The UK industrial and manufacturing sector remains an active ground for buy and build strategies, with fragmentation, niche specialisms, and opportunities for operational improvement driving sustained M&A activity. Investors and acquirers are drawn to the UK’s potential for scale, high quality, and premium products, but must be wary of the risks the sector faces with rising labour and overhead costs, labour shortages, and increased international competition.

Our Transaction Services team has advised on a range of deals across the sector. Some highlights of the recent deals we have advised on in this space include:

• Jones Skips and PeterLynn Labels acquisition by Continuance Capital

• Forza Doors, Garner Osborne and Active-PCB Solutions multiple search funds backed by Novastone

• Rose Streets’ acquisitions of AGG Electrical Safety Testing and Kenwood Damp Proofing

• Bay Tree PE-backed Prime Light’s acquisition of Emergency Light Products

These transactions, and the process leading to their completions, were very varied, but common themes emerge when considering the buyers’ rationale to make the purchase(s) and the opportunities that the deals represent. In this article, we explore the different reasons driving this activity, the risks that could arise, and how different elements of diligence can lessen the exposure to these risks.

Why this sector attracts buy and build activity

Fragmented market structure

Industrial and manufacturing sub-sectors, such as specialty manufacturing, building materials, packaging, and construction services, are characterised by a large number of small and mid-sized operators in the UK with 250,000 manufacturing businesses (MakeUK.org), of which 99% are considered micro to small. This fragmentation creates opportunities for consolidation, allowing acquirers to build scale, optimise supply chains, and increase bargaining power with suppliers.

Reviewing the supply base and chain of the targets is a crucial part of the financial diligence of these businesses. This gives an insight to any potential supplier synergies available but also which includes ensuring the business is well diversified, or, where this is not possible, that there are reassurances available (either contractual or commercial) to give confidence in the smooth operations of the business.

Market access and distribution

Consolidation can broaden market reach and improve distribution networks. When it comes to specialist services, the end customer can be exceedingly difficult to access, due to minimal opportunities to tender and shortlists being closed to new providers. These practices create high barriers to entry, adding value to a firm’s existing client list, and thus making acquisition an attractive prospect.

These key contracts need to be examined from a legal and financial perspective to ensure that not only does their reported value stack with the business’ performance, but that the contractual protections for these clients are in line with expectations. Key clauses such as termination rights, change of control, and performance guarantees create risks that can materially affect deal value, disrupt continuity of revenue, and expose the acquirer to unforeseen liabilities or operational constraints post-transaction.

Cross-selling and innovation

Portfolio companies can share successful strategies and new innovations, generating a multiplier effect on returns. This includes best practice and enhancement to operations. The cross-selling and client sharing element can create a broader customer base and accelerated revenue growth across the group, especially where complementary services or geographic reach enable bundled offerings or strategic upselling.

Financial diligence provides granular breakdowns of revenue by service line, geography, and customer segment making further analysis possible in:

• Identifying complementary offerings across portfolio companies.

• Quantifying cross-selling potential by assessing overlap in customer bases and service adjacencies.

• Validate the scalability of existing services into new verticals or geographies.

Buy-side risks in industrial M&A

Reliance on capital allowance

Investment in plant and machinery is currently supported through full expensing, with 100% of qualifying assets able to be claimed. However, there are pitfalls that many industrial and manufacturing companies are exposed to. There is also future risk as capital allowance reforms can threaten the cashflow of these businesses.

Capital allowances are only available for qualifying assets (e.g. plant and machinery). Misclassifying non-qualifying items, such as buildings or general infrastructure, can lead to HMRC challenges and clawbacks. There is a need for robust documentation to support these claims if HMRC challenges or questions them. Group structures must be carefully managed to avoid duplication or disqualification of claims, especially where AIA limits are shared across connected entities.

Tax diligence will review the basis of tax returns and computations to opine on the validity of historic claims made.

Operational integration and reporting

Integrating systems, processes, and teams can be a major challenge post-acquisition. Industrial businesses often have legacy systems and entrenched practices. These can act as barriers to planned changes meaning careful planning is required. Gaining a clear understanding during the diligence process of how finance and operations marry up can lay the groundwork for successful integration and set out a clear prioritisation of necessary changes.

Owner-managed or lifestyle businesses often place limited emphasis on structured information gathering and reporting. As a result, data sets within target businesses may be sparse or entirely absent. To meet the reporting standards expected by new owners, additional systems may need to be implemented to track key performance indicators (KPIs), potentially introducing further costs to the acquired business.

Leverage and debt structure

Many industrial roll-ups involve debt financing, which can strain cash flow if not carefully structured. Hard assets are used as collateral with lenders, which can unlock the required debt funding, but the business needs to carefully model the repayments with suitable and realistic sensitivities to give confidence over the future ability of the business to service the debt.

Ensuring these assets have been reasonably valued in the financial records, are in good working order, and have been suitably maintained may require specialist technical diligence.

Regulatory and compliance risks

Industrial businesses face increasing scrutiny from regulators, especially regarding environmental, health and safety, and antitrust issues. Environmental and social governance (ESG) factors are increasingly material in industrial M&A. Risks around hazardous materials, supply chain ethics, and sustainability must be assessed to ensure the buyer is not inheriting undisclosed liabilities.

Due diligence mitigates regulatory and compliance risks in industrial M&A by conducting targeted assessments across ESG, environmental, health and safety, antitrust, and supply chain ethics to uncover liabilities and gaps. This enables informed decision-making, accurate valuation, and smoother post-deal integration through early identification of red flags and compliance requirements.

Conclusion

Industrial buy and build strategies offer compelling opportunities for scale and value creation, but success depends on diligent risk management and thoughtful integration. Our track record in industrial M&A demonstrates the importance of tailored diligence, sector expertise, and proactive risk mitigation. As consolidation continues, those who balance financial performance with operational and regulatory discipline will be best placed to thrive.

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