High inflation, stagnant economic growth and rising unemployment have all contributed to a slowdown in M&A activity. Whilst such factors are still very much prevalent, recent reports suggest that the number of higher value M&A deals in Scotland in the first half of 2025 has increased and that there has also been a significant rise in "outbound M&A" whereby Scottish businesses are acquiring foreign businesses.
So, are we beginning to see the green shoots of a recovery in the Scottish M&A market or is there still a bumpy road ahead?
A perfect storm
An economy and M&A activity are closely linked. A strong economy usually boosts M&A activity with more affordable borrowing being available to assist investors with funding acquisitions and investors having greater confidence in the sustainability and growth of the businesses which they are seeking to invest in. In contrast, a weaker economy usually reduces M&A activity with less affordable borrowing and investors becoming more risk adverse in their approach to acquisitions (although a weaker economy can of course bring opportunities to acquire distressed businesses at a reduced price).
As is the case with the United Kingdom as a whole, the Scottish economy is currently experiencing high inflation and stagnant economic growth with recent reports suggesting that Scottish businesses' confidence in their own trading prospects and the economy have fallen substantially last month. Scotland has also not been immune from the impact that geopolitical tensions and global tariffs are having on the worldwide economy.
Given these challenges, it is not unsurprising that in the first half of 2025, the number and value of Scottish M&A deals has reportedly fallen. For those deals which are happening, buyers are becoming noticeably more cautious and risk adverse. Buyers are undertaking longer and more thorough due diligence exercises on target businesses and it is becoming increasingly common for a proportion of the agreed price for a business to be contingent on certain targets being met in the future. We are also experiencing more instances of buyers insisting upon warranty and indemnity insurance being put in place in transactions (the cost of which is usually borne by sellers, either partly or in full) to give greater certainty that they will recover loss where there is a warranty or indemnity claim.
Cause for optimism?
It is not all doom and gloom, however.
The first half of 2025 has reportedly heralded an increase in the number of higher value M&A deals in Scotland and there has also been a significant increase in outbound M&A with the United States and Australia being identified as key emerging markets.
There has also been strong M&A activity in sectors such as financial services, professional services, technology/software and healthcare and it is expected that these sectors will continue to perform well in the foreseeable future with the financial services and professional services sectors continuing to experience consolidation.
It also anticipated that the scheduled increase in the rate of capital gains tax on the disposal of business assets (including shares) qualifying for Business Asset Disposal Relief (previously known as Entrepreneurs' Relief) in April 2026 from 14% to 18% will drive increased Scottish M&A activity. This was the case when the rate was increased from 10% to 14% in April this year.
Outlook for 2026
In the face of a number of challenges to the economy, the Scottish M&A market has shown great resilience in 2025, and, in certain sectors, there has been substantial growth in M&A activity emphasising that Scotland continues to be an attractive destination to do business.
So, should we expect a more buoyant Scottish M&A market in 2026? That would seem optimistic with economic outlook forecasts projecting that the Scottish economy will only grow between 1% and 2% next year. A more realistic expectation may be that there will be a modest increase in Scottish M&A activity with continued growth in sectors such as financial services and technology.
Cautious optimism if you will.
This article was published in Scottish Business Insider - read the original article here.
