly in sectors like real estate, healthcare, and infrastructure. Notable recent examples include: KKR’s £1.6 billion bid for NHS landlord Assura, Apollo’s $1 billion acquisition of OEG Energy Group, and Blackstone’s multiple attempts to acquire Warehouse REIT. Peel Hunt estimates one-third of AIM-listed companies worth £50 million to £250 million are vulnerable to takeovers, constrained by depressed valuations, limited financing, and high compliance costs.

How BTG Advisory can help

If you are planning to bring your company to market, BTG Advisory can provide an impact assessment of how tariffs and fiscal policy affect your sector, evaluating changes in operational costs, margins, supply chains and pricing strategies. We offer scenario planning and forensic due diligence to help buyers and sellers navigate valuation risk, supply chain exposure, and financial sustainability in this complex environment.