The UK's manufacturing sector continues to be the backbone of the economy, but as we approach 2025, several key changes due to budget reforms will have a significant impact on business valuations. If you’re a business owner in the manufacturing sector who’s considering selling, staying informed about upcoming changes is essential to maximise your company’s value. In this post, we’ll break down how the latest UK budget changes could influence your business’ valuation and provide best practices for positioning your company favourably for the sale process.
Understanding the UK’s Changing Economic Landscape
2025 brings forward a series of monetary and fiscal policies aimed at tackling inflation, boosting productivity, and ensuring sustainable growth in the UK. For business owners in manufacturing, these changes will inevitably affect profitability, operational costs, and, of course, your company’s overall valuation. Before diving into specifics, let’s first outline some key statistics:
- The UK manufacturing sector contributes approximately 10% to national GDP and employs 2.7 million people.
- Recent reports from the Office for National Statistics (ONS) indicate a 1.8% increase in overall manufacturing turnover from 2022 to 2023.
- However, energy prices and supply chain disruptions continue to cause costs to balloon, with raw material costs rising by 6.4% in 2023.
While these figures paint both opportunities and challenges, how will budget reforms affect individual businesses when it comes to their valuations in 2025?
The Four Key UK Budget Changes Impacting Manufacturing Valuations
When analysing your business' potential sales price, several factors need to be taken into account, and the new budget announcements will influence many of them. Here are the most significant reforms slated to affect valuations:
1. Corporation Tax Increases
UK corporation tax rates are set to rise in 2025 to 25% for businesses with profits exceeding £250,000, up from the current 19%. For many manufacturers who typically operate with slim margins, this tax increase directly affects net profit. Given that valuations of manufacturing companies are often based on a multiple of earnings or EBITDA, a decline in net income will lower your overall valuation if the business isn't optimised to absorb these costs.
What you can do: Business owners should look into streamlining operations or restructuring financials to preserve profitability. Reducing unnecessary expenditure, optimising supply chain contracts, or adopting more energy-efficient practices could mitigate the strain from tax hikes.
2. Capital Allowances and Investment Incentives
A key highlight of the budget is the overhaul of capital allowances, which is particularly beneficial for manufacturers regularly investing in plant and machinery. Under the new scheme, 100% first-year allowances allow businesses to deduct the full cost of qualifying investments from their taxable profits. For businesses concerned about valuation, this is an opportunity to invest in production upgrades, making your company more attractive to potential buyers.
Best practices: Review your current capital expenditure and consider making strategic investments before 2025 to enhance your asset base. Buyers typically favour businesses that have invested in technology and machinery that reduce operational risks.
3. Energy Costs Relief and Transition to Renewables
Industrial energy users such as manufacturing firms will receive further reliefs in 2025 to curtail the impacts of rising energy prices. However, the long-term strategy in the budget also pushes for compliance with net-zero targets, encouraging manufacturers to adopt sustainable practices, including renewable energy integration. Companies embracing these trends are positioning themselves as resilient and future-ready, which can result in higher desirability and valuations.
Actionable step: If you haven't already, consider adopting energy-efficient solutions ahead of the 2025 reforms. Potential buyers are looking for businesses that are not only optimized for present-day costs but also future-proofed against environmental regulations.
4. Increased Focus on R&D Tax Reliefs
The UK government is placing more importance on innovation by expanding R&D tax reliefs under the new budget. For manufacturers heavily reliant on research and development, this provides the opportunity to reduce tax liability, thereby increasing available capital for reinvestment. More financially stable businesses typically earn higher valuations and command strong negotiating positions.
What you can prioritise: Record all R&D efforts within your business and ensure the necessary documentation is in place to qualify for these reliefs. Being transparent and consistent with innovation will not go unnoticed by potential buyers, driving both purchase interest and offering price.
Preparing Your Manufacturing Business for a Strong Valuation
In light of these upcoming changes, it’s never been more important to plan ahead if selling your manufacturing business is on the horizon. Here are a few key steps to ensure smooth sailing:
- Update Financial Records: Buyers will scrutinise consistent financial performance, so ensure your accounts are accurate, audited, and up to date. Reviewing three to five years of profit and loss statements, balance sheets, and cash flow reports is standard practice.
- Bolt-On Acquisitions: Consider acquiring smaller companies or adding complementary product lines to diversify revenue streams and enhance overall attractiveness to buyers.
- Asset Management: Identify any underutilised or non-essential assets that could be sold off or made more productive. Refining your fixed asset register not only enhances valuation but also gives a clearer picture of potential earnings.
- Employee Retention: Talent is critical for manufacturers, and turnover in skilled labour can harm the perception of stability. Ensure worker training programs and retention plans are in place to present a well-oiled operation to buyers.
Analysing Market Trends: What Buyers Are Looking For
The manufacturing sector has high buyer demand, particularly from private equity firms and strategic investors looking to capitalise on post-pandemic growth. However, this demand focuses on certain areas:
- Automation: With labour shortages affecting manufacturing, businesses already making strides in automation and robotics are receiving higher valuations.
- Sustainability: ESG (Environmental, Social, and Governance) practices are now more than just a tick-box exercise. Buyers are increasingly interested in firms with clear sustainability goals and low carbon footprints.
- Strong Customer Base: A well-diversified client portfolio reduces dependency on one or two major customers, making your business more resilient and attractive to buyers.
- Earnings Stability: Buyers tend to favour firms with strong cash flow and consistent growth, both of which reflect long-term potential and minimise acquisition risks.
Conclusion
With comprehensive budget changes on the horizon, UK business owners in the manufacturing sector should consider acting now to ensure they are well-prepared for a shift in the market by 2025. Understanding how factors like corporation tax increases, capital allowances, and energy cost reliefs will change the valuation landscape is critical.
If you’re preparing to sell your business or would like an expert consultation on valuing your manufacturing business, there’s no time like the present to plan strategically. Make sure you’re taking action now to ensure the highest possible return when you decide to transition.