The M&A market is experiencing high levels of activity, and many service providers are so overwhelmed they are turning deals away or at least adjusting expectations on deal timelines. The availability of financing and capital and expected tax law changes are factors driving the market. All sectors, including healthcare, manufacturing, industrials, consumer, and business services sectors, are strong and multiples are at record highs.
The Perspective of Buyers
Acquisitions are a relatively fast growth strategy, as well as way to deploy available cash, rather than a long-term sales growth strategy. Also, debt costs are historically low and expected to stay low, allowing for leverage opportunities with maximum ROI. Buyers are looking for other firms that will expand capabilities, geographies, or customers, particularly diversified companies that can withstand economic downturns.
The Perspective of Sellers
There are several drivers from the seller side of M & As, including an increase in the capital gains tax, which is creating urgency to get deals done in 2021, before changes take effect. The pandemic has also created personal situations that are driving some business owners to sell.
Sellers are also trying to determine when to sell because the valuation expectations of buyers and sellers do not always align. Currently, buyers are considering past performance, while sellers are considering projections. Holdbacks, escrows, and earnouts can offset these unbalanced expectations; however, sellers trying to recover after the pandemic are waiting until they can justify higher valuations.
The high volume of market activity is increasing timelines for deals and making it harder to find dealmakers. Easier deals take priority, while those with more complexities may not attract buyers, or at the very least take longer.
Buyers are evaluating the quality of earnings before the deal more closely. Serial buyers are doing thorough due diligence since they rely on representations and warranties insurance and have to meet underwriter requirements. Regardless, the highly sought-after companies that are selling have the power in the deals, with buyers offering term flexibility.
What’s Coming Next
The current M&A fast-paced trend is expected to continue into the near future due to the long timelines and the over-filled plates of dealmakers that are pushing deals into next year. Also, sellers who are trying to recover will be willing to make deals once their valuation is back in line with their expectations.
If inflation causes an economic slowdown, the M&A activity is likely to decline. Additionally, economic conditions with all the leveraged transactions that are occurring could result in a credit crisis, although this is unlikely.
C-Suite Dealmakers and CFOs Can Guide You Through the M&A Landscape
At C-Suite, our CFOs and dealmakers have a broad range of knowledge, skills, and industry experience and can help you through the M&A process. We can become a trusted partner to you and provide ongoing guidance and support throughout your deal journey and beyond. We also have a host of other resources in our portfolio that are available to you from growth to exit. Contact us today to learn more.