How the UK’s prize draw sector is handling its rapidly maturing M&A outlook

For several years, Britain’s prize draw industry operated with relatively light regulatory overhead, allowing entrepreneurs to build online competitions around supercars, houses and cash without the infrastructure required of a conventional gambling company. A good website, an attractive prize and an effective marketing operation could go a surprisingly long way. 

That simplicity is disappearing. 

Three developments have accelerated that shift: the voluntary code has come fully into effect; the sector has acquired its first dedicated trade body, the Prize Competition Council; and German lottery group ZEAL Network has entered the UK market through its acquisition of SevenCanyon.

iGB reported that ZEAL paid approximately £33.8 million in cash for the business, with a possible further £4.8 million earn-out. 

Then there is tax. In February the Treasury confirmed HMRC’s position that prize draws offering both paid and free entry routes do not qualify for the relevant VAT exemption, meaning paid entries are subject to the standard 20% rate. In July, HMRC was reported to have sent letters to prize-draw businesses reminding them of its view that output VAT is due on entry fees.

The question of historic VAT liabilities is more complicated. HMRC’s position is becoming clearer, but the extent of any liability for earlier periods – and how businesses might challenge or settle it – remains uncertain. 

That uncertainty may be almost as important as the tax itself. 

The prize-draw industry is discovering a familiar lesson from other fast-growing sectors: regulation does not merely constrain businesses. It changes who owns them. 

From entrepreneurial to institutional 

Josh Darby knows the industry’s first phase well. As co-founder and former CMO of SevenCanyon, he helped build the business from around £10 million of annual turnover to roughly £80 million in four years before its sale to ZEAL. 

His description of the change is revealing. “Five years ago it was possible to build a successful business with a relatively small team, a strong product and effective marketing,” he tells iGB. 

“Today you’re competing on technology, customer retention, data, compliance, governance and access to capital. That’s a very different business.”

That is the standard evolution of an emerging industry. In its infancy, the advantage belongs to entrepreneurs who move quickly. As the market becomes crowded, the advantage shifts towards companies that can manage complexity. 

The British prize draw sector remains highly fragmented. Consultancy Rokker has estimated that over 1,000 operators are actively running prize draw competitions in the UK, a sharp increase from the 401 operators identified in government research of 2023. Such fragmentation is an invitation to consolidation.

How buy and sell-side due diligence is evolving

But consolidation does not mean that every small operator is suddenly a bargain. Quite the opposite. The value of a prize draw business increasingly depends on how much risk a buyer inherits along with its revenue. 

Ben Gale, a corporate partner at Quastels who advises on prize draw transactions, recently described the market as entering a “new regulatory era”. In his assessment, buyers are increasingly treating the government’s voluntary code as a baseline, even though it remains voluntary. 

That changes the meaning of due diligence. 

The old questions were familiar: who owns the company, what contracts does it have, how strong is its intellectual property and what does the customer data look like? The new questions go deeper. Are the free-entry mechanics compliant? Are age checks being conducted properly? How are complaints handled? Are customer-spend controls adequate? Is the draw independently overseen? Is marketing consent properly documented? 

As Ben Gale’s analysis suggests, these may sound like operational details. In an acquisition, they are increasingly valuation and transaction issues. 

A flaw in a free-entry system, which lets people enter without paying, can lead to tougher warranties or indemnities, or simply reduce the price a buyer is prepared to pay. 

Gale argues that compliance gaps – where a business does not fully meet regulatory requirements – that might once have simply been disclosed are now becoming important issues in negotiations. 

The prize draw business is therefore becoming less like an internet start-up and more like a regulated consumer business. 

Notably, a recent white paper by Rokker suggested that only 20% of UK prize draw operators were signed up to the voluntary code in July.

How VAT changes the numbers 

The tax question makes that transition sharper. 

Darby says VAT is “one of the biggest issues facing the sector today because uncertainty affects everyone”. Many operators, he argues, are working on relatively thin margins. A substantial historic liability could therefore become an existential problem rather than merely an accounting adjustment. 

More important still is the effect on future economics. 

“If VAT becomes part of the economics going forward,” Darby says, operators have to reconsider what their margins and business models actually look like. 

That creates several possible responses. An operator can raise prices, reduce prize costs, accept lower margins, seek outside capital or look for a buyer. A founder who expected to remain independent for another decade may suddenly discover that independence has a price. 

This is where tax policy starts to reshape the M&A market. 

Darby believes VAT could become a “significant catalyst for consolidation”. It is not, in his view, the reason consolidation is happening. The industry was already becoming more professional. But tax pressure could accelerate a process that was already under way. 

Oakvale expecting a ‘wave of consolidation’

Elliot Berg, the Oakvale Capital director who led the ZEAL-SevenCanyon transaction, reaches a similar conclusion from the dealmaking side. He expects “a wave of consolidation”, arguing that there are “so many operators with relatively unsophisticated operations, where scale will ultimately be a big driver of success, especially if there’s going to be regulatory costs and PRs going forward”.

Yet Berg also highlights the paradox created by VAT uncertainty. “Although the small operators may ideally seek buyers, I don’t think there’s going to be many buyers in the space until there’s a lot more certainty,” he says. “There might be some, but I think they will pay low prices or low multiples until there’s much more certainty.” 

That could produce a peculiar market in which the number of potential sellers rises faster than the number of credible buyers. 

Berg says the sector will ultimately need “fewer operators”, because “when the margins are going to be squeezed, you need more scale”. 

The outcome, he suggests, could be a mixture of consolidation and exits. “The question is: is that going to be driven by M&A consolidation, or are people just going to leave the market because they can’t compete anymore?” he says. “It’ll be a bit of both.” 

Why ZEAL’s SevenCanyon deal mattered 

SevenCanyon provides a useful illustration because it was not simply a distressed asset. 

Sebastian Blohm, ZEAL’s vice-president for public policy and corporate communications, tells iGB that SevenCanyon was “a very successful prize draw operator in the UK”, was “highly profitable” and had “a proven business model”. With the acquisition, ZEAL could “hit the ground running in a highly attractive and growing market”, as SevenCanyon “fit perfectly into our growth strategy”.

The strategic attraction went beyond the individual business. Blohm says ZEAL wanted to diversify its business model and reduce its dependence on “jackpot volatility in the core business” of reselling state lotteries in Germany. SevenCanyon allowed it to expand beyond Germany while remaining in a sector it understood. 

The existing relationship also mattered. ZEAL had followed SevenCanyon’s growth for years and knew its management and numbers. “We know the team and its owners for years now,” Blohm says. “We followed their growth and their strategic decisions. We know their numbers and their capabilities. There is a lot of trust in the relationship.” 

That familiarity was complemented by extensive diligence. Blohm says ZEAL conducted “a full-on due-diligence”, examining “every relevant part of the business, the organisation, the market and the regulatory developments.” He adds that ZEAL’s experience in regulation meant SevenCanyon would be “perfectly positioned to deal with any potential regulatory changes.” 

VAT risk built into the deal structure

The treatment of VAT risk within the deal is particularly revealing. “We looked into this very diligently,” Blohm says. “Risks from the past are covered through an insurance. Future changes are built into the valuation.” 

That distinction shows how tax uncertainty can be allocated in a transaction: historic risk can be insured, while potential future costs are reflected in the price. 

For ZEAL, SevenCanyon therefore offered more than access to a new market. It combined profitability, an established operating team and a business model that fit the group’s broader strategy of expanding prize-led products beyond Germany. 

Scale is becoming a competitive advantage 

The broader economic logic is straightforward. 

Compliance is expensive. Technology is expensive. Customer acquisition is expensive. Professional advice is expensive. A large operator can spread those costs across more revenue. 

A smaller founder-led business has less revenue over which to spread them. 

As Darby puts it: “Scale gives you more options when something unexpected happens.” 

That does not mean small operators are necessarily weak. Some may have excellent products, loyal customers and strong profitability. But if most of a founder’s personal wealth is tied up in the business, taking an uncertain tax liability on the chin is a very different p...