The decrease in North American M&A deal count has shown signs of slowing down, as illustrated in the chart below. After six consecutive quarters of consistent decline following the peak in Q4 2021, the rate of decrease in deal count appears to be moderating. PKF Investment Banking estimates M&A deal activity stabilizing in the second half of 2023. We expect Q4 to be similar to Q2 and Q3 levels of 3,600 – 3,700. It is important to highlight that the North American M&A deal count in 2023 is projected to approach the preCOVID levels seen in 2018 and 2019, both of which were considered strong M&A markets.
The decline in activity in 2022 and 2023 can be attributed to several factors: higher interest rates, recessionary fears, persistent inflation, tightened credit markets, geopolitical uncertainties and a dislocation in buyer/seller value expectations across various sectors.
The lower middle market (LMM) with deal sizes ranging from $10 million to $250 million is less impacted by interest rates and tightening debt markets. This is due to more moderate leverage levels associated with these deal sizes, and many of the LMM deals involve add-on acquisitions. While LMM activity has benefited from an increased focus on add-ons by PE, it has not been immune to the headwinds mentioned above.
A Pause in Interest Rate Hikes Reduced Upward Pressure on Borrowing Costs
The Federal Reserve’s decision to maintain the rates steady at 5.25-5.50% during its September 19-20, 2023, FOMC meeting marked a temporary break from the previously aggressive rate-hiking campaign initiated in March 2022 to combat inflation. This pause, expected by the market, provided relief by easing the upward pressure on borrowing costs, a key challenge for dealmaking. It’s worth noting, however, that the Federal Reserve has indicated the possibility of another rate increase beyond the current 5.25% to 5.50% range. This reflects the central bank’s ongoing effort to balance inflation control with support for economic growth and stability.
PE Platform Activity Continued to Decline while Add-on Activity Remained Steady
According to Pitchbook, platform deals declined by 20.6% in value from the prior quarter and 42.9% YTD. Higher debt financing costs and contracting leverage ratios remain challenges to platform deals.
On the other hand, add-on deals, with much smaller deal sizes and lower reliance on new debt, have consistently represented over 70% of all buyouts. Pitchbook reports that add-ons have reached a near record high share of all PE buyouts at 76.1% YTD.
With $1.4 trillion in unspent dry powder, PE firms are utilizing add-on opportunities to deploy their capital while awaiting a more favorable environment for platform acquisitions.
M&A Transaction Backlogs and PE Exits Are Waiting for Market Resurgence
The deceleration of M&A activities since 2022 has led to a backlog of M&A transactions waiting to go to market. Concurrently, the PE exit markets have continuously shown signs of a downturn. According to data from Pitchbook, Q3 saw a total of 275 PE-backed companies exiting the market, accumulating an exit value of $44.1 billion. This marks a decline of 6.9% and 40.7% on a quarterly basis, respectively.
Factors such as economic uncertainty, a challenging lending environment and valuation volatility have dampened the enthusiasm of PE firms for pursuing new deals. Instead, they are increasingly inclined to extend their ownership of portfolio companies. Chiefexecutive.net reports that the median holding periods of PE-backed portfolio companies have reached historical lengths, now standing at 5.6 years, the longest duration observed in over two decades.
As the economic landscape stabilizes and financing dynamics improve, accumulated M&A backlogs, particularly those comprising PE-backed portfolio companies, are poised to offer a pool of attractive assets for prospective investors.
Valuation Compression in 2023
Recessionary fears, disappointing company performance, higher borrowing costs and a tighter lending environment have collectively pushed down valuation multiples across the board. However, the shift in valuation multiples varies significantly across industry sectors and individual company performances. A flight to quality by investors continues. Companies demonstrating robust operating performance in sectors better equipped to withstand a recession continue to experience strong valuation multiples.
The chart below illustrates TEV/EBITDA multiples categorized by TEV tier on a rolling four-quarter basis.
The lower end of the LMM has shown more resilience in terms of valuation multiples. PE firms remain highly active in pursuing add-on acquisitions to grow their platforms. Additionally, lower debt leverage is utilized in these deal sizes, and there is less of a valuation disconnect between buyers and sellers, as deals in the LMM tend to transact within a tighter multiple range. It is worth highlighting the noticeable increase in the utilization of earnouts and seller notes to help bridge the valuation gap.
Outlook – Near Term Stable Activity Level with Moderate Increase Later in 2024
In the coming quarters, we anticipate stable activity levels in the M&A market for Q4 2023 and Q1 2024, with the expectation of a gradual increase in activity during 2024. Several compelling near-term drivers could stimulate M&A activity:
- Moderating Interest Rates. Private equity activity is expected to increase as interest rates in North America stabilize and eventually decline. Lower interest rates will make financing more attractive and accessible leading to a resurgence in deal-making, especially LBOs within the PE sector.
- Record-Level Dry Powder. With substantial funds on hand, PE firms are under pressure to seek out viable investment opportunities rather than letting their raised capital remain idle for extended periods.
- Valuation Convergence. The narrowing gap in valuation between potential buyers and sellers is likely to facilitate more fruitful negotiations and bring both parties back to the table, spurring increased M&A transactions.
- Sizable Deal Backlog. A backlog of M&A deals, combined with an abundance of exit opportunities for PE-backed firms, is expected to create a wealth of investment prospects. We believe sponsors will adopt a more assertive stance in deploying capital to close out existing funds and to capitalize on portfolio company realizations, which will support future fundraising efforts.
While we acknowledge the existing challenges, these key drivers offer reasons for optimism within the M&A landscape as we navigate through the uncertainties of the coming quarters. For pdf version click here.
Senior Managing Director
PKF Investment Banking
firstname.lastname@example.org | 561.337.5324
PKF Investment Banking
email@example.com | 201.639.5739
About PKF Investment Banking
PKF O’Connor Davies Capital LLC (DBA PKF Investment Banking) is the investment banking affiliate of PKF O’Connor Davies. PKF O’Connor Davies Advisory LLC is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.
The PKF Investment Banking team has completed over 250 M&A advisory and capital raise engagements in North America and abroad. Companies and business owners across a range of industries rely on our transaction and sector expertise, global reach, confidentiality and utmost integrity to help them achieve their objectives. We focus on privately held companies and have extensive knowledge with decades of experience advising middle-market businesses. Our key services include sell-side and buy-side M&A advisory, exit readiness and transaction planning.
PKF Investment Banking provides this report for information purposes only and it does not constitute the provision of financial, legal or tax advice or accounting or professional consulting services of any kind. Securities-related transactions are processed through an unaffiliated broker-dealer, Burch & Company, Inc.
Are You the Best Person to Sell Your Business?
Enhancing deal value and increasing certainty to close are what investment bankers do every day. As competition and technological advances continue to drive consolidation across many industries, it’s likely you’ve been contacted by a variety of buyers, or their agents, interested in acquiring your company.
According to S&P Global Market Intelligence, global private equity dry powder soared to a record $2.4 trillion in mid-2023. Private equity firms are in business to secure returns for their investors, so all that cash needs to find a home. In addition, strategic buyers are actively searching for acquisitions as a component of their growth plan.
As an entrepreneur, you’ve succeeded by seizing opportunities, and it could be tempting to pursue a specific buyer who appeals to you. However, even if you’ve sold a company before, it’s rare that a business owner can maximize value and achieve superior deal terms on their own.
The Right Investment Banking Team Empowers You
The team you should rely on is one that has gained wisdom by completing hundreds of deals ‒ and seeing some failed deals too. For the most important sale you’ll ever close, it’s critical to engage the right investment banker who can empower you all through the deal process, from start to finish.
An experienced investment banking team can enhance the value of your business and increase certainty to close by providing:
- Multiple deal options – The only way to know if you’ve received the best possible offers for your business is through a competitive auction among buyers ‒ including those you’re aware of and those you never knew existed. An astute investment banking team has the capabilities, resources, and processes to present you with a range of options.
- Negotiating prowess – While you may be able to skillfully negotiate various transactions related to running your company, the team working on your deal is better positioned to garner the highest value and best terms for your business.
- A buffer between you and buyers – Staying focused on keeping your business growing and profitable is crucial during the marketing and sale process. Plus, selling a business can stir up a lot of emotion. Best to let professionals take the lead in negotiating value, deal terms and critical deal issues with buyers and other professionals throughout the transaction.
- Early warning system – A mature investment banking team can recognize when the other party is not sincere or when the certainty of closing a deal is low. You don’t want to waste time on a buyer who is displaying low odds of completing a successful deal.
- Guidance based on market trends and dynamics – Understanding the current market value and terms is key to setting realistic goals. An effective team can identify and convey the real and often hidden value of your business to buyers. This increases your chances of receiving a premium offer compared to market benchmarks.
- Creativity and resourcefulness in resolving deal issues – Anticipating business issues that are likely to arise in due diligence and preparing management to address them will reduce the risk of a broken deal. Since few businesses have no shortcomings, challenging issues that arise either before or during due diligence often require investment banking creativity to resolve.
- Maximum deal control to your advantage – The deal journey can be formidable. Investment bankers are skilled at controlling the sale process and driving to the closing date.
Team Up with Experts
High-performing investment bankers don’t have just one or two techniques they rely on to achieve success. They set standards of excellence for themselves and are systematic about realizing those standards on every deal. By partnering with the right team, you’ll be bringing integrity, expertise, options, deal control and unshakeable confidence to the sale of your most valuable asset.
If you’re thinking of selling your business in the near future, contact us for a preliminary conversation as to your company’s readiness for a marketing process or for a complimentary value assessment.
Senior Managing Director
North American merger and acquisition (M&A) deal volumes slowed down in first quarter 2022 after a record-setting 2021. Year-over-year deal volume decreased 11.5% over first quarter 2021. Deal activity, nevertheless, was still in line with that of the last five years. With strong corporate balance sheets and record private equity (PE) dry powderRead More
While you may be confident in the unique advantages and future prospects of your company, most potential buyers will need to be convinced beyond a doubt. Strength testing your business before approaching buyers is critical. When your company’s information and outlook are transparent, buyers will compete to buy it, driving price and favorable deal terms for your business.
For most private business owners, the sale of their company is the most important financial transaction in their life and can be transformational.
If you’re considering a sale this year or in 2024, now is the time to get prepared. Start by checking these critical deal success factors:
1. Obtain a realistic value range. You should have an understanding of the value range for your business and ways you can increase such value. In addition, you should confirm that this value will meet your financial objectives.
2. Accurate historical financial statements. Income statements and supporting detail need to be accurate and readily available. In addition, your company’s balance sheet should be checked to ensure all assets and liabilities are captured and fairly stated. Accrual basis financial statements will be required.
3. Projections for 1-3 years out should be bold but achievable. Work with your M&A advisor to develop financial projections that will be foremost in buyers’ minds when making offers. Plan to surprise only on the upside!
4. Build an experienced M&A deal team. An M&A advisor with a strong track record of selling companies in your value range and who can reach the right buyers domestically and internationally is key. You’ll also need a tax advisor and a corporate attorney focused on M&A.
5. Select managers for an internal deal team. All operating shareholders should be involved in the sale process, and it’s also advisable to enlist the support of one or two senior financial or key employees. With guidance from your M&A advisor, this can be done skillfully at the right time in the process.
6. Clarify and implement your growth story. Realistic, well-formulated growth opportunities increase the likelihood of attracting premium value offers. Are you ready to present buyers with concrete expansion opportunities that could be achieved with additional growth capital?
7. Identify and address potential risks. Objectively review any present or future risks associated with your business and devise strategies for mitigating them. These could include customer or vendor concentration, nexus issues, regulatory changes, employee retention, supply chain challenges, technology disruption and many others. Buyers will challenge everything; be prepared so your deal does not get delayed or lose value.
8. Know your Key Performance Indicators (KPIs). Demonstrate how efficiently you run your company by setting up and monitoring a dashboard of metrics appropriate to your industry that buyers will expect to be available.
9. Double down on documents. Every contract, registration, benefit and insurance plans, tax filings (last 3-5 years are typical) and other documents related to your company will need to be gathered into a virtual data room before a deal can close. Early in the process, your M&A advisor will supply you with a list of required documents.
10. Fire on all cylinders as you run the business. You and your management team must stay focused on the business, driving growth and profitability throughout the sale process. The importance of meeting or, if possible, exceeding projections while your company is in market cannot be overstated.
If you’re thinking of selling your business in the near future, contact us for a preliminary conversation as to your company’s readiness for market or for a Complimentary Value Assessment.
Senior Managing Director
PKF Investment Banking firstname.lastname@example.org | 561.337.5324 or 201.788.6844Read More
Financial buyers deploy significant resources to contact private companies to purchase a company below its true market value. Before agreeing to sell, here are some important Do’s and Don’ts for sellers to consider.
As a Seller: Questions You Might Ask Yourself
- Why would any buyer pay the high end of their value range or offer their best terms if there’s no competition and/or no knowledgeable M&A advisor negotiating on behalf of the seller? The fact is: no unchallenged buyer would pay top dollar.
- Should you directly negotiate the value and major deal points in the sale of your company? No, this is not your expertise and selling your business is probably the most important financial transaction of your life. You need an advocate with decades of M&A experience.
- Should you sell your company to a buyer who has approached you and this is the only offer you have? Maybe, but is there certainty to close? Is it the best fit available? Can value and terms be improved, or will another buyer pay more or be a better fit for you and your company?
- Should you pay a full M&A advisory fee on a deal where you are already talking to a qualified buyer? No, you shouldn’t. In this situation, our firm may negotiate only with the existing buyer and would adjust our fee accordingly. However, if we contact other buyers, and a deal is done with one of them, then yes, a full fee is warranted.
Call a Specialist
Despite ongoing macroeconomic uncertainties, 2023 is expected to offer strong demand from buyers for companies in the lower middle market (under $200 million in annual sales). Various types of buyers, especially private equity firms, will no doubt be contacting you to express interest in acquiring your business.
Before you respond to these inquiries, check with us. PKF Investment Banking can help drive up value, improve terms and evaluate fit and certainty to close. We do this by being your advocate, knowing the market and, when appropriate, quickly and confidentially contacting a select group of additional buyers.
With a high-quality M&A advisor in the picture, the “one-buyer” is presented with the possibility that we will run a full marketing process if he or she is not willing to agree to the deal that is right for you.
Reaching a Better Deal
Here are two examples of “one-buyer” deals we negotiated:
- The deal already on the table with a qualified buyer was improved by 20% and then closed within
- The deal already on the table had a value that we deemed was too low. After an efficient
marketing process, the original buyer improved their offer, yet ultimately lost out to another buyer
who was not only a better fit but paid a higher value by several million dollars.
Team Up with Pros
Our investment banking team is comprised of senior-level professionals with decades of M&A experience across a range of industries. We’re not cookie-cutters − our approach is tailored to each engagement. Our commitment is to be your trusted advocate.
Without competition or proper M&A advisory representation, selling to a buyer on your own can result in money left on the table and/or deal terms that fall short of what you should be receiving. We can help to ensure you obtain the best value and terms.
Senior Managing Director
561.337.5324 | 201.788.6844
About PKF Investment Banking
PKF Investment Banking is the investment banking affiliate of PKF O’Connor Davies. Whether a business owner is ready to sell the company or seeking growth through acquisition, our investment banking team is committed and credentialed to help owners achieve their objectives. Our investment bankers provide guidance through every step of the process and bring the expertise to enhance certainty to close – while always staying focused on maximizing the value derived from the transaction. The PKFIB team has closed over 200 successful M&A transactions across many industry verticals.
Securities-related transactions are processed through an unaffiliated broker dealer, Burch & Company, Inc.
PKF O’Connor Davies, LLP is a full-service certified public accounting and advisory firm with a long history of serving clients both domestically and internationally. With roots tracing to 1891, the Firm has 19 offices in the United States and abroad with more than 1400 professionals who provide a complete range of accounting, auditing, tax and management advisory services.
Our Firm provides the information in this e-newsletter for general guidance only, and it does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind.Read More