M&A in 2025: what it means for SME owners

Mergers and acquisitions in 2025: green shoots, trends and what it means for SME owners

After some challenging years marked by economic volatility, expensive debt and a cautious investment landscape, mergers and acquisitions (M&A) activity in the UK is showing some renewed activity for small and mid-market transactions.

For SME owners (small and medium-sized enterprises), this presents both a challenge and an opportunity; a challenge, because the competitive landscape may shift rapidly and an opportunity because this could be the ideal time to capitalise on years of hard work, whether through growth by acquisition, strategic consolidation, or preparing for a partial or full exit.

Here are some key trends we’re seeing currently and what they mean for SMEs looking to position themselves in this M&A environment.

1. Strategic acquisitions

Encouragingly, much of the activity we’re seeing is in the small and mid-market deals, where valuations are attractive and sellers are motivated.

We’ve advised clients involved in vertical acquisitions (for example, where an SME may buy an element of its supply chain to gain resilience), horizontal consolidation (where companies in the same sector combine to increase market share and reduce duplication) and geographic expansion, to broaden client reach and talent pools.

For SMEs, this often means buying another SME which may perhaps be underinvested or succession-challenged, but commercially sound. Acquirers must ensure they have:

• An appropriate and tax efficient corporate structure for the acquisition.
• A robust due diligence plan covering financial, legal and operational matters.
• A clear understanding of deal funding, including whether third-party finance, seller loans, or equity investment will be involved.

It’s also important to consider regulatory clearance where required. The National Security and Investment Act 2021 (NSIA) introduced a mandatory and voluntary notification regime for certain transactions, even at SME level. While often seen as relevant only to large or high-profile deals, SMEs should be aware that:

• The Act applies to any acquisition of “material influence” over an entity (as little as 25% shareholding or voting rights).
• It covers 17 sensitive sectors, including artificial intelligence, data infrastructure, communications and defence.
• Failure to notify when required can render the deal legally void and parties may face civil or criminal sanctions.

This is particularly relevant for SMEs in technology, telecoms, or engineering sectors, or those with government contracts, looking to sell to or merge with larger entities, including private equity or overseas investors. Even where mandatory notification is not triggered, voluntary filings may be wise to pre-empt future scrutiny.

2. Preparing for sale: getting your house in order

On the sell side, we always encourage SMEs to start preparing for transactions at least 6 to 12 months in advance. Several statutory and best-practice frameworks underpin this preparation, including the following top 10 areas we most frequently identify issues with on an initial review:

Companies House filings & registers

• Ensure annual confirmation statements and accounts are filed on time with Companies House, in line with the Companies Act 2006.
• Maintain up-to-date statutory registers including directors, shareholders and Persons with Significant Control (PSC).
• From 2025, under the Economic Crime and Corporate Transparency Act 2023, all directors and PSCs will need to undergo identity verification.

ICO registration & data protection compliance

• SMEs processing personal data must be registered with the Information Commissioner’s Office (ICO) and pay the data protection fee (from £40/year).
• Ensure compliance with the UK GDPR and the Data Protection Act 2018, including having a privacy policy, having data processing contracts in place and handling data subject access requests (DSARs) properly.

Minimum pension provision (auto-enrolment)

• Provide a workplace pension scheme in accordance with The Pensions Act 2008.
• Make the minimum employer contributions.
• Complete re-enrolment and re-declaration duties with The Pensions Regulator every three years.

Business insurance requirements

• If you have staff (including part time staff), hold a minimum of £5 million Employers’ Liability Insurance, a legal requirement.
• Assess whether Public Liability, Professional Indemnity, Cyber Insurance or Product Liability Insurance are needed – depending on the nature of the business.

Employment law documentation

• Provide all employees and workers with a written statement of particulars.
• Comply with Working Time Regulations, minimum wage legislation and the requirement for holiday pay, sick pay and parental leave.

Health & safety obligations

• Comply with the Health and Safety at Work etc. Act 1974, including Carrying out risk assessments, having a health and safety policy (if five or more employees), appointing a competent person to manage health and safety and reporting workplace injuries under RIDDOR.

Anti-Money Laundering (AML) & Know Your Customer (KYC)

• If operating in a regulated sector (e.g., financial services, accountancy, legal, estate agency), comply with the Money Laundering Regulations 2017.
• Register with a supervisory authority and implement appropriate customer due diligence, record-keeping and internal controls.

Licensing & permits

• Ensure you can locate and provide up to date sector-specific licences or registrations, such as Food business registration (local authority), Alcohol licences (Premises and Personal Licence under the Licensing Act 2003), Waste carrier licence (Environment Agency) and Software licences for commercial tools or platforms.
• Check whether your proposed transaction will require any third-party consent or authorisation in order to maintain the existing licence on the same terms.

Corporate governance & shareholder agreements

• Review articles of association and ensure they reflect current shareholdings and governance.
• If external investors or minority shareholders are involved, consider implementing drag/tag-along rights and pre-emption clauses.

Consumer protection & commercial contracts

• For B2C businesses, comply with the Consumer Rights Act 2015, ensuring clarity around cancellation rights, refunds, digital content and terms of service.
• Check change of control / assignment provisions in key existing contracts to see if the proposed sale will impact any of your material agreements.
• Consider whether any prior consents will be required from commercial contract counterparties or lenders.

3. Valuation expectations: bridging the gap

The tension between seller expectation and buyer conservatism remains pronounced in many sectors. Structuring a deal that accommodates both sides will now often involve an element of deferred consideration or risk-sharing mechanisms on price.

Where earn-outs are agreed (typically over 12 to 36 months) careful drafting is essential to align incentives while avoiding future disputes. We recommend clear provisions around:

• Accounting methodologies underpinning the basis to the financial metric that will determine whether the earn-out will be payable and the quantum of such payment (UK GAAP vs IFRS and any specific accounting policies).
• Operational autonomy of the business during the earn-out period.
• Anti-avoidance clauses preventing deliberate actions of the buyer and/or its group that suppress earn-out achievement.

From a tax perspective, sellers should be aware of changes to Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief (both recently and upcoming).

If deferred consideration is payable in shares (a common feature in private equity-backed transactions), this will need to be structured carefully and tax advice taken early on in the process.

4. Due diligence: avoid small issues undermining big deals

Legal due diligence extends beyond constitutional documents and headline contracts. Buyers, particularly institutional investors and regulated entities, often demand greater assurance in areas shaped by recent legislative and regulatory developments:

• Data protection compliance under the UK GDPR and Data Protection Act 2018, including third-party processing agreements and international transfers.
• Cyber risk disclosures to protect client data.
• IP ownership and licensing, especially where software or digital assets are involved, with scrutiny on whether copyright vests in the company, the founders or third-party developers.

Failing to proactively address these issues can lead to price chips, indemnity claims or even aborted deals.

5. Managing the human factor

Transactions are not executed by balance sheets but by people. Many of our SME clients are founder-led businesses and the emotional impact of selling (or acquiring) can’t be underestimated.

Legal issues around alternative views on succession (trade sale, PE sale, EOT, MBO etc.) should be fully unpacked, advised on and settled in a manner which ensures key management and staff have buy-in and remain incentivised.

With a partial sale, minority shareholder protections and conflict management for directors often come to the fore during negotiations and majority business owners are well-advised to get in front of these discussions.

6. Legal readiness equals strategic advantage

Ultimately, legal readiness should not be something to bolt on after heads of terms are signed. The most successful deals we’ve been involved in during 2024–2025 were those where the client started early, identifying skeletons in the closet, correcting anomalies and planning their tax position and ongoing management incentives well in advance.

For instance, we have seen on more than one occasion, the fallout from poorly drafted or non-compliant historic EMI (Enterprise Management Incentive) schemes, which are not properly triggered by the proposed sale or were not notified to HMRC in time or otherwise will not provide the long-awaited upside promised to management.

Again, getting in front of these issues with an alternative proposal that retains loyalty can save time and provide more credibility later.

Final thoughts

Activity is rising and the market is favourable for well-run businesses. But success in M&A is never accidental. It takes planning, discipline and strategic legal advice. Whether you’re looking to grow, exit, or simply understand your options, we recommend that you start the conversation early.

How Morr & Co can help?

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Corporate and Commercial team on 0333 038 9100  or email info@morrlaw.com and a member of our expert team will get back to you.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.