The UK Mid-Market deals outlook for 2026. “Keep Calm and Carry On”

As I write this, Netflix have just announced their $72bn acquisition of Warner Bros, demonstrating that even in the maelstrom of Trump’s US, the inherent optimism that underpins any deal prevails.

In the UK it is lucky that the entrepreneurial spark is strong, for the lack of clarity and confidence surrounding the last two budgets and the sense that there are more brickbats to come for business and businesspeople, has undoubtedly created a backdrop of uncertainty. The budgets of 2024 and 2025 have both been characterised for HMT by a wave of deals in the preceding weeks as vendors sought to close out the risk of future tax hits.

Despite the fiscal backdrop to the UK deals environment however, the fundamental drivers for mid-market transactions remain consistent and strong.

In a very low growth economy, intelligent acquisitions remain a route for corporate buyers in the UK and overseas to deliver (or at least to promise) growth in revenues and margins. Private Equity and Private Credit funds remain buoyant and are actively seeking new investment opportunities. A trend for buy and build platforms has also created exit opportunities for smaller business vendors in such diverse and consolidating sectors as auto repair centres, accountancy firms, Managed Service Providers and building services.

At the same time, many business founders, having survived Brexit, Covid, Truss, War in Europe, Tariff uncertainty and now a business unfriendly Labour Government; have frankly had enough and with increases in the Business Asset Disposal Relief rate and the threat of aligning capital and income tax rates, are looking to the near term for their exit before anything else changes for the worse.

This creates a reasonable environment for mid-market deals in 2026 despite the gloom of economic commentators. On the ground there are good businesses whose shareholders want to sell and plenty of motivated buyers, corporate and institutional, who are looking to buy.

Overseas buyers have become more active in the UK Mid-market over the last couple of years with even US PE Funds actively targeting (and paying good prices for) strategic assets. Historically the mid-market would not have attracted these players. We have also seen the rise of the Search Fund, which is creating deal opportunities at the lower end of the market as privately backed individuals search for businesses where they can individually add value.

The reduction in Capital Gains Tax relief on the sale of a private business to an Employee-Owned Trust (EOT) is also likely to result in more businesses coming to the deals market. While tax relief on such a sale remains attractive at 50% (meaning at current CGT rates an effective tax rate of 12%), there are downsides to the resulting structure, particularly if there is any prospect of a subsequent sale of the trust shares. The reduction in the tax benefit and the increased regulation around how Trusts are administered might make the choice between EOT and commercial sale more marginal, particularly if exiting shareholders are entitled to BADR.

In terms of the sectors that will be the most active in 2026, it is difficult to see the wave of professional services deals subsiding. With more than 20 Private Equity backed accountancy and/or legal consolidation platforms in play in the UK, the competition for professional services assets is likely to drive significant activity into next year and as those platforms look for efficiencies and growth, it is likely to impact demand for relevant software solutions, digital capabilities and data analysis. Furthermore, the appetite and competition for human capital businesses is likely to spill over into other areas of the market such as recruitment, marketing services and specialist consultancies.

Business to Business software platforms, data science businesses and IT managed services are perennially attractive to private equity and consolidators alike with their recurring revenue profiles and scalability. As increasing numbers of investors specialise in these sectors, we can expect to see appetite and competition for businesses that define themselves under these headings. This will be particularly true in the Fintech and Insurance markets where significant scope remains for efficiency gains, and genuine use cases for Artificial Intelligence can expect to generate exciting multiples. This is not unrelated to the focus of PE on professional services where demonstrably there must be a revolution in the use of technology to deliver target returns.

Other sectors which are likely to see significant deal activity will, as ever, be influenced by the Government pound and where it is to be invested. We have seen an increased but very selective appetite for defence focussed businesses and continued interest in healthcare services and green energy, albeit that the ESG sector demands more investment cash than is available for it so there is a definite flight to quality and to proven, cash generating technology/services. It is also a detractor that the Government has shown itself willing to disrupt entire supply chains with a single change in policy such as the ECO4 grant regime.

Debt multiples have not changed much, and investors and corporates (as well as lenders) remain circumspect about leverage. We have seen the rise of the debt fund in recent years with highly priced debt instruments taking the place of equity in a range of transactions and these funds are now an established part of the mid-market, often willing to look at stable but lower growth businesses who are willing and able to service their interest rates but not able to deliver equity returns. Private Equity funds rarely look for more than 3-4x earnings as a debt strip and will always ensure that there can be no circumstances were control is ceded to a debt provider.

Start-ups and early-stage funding rounds remain challenging and the ecosystem for funding at this end of the market is woefully inefficient. Investors are seeking potential unicorns, knowing that the chances of finding one are slim. The costs of bringing a start-up product or service to market and scaling it are vast and for early-stage investors the risk of dilution, even in a successful investment, means that without the capacity to follow on, the rewards are capped.

For investors across the market the risk of losing a successful investment “too early” due to the constraints of their fund or the timing of a likely exit has led to a plethora of Continuation Funds, allowing investment managers to “recycle” their most exciting investments without losing control of them. This trend is likely to grow. It will be interesting to see if venture funds are able to build their own continuation capacity, which might increase the appetite for earlier stage investing.

Despite the increase in CGT rates for entrepreneurs, tax does not seem to be the focus for most would-be transactors. It is rare now to see the “Tax tail wag the commercial dog” other than (perhaps) in the popularity of EOTs. The tax code offers relatively little opportunity for meaningful tax planning, and most vendors are prepared to pay up. It is to be hoped that the Chancellor doesn’t mess around with Capital Gains Tax rates any further. Any threat of this is likely to drive another pre budget wave of deal closings.

All in all, the UK Mid-Market deal environment is one that has become used to black swan events and to dealing with them. These days, deals need to be well prepared for and will rarely be rushed. Due diligence is thorough and protracted, and risks are fully debated and allocated between buyer and seller. Multiples have declined from the heights of 2021 but remain buoyant where there is strategic value and/or competition for an asset. Despite inherent cautiousness, the market is packed with willing buyers and sellers and we expect another active year in 2026.

Share this Article