The start of 2023 is an interesting time in the UK M&A market. Widespread financial distress means there is set to be a plethora of opportunities over the next few months. However, the economic downturn that has fed into this financial distress also means that potential buyers may find it difficult to fund acquisitions, or may be hesitant about targeting deals even if they have the cash.

However, history has repeatedly shown two things: that the best acquisitions are often made during recessions and that M&A can offer a reliable route to growth, even in the midst of economic downturns like the one we are currently experiencing. With that in mind, businesses that might be considering making acquisitions during 2023 could do a lot worse than to turn to the UK’s small and medium-sized businesses (SMEs).

SMEs across the UK are being battered by the economic downturn, as well as adjacent/contributing factors such as rising costs, supply chain issues, waning consumer confidence and the ongoing effects of COVID-19 and Brexit. Small firms are particularly vulnerable to these kinds of headwinds and this, combined with their smaller size, means that valuations will be lower, opening the door for cost-effective acquisitions.

Furthermore, the scale of financial distress facing UK businesses right now means that many companies will be under pressure that wouldn’t otherwise be failing or unviable. SMEs are the lifeblood of many of the UK’s highest growth-potential industries and many struggling small companies could provide serious growth opportunities for business owners once they are acquired, integrated and properly financed.

Here are three high-growth sectors for SMEs that potential buyers could consider when eyeing up small business acquisition opportunities.

Logistics
The logistics sector is currently being impacted by a huge range of issues, from rising costs and supply chain disruption to a shortage of qualified HGV drivers. However, despite this, a significant number of owners at UK logistics firms say they are planning M&A activity during 2023 as they look to secure growth.

As companies seek growth through acquisitions, SMEs in the logistics sector could provide the perfect solution, offering many of the upsides that acquisitive logistics firms are targeting: technological disruption; presence in key strategic areas; cost-effective valuations and, if buyers target multiple small firms, the ability to rapidly grow at scale.

Despite the disruption the sector is seeing, small UK logistics firms have still recorded decent growth figures in recent months. According to ONS figures from last year, SMEs in the UK transport and storage sector registered a 4.1 per cent growth rate, with 415 firms classed as “high growth”.

Information and communication
Given the ever-growing importance of digitalisation and technological disruption for businesses looking to adapt and grow in a worsening economic climate, it is no wonder that the UK’s information and communications sector is one of the fastest growing for SMEs

According to the ONS, information and communication had a growth rate of 8.1 per cent at the halfway point of 2022, the highest among all UK sectors, with 1,120 SMEs in the industry classed as “high growth” businesses.

Businesses across all sectors can benefit from harnessing the power of digital tools and new technologies and acquisitions of small companies in the UK’s information and communications industry can enable buyers to quickly tap into the latest technologies and the most innovative new developments in their sector.

E-commerce
Even before COVID-19, e-commerce was one of the world’s most important and fastest-growing industries. The pandemic, and the associated widespread closure of physical retail for much of 2020, pushed the accelerator down even further on this trend, shifting consumer habits further towards online retail.

SMEs have been at the forefront of this and, even prior to the pandemic, represented key acquisition targets for larger e-commerce businesses looking to grow, tap into the latest trends and technologies and stay ahead of their closest competitors and emerging upstarts.

E-commerce hasn’t been immune from the current recession, however. Following the enormous growth seen during 2020 and 2021, 2022 represented something of a slowdown and, as consumer sentiment weakens amid the escalating cost-of-living crisis, e-commerce firms large and small will begin feeling the pinch even more.

For bigger companies, a key issue will be maintaining the high growth levels they experienced in the wake of the pandemic and strategic acquisitions of smaller operators will be a key part of this. For SMEs, meanwhile, being acquired by a larger counterpart will help them survive the current downturn and improve their prospects of fulfilling their growth potential.


As we enter 2023, M&A will play a vital role in the recovery and future growth of businesses across a wide array of sectors and SMEs will be central to this, offering innovation, scale, regional presence and the ability to grow sustainably through cost-effective acquisitions.