The M&A market is shifting.
In 2021, deal volumes and multiples rebounded from a COVID dip due to basement bottom interest rates and piles of cash on the sidelines. And the year prior (2020), the Calder team managed a record-setting year even through a global pandemic. Buyers maintained vast amounts of dry powder and outnumbered the quantity of quality sellers on the market leading to extremely competitive bidding processes for businesses and overall a seller’s market.
Yet tides are turning.
Here are a few reasons the M&A market is declining:
- Buyers and sellers are losing confidence. Facing inflation, labor shortages, interest rate hikes, and other negative headwinds, many buyers are acting more conservatively and many would-be sellers are holding off.
- While multiples generally stayed steady, many businesses’ performance started to decline in 2022. Decreased performance plus higher interest rates are beginning to have a depressing effect on business valuation for select companies.
- Banks are bracing themselves for a downturn and are lending prudently and cautiously. This is also not helping business valuations and is leading requests for sellers to finance larger sums of the deal.
MiBiz’s recent article predicted the 2023 M&A market would be a “mixed bag” and stated, “sellers are reducing prices to accommodate buyers who are facing rising interest rates and higher acquisition costs. This is compounded by rising costs impacting sellers’ discretionary earnings.”
Overall, the market is shifting away from the strong seller’s market of 2018-2021 in favor of buyers. There is no shortage of sellers that are burnt out and ready to retire and yet buyers have pulled back and are being more selective. We have even seen institutional capital put a pause on their acquisition strategies entirely in order to address internal issues, firm up their own portfolios, and reassess their financial models relative to a rapidly changing rate environment.
There isn’t any more free money raining from the government and interest rate hikes are slamming the brakes on the economy.
Despite the negative M&A headlines, the Calder team set another record in 2022 with 46 closed transactions, and a company revenue growth of ~57%!
Most business owners are burnt out and starting to come to the realization that their business isn’t getting more attractive or marketable as time goes on. Yet, these owners still have their heads down and are focused on their businesses as they brace for a downturn.
Therefore, they are less apt to be marketing their business for sale or working with an advisor to do so. However, they are often very receptive to direct outreach especially when it is a qualified buyer that is approaching them.
Organic growth (especially from an HR perspective) remains much harder than growth via acquisition. MiBiz elaborates, “some buyers view the current economic conditions as an opportunity following two years of high valuations during which buyers sat on the sidelines and built up dry powder.”
For buyers with available capital, 2023 is going to be an exceptional year to acquire a business.
Reach out to Sam Scharich at [email protected] or 616-970-6124 today to discuss how we can help you get connected to off-market sellers.