M&A Middle Market Update Q1 2022
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 powder
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10 Ways to Position Your Business for a Successful Sale
Use this checklist to ensure your company is ready to go to market and positioned to realize maximum value
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 owners.
Today’s market for healthy, privately held companies still favors sellers. There is a record amount of buyer cash looking for a home and a limited supply of quality companies. If you’re considering a sale this year or in 2023, now is the time to get prepared. Start by checking these critical deal success factors:
- 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 such value will meet your financial objectives.
- 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.
- Projections for 1-2 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!
- Build an experienced M&A deal team. An M&A advisor with broad knowledge of the transaction process and a strong track record of selling companies to a range of buyers is key. You’ll also need a tax advisor and an attorney with a solid background in M&A.
- 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.
- 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?
- 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.
- 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.
- 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.
- 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.
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M&A Middle Market Q4 2021 Update
M&A Deal Activity Reached Historical Highs in 2021
North American mergers and acquisitions (M&A) deal volume hit a record high in Q4 2021 reaching over 4,400 transactions. Total 2021 deal volume of 16,718 was also a record high and a 25% increase over 2020. With easy access to capital, low interest rates, and a recovering economy, M&A globally set a new record with over $5 trillion in transaction value. The U.S. deal market’s performance was particularly prominent, accounting for $2.9 trillion in transaction value in 2021, up 55% from $1.9 trillion in 2020. The U.S. deal activity was also bolstered with sellers concerned over potential increases in capital gain tax rates and 2020 deals pushed into 2021 due to COVID.
2021 was also a banner year for the private equity (PE) industry. U.S. PEs closed 8,624 deals for a combined value of $1.2 trillion, over 50% above the previous annual record for deal value. In 2021, U.S. PEs raised over $300 billion in new capital, as institutional investors increased their alternative asset class investment percentage. 2021 was also a record year for PE-backed exits. PEs exited U.S. companies with a total enterprise value in excess of $800 billion.
The venture capital (VC) market continued at a break-neck pace throughout Q4 2021. Globally, venture capital financings set a record in 2021 with $621 billion in combined deals, more than double the $294 billion recorded in 2020. Venture capital dealmaking in the United States reached an all-time high in 2021 at nearly $330 billion, buoyed by excess liquidity and an accommodative monetary policy. It was also the best year on record for U.S. VC fundraising, which hit $128.3 billion across 730 funds. U.S. VC-backed companies going public or being bought out led to exits worth $774.1 billion in 2021, nearly 88% of which was realized through public listings. In addition to the U.S. IPO market, special purpose acquisition companies (SPAC) offered a viable alternative to traditional IPOs despite tightening regulatory scrutiny.
Closed M&A Deals in North America (Q1 2019 – Q4 2021)
Record Dry Powder and Corporate Cash Continue to Drive M&A Activity
In addition to 2021 being a record year for PE fundraising and capital deployment, global PE dry powder ended 2021 at $2.3 trillion, 14% higher than the start of the year, signaling another favorable year for M&A in 2022. As of June 30, 2021, U.S. PE had an all-time high in capital overhang of $827 billion.
US PE Capital Overhand ($B)
Cash on the balance sheets of nonfinancial companies in the S&P500 swelled to over $2.0 trillion, compared to $1.5 trillion before the pandemic crisis in early 2020. Just 13 non-financial companies in the S&P 500, including tech giants such as Apple (AAPL) and Google-parent Alphabet (GOOGL), are sitting on cash and investments of more than $1 trillion, according to S&P Global Market Intelligence and MarketSmith. Cash-rich companies will continue their spending in 2022.
US Nonfinancial Corporate Balance Sheet Cash ($B)
2022 Outlook
After a record year for M&A, dealmaking will continue to be robust in 2022. The factors that contributed to the record M&A market in 2021 will remain influential for dealmaking in 2022. Unprecedented dry powder, record levels of cash on corporate balance sheets, low cost of debt, a strong macroeconomic climate, and intense demand for technology disruption and innovation. The fierce competition among corporates and PEs will keep multiples high for sought-after assets. However, increasing interest rates during the year may soften valuation multiples.
Some headwinds such as persistent inflation, rising interest rates, supply chain and labor shortage challenges, as well as softening equity markets, may have a moderating impact on M&A transaction volume. As the market continues to be driven by these macrotrends, we are bullish on M&A activity in 2022, especially in the middle and lower middle market.
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Check these 5 Boxes Before Choosing an M&A Advisor to Sell Your Company
The 2022 outlook for deal activity is robust and sellers are expected to hold the advantage − as long as they have a skilled M&A team leading the way.
By Robert Murphy, Senior Managing Director
Engaging an effective Mergers & Acquisition (M&A) advisor to sell your company is critical to a successful outcome. Even the fastest-growing companies in high-demand industries require an adept deal team to ensure shareholders receive the value and terms they deserve. The right M&A advisor can also generate fresh ideas and identify unique opportunities, as well as navigate to a timely close, while the wrong advisor could lead you astray − or merely let your deal languish when larger deals draw away their attention.
What should a business owner consider in selecting an M&A advisor? Here are five key criteria to use
when evaluating potential advisors:
1. Overall Comfort Level. First and foremost, choose a firm that conveys professionalism, trustworthiness and communicates straightforwardly. From the outset, you should feel a sense of confidence that the M&A team will always put your best interest first and give you honest advice.
2. Vast Deal Experience. Since every merger and acquisition transaction is different, there’s no substitute for experience in this industry. Choose a team that has closed many transactions (in excess of 100) to ensure they possess deep knowledge of all the intricacies involved in closing successful deals.
3. Without Thorough Preparation, There Is Only Hope. Surprises and deal delays hurt values and kill deals. The right firm will have a clearly defined process and expertise to fully prepare you and your company before going to market. Diligent preparation is essential for increasing certainty to close and for maximizing value.
4. Robust, Global Marketing. Is the M&A firm willing to, and capable of, contacting all qualified buyers and not just a small group? Also, your business could be attractive to overseas buyers. That’s why engaging an M&A firm with international reach and cross-border transaction experience is a key advantage. In almost all cases, contacting more buyers results in more offers and opportunities, which increases certainty to close and maximizes value.
5. Passion for Working with Companies of Your Size. Be sure the M&A team you select is committed to closing deals in your size range. Some firms will take on smaller deals but shift their energies to larger deals as they come in. Your deal should be meaningful to the firm, and you should be sure the team will be “all-in” for getting it done. You may be wondering: “What about industry specialization? Don’t I need an advisor who focuses on my industry?” There’s a good reason why industry expertise is not among these five advisor “must-haves.” It’s because technology has leveled the playing field. In fact, buyer contact information and transaction data across all industries are readily available today, making industry specialists in most sectors not a driving factor in selecting the right firm. An M&A firm that has invested in multiple data sources can offer insights into realistic value expectations and target buyers,
as well as provide the full-range M&A guidance to clients in virtually any industry.
If you’re thinking of selling your business, contact us for a preliminary conversation as to your company’s readiness for market or for a Free Value Assessment.
Contact Us
Robert Murphy
Senior Managing Director
rmurphy@pkfod.com
561.337.5324 | 201.788.6844
M&A Lower Middle Market Q3 2021 Update
M&A Deal Activity Continued its Record-setting Pace in Q3 2021
North American M&A deal activity remained robust in Q3 2021 following a strong H1 in 2021 and a record-breaking fourth quarter in 2020. YoY deal volume in Q3 increased 28.6% over Q3 2020. Through the first three quarters of 2021, deal volume is on pace to approximate or surpass record highs.
The economic recovery is forging ahead despite inflationary pressures and global supply chain disruption, fueling unprecedented M&A activity. M&A activity across multiple sectors is being driven by digitalization and changes in business and consumer preferences due to COVID. As businesses reopen, travel reemerges, and equity markets continue to post broad gains, corporate executives and investors remain confident in a strong economic recovery.
Although the U.S. economy slowed in Q3 2021 with real GDP increasing at a modest 2%, 2021 is on track to achieve the highest annual GDP growth rate in almost four decades. Inexpensive financing, ample private equity dry powder, strong public company valuations, and diminishing economic uncertainty continue to encourage businesses and investors to grow through acquisition.
Transaction Multiples Reached Historical High
Average transaction multiples in Q3 2021 with Transaction Enterprise Values (TEV) of $10 million to $250 million increased to 7.6x, which was the highest quarterly mark in GF Data’s 16-year history. It again signals strong M&A momentum and transaction valuations, especially for companies that have performed well through COVID.
One of the key factors contributing to higher multiples is the greater percentage of platform acquisitions, which tend to be higher valued than add-ons. This reverses a recent trend in favor of add-on deals. From 2018 to 2020, the platform percentage of total acquisitions ranged from 79.5% in 2018 to 70.0% in 2020. For the first nine months of 2021, the figure bounced back to 74.5%.
While valuations surged across the board, larger companies tended to receive higher valuation multiples. In the $100-$250 million TEV tier, the average was 9.8x. Buyers continued to favor companies with above-average TTM EBITDA margins and sales growth. In the past three quarters, above-average performers accounted for 62% of total reported transactions, while the historical average is 56%. These above-average performers were rewarded with a 28% valuation premium compared to below-average performers.
Debt Leverage Stabilized at Pre-COVID Levels in Q3 2021
Debt leverage has been steadily returning to pre-COVID levels since Q3 2020. Total debt in Q3 surged to 4.1x EBITDA, compared with 3.6x in Q2. The increase of leverage in Q3 is in line with increased valuation. For the first nine months of 2021, total debt averaged 3.9x, up from 3.7x in 2020 and reverted to the same level in 2019. Continued low interest rates across investment-grade and high-yield debt have boosted debt utilization to support M&A transactions.
The average debt leverage in Q3 2021 of 4.1x EBITDA comprised 3.1x senior debt and 1.0x subordinated debt, compared with 2.8x and .8x in Q2 2021, and 3.6x and .3x in Q1 2021, respectively. The lower percentage of senior debt usage reflects add-ons accounting for a lower percentage of the deals, as most add-ons are structured with all senior debt. GF Data noted that add-ons account for 24.5% of the sample transactions in YTD 2021, a drop from an unprecedented high of 30% in 2020.
Outlook
We are bullish on M&A activity during Q4 2021 and Q1 2022. The key M&A drivers remain intact, maintaining deal volumes and values at record levels. There are plenty of opportunities for value creation and growth. Highly sought-after deals that offer innovations and targets with outstanding performance are likely to continue to command a premium in this competitive market. However, recent increased COVID concerns, expected increases in interest rates and inflationary pressures could slow M&A activity at some point in 2022.
Anticipating an increase in capital gains tax in 2022, many buyers and sellers are racing to close deals in 2021. Consequently, Q4 2021 is expected to see record level of M&A volume and transaction values ahead of potential capital gains tax hikes.
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