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.
Read MoreM&A Deal Activity Continued to be Robust in Q2 2021
North American M&A deal activity remained strong in Q2 of 2021, following a strong first quarter in 2021 and a record breaking fourth quarter in 2020. YoY deal volume was 57.6% higher than the volume in Q2 2020. Through the first half of 2021, deal volume is on pace to approximate record highs.
Closed M&A Deals in North America (Q1 2019 – Q2 2021)
Source: Pitchbook and PKF Investment Banking research.
Investor confidence remains high as the equity markets continued to record broad gains. Other factors, such as levels of uncommitted capital, potential increase in capital gain tax rates, low interest rates, reduced uncertainty for buyers and sellers, and increased CEO confidence all contributed to the already heated M&A market. With over $1.5 trillion dry powder in the U.S. equity firms, the US PE deal making notched a record-setting pace through Q2 2021. PE exit activity through H1 2021 is also on track for a record-setting year.
Transaction Multiples Increased
Average transaction multiples in Q2 2021 with Transaction Enterprise Values (TEV) of $10 million to $250 million has rebounded to 7.2x after three quarters in which pricing averaged 6.6x-6.9x. It again signals a strong recovery of the M&A market and transaction valuations, especially for those companies that have performed well through COVID.
Source: GF Data®
Higher performers with above-average TTM EBITDA margins and sales growth continued to be rewarded with premium valuation multiples. In Q2 2021, the buyout targets with above average financial performance were valued at an average of 7.8x, increasing from an average of 7.6x in Q1 2021. This “quality premium” phenomenon has been observed since the second half of 2020, when the reward in valuation for better performance represented over 30% premium, compared to a historic average of 14%. The rest of the buyout targets in Q2 were valued at an average of 5.8x, compared to 5.7x in Q1 2021, indicating a bigger valuation multiple gap between the targets that have strong TTM performance with clear industry sector visibility and companies with weak TTM performance and cloudy visibility.
Quality Premium – Buyouts Only
Source: GF Data®
Debt Leverage Stabilized at Pre-COVID Levels in Q2 2021
Debt levels have been steadily returning to pre-COVID levels since Q3 2020. Total debt utilization is largely unchanged in Q2 2021. Low interest rates across investment-grade and high-yield debt have boosted debt utilization to support M&A transactions.
The average debt leverage in Q2 2021 of 3.7x EBITDA comprised 2.9x senior debt and .8x subordinated debt, compared with 3.6x and .3x in Q1 2021, respectively. The decreased portion in senior debt implies a slowdown in add-ons as most of the add-ons tend to structure the debt with all senior debt. GF Data noted that add-ons account for 23% of the sample transactions in 2021, a drop from an unprecedented high of 30% in 2020.
Total Debt/EBITDA – All Industries by Deal Size
Note: Deals with no debt are eliminated from leverage data, as are significant outliers. Please note that N for 2003-16 encompasses 14 years of activity.
Source: GF Data®
Outlook for Remainder of 2021
The outlook for LMM M&A remains very positive for the second half of 2021. As business reopened and economy recovered, business leaders and investors are more confident and open to develop M&A strategies to accelerate growth and gain scale. The abundance of capital and low interest rates encourage the spending of corporates and financial investors. As a result, highly sought-after deals for innovations and targets with outstanding performance are likely to continue to command a premium under this competitive market.
Anticipating an increase in capital gains tax in 2022, many sellers are racing to close deals in 2021. However, many other companies are waiting to launch an M&A process until Q3 2021 to ensure the disruptions of Q2 2020 are not included in the last 12 months financial metrics, in order to present more normalized performance.
Government spending and increasing consumer expenditure will continue to create optimal environment for business recovery across sectors. We expects a dynamic M&A situation to be continued throughout the second half of 2022.
Contact Us
Robert Murphy
Senior Managing Director
rmurphy@pkfod.com
561.337.5324 | 201.788.6844
M&A Deal Activity Continued its Momentum in Q1 2021
North American M&A deal activity remained robust in Q1 of 2021 following a record-breaking Q4 in 2020. However, year-over-year deal volume was 9.3% lower than Q1 2020.
Closed M&A Deals in North America (Q2 2019 – Q1 2020)
The vaccine rollout is helping to reduce uncertainty for buyers and sellers and CEO confidence levels, as measured by The Conference Board, are at all-time highs. This, along with low interest rates, active credit markets and significant levels of available capital looking for a home, is driving a heated M&A market. Dry powder with U.S. equity firms at the end of 2020 was $1.5 trillion, an increase for the sixth year in a row, and non-financial corporations held $1.7 trillion in cash at the end of 2020, a significant increase from 2019.
Transaction Multiples Remained Strong
Average transaction multiples in Q1 2021 with Total Enterprise Values (TEV) of $10 million to $250 million decreased slightly, with an average of 6.8x EBITDA. This departs from the widely held view that valuations have risen, not fallen, over the past nine months. It is clearly a robust seller’s market, especially for those companies that have performed well through COVID. The 6.8x average does not give the true picture, as strong performing companies are trading at multiples above pre-pandemic levels. The average is being brought down by: companies negatively impacted by COVID trading at lower multiples, higher percentage of add-ons which typically trade a bit below platform acquisitions, and an increased number of deals with earn-outs as the earn-out value is excluded from TEV in the following chart.
Total Enterprise Value (TEV)/EBITDA
Higher performers with above-average trailing twelve month (TTM) EBITDA margins and sales growth are rewarded with premium valuation multiples. In Q1 2021, the buyout targets with above average financial performance were valued at an average of 7.6x, which represents 34% premium, compared to a historic average of 14% while the rest of the buyout targets in Q1 were valued at an average of 5.7x. In this marketplace, there is a stark contrast between the targets that have strong TTM performance with clear industry sector visibility and companies with weak TTM performance and cloudy visibility.
Quality Premium – Buyouts Only
Debt Leverage Reverted to Pre-COVID Levels in Q1 2021
Debt utilization returned to pre-COVID levels in Q1 2021, reflecting a reversion to more normal capital structures as lending institutions regained confidence.
The average debt leverage in Q1 2020 of 4.0x EBITDA comprised 3.7x senior debt and 0.3x subordinated debt, compared with 3.1x and 0.6x in 2020, respectively. The increased share of add-ons attributes to the higher percentage of senior debt as most of the add-ons tend to complete these transactions with a debt structure comprised of all senior debt.
There has been an increase in the use of earn-outs to address financial performance concerns and lack of industry visibility for companies that have not returned to pre-COVID levels.
Total Debt/EBITDA – All Industries by Deal Size
Outlook for Remainder of 2021
Several tailwinds should continue to support robust activity for the remainder of 2021. Deal activity in Q2 and Q3 should be significantly above 2020 levels with strong valuation multiples.
- Business conditions in COVID-impacted sectors improving as vaccination increases.
- Improving economy and government stimulus.
- Low interest rates and supportive debt market for transactions.
- Renewed confidence among corporate buyers to deploy capital and seek growth through acquisitions.
- Record levels of capital with financial and strategic buyers seeking targets.
An infrastructure spending plan, if approved, should help to drive transaction activity and a capital gains tax rate increase for 2022, if approved, could create a frenzied M&A market to finish out the 2021 year.
Contact Us
Robert Murphy
Senior Managing Director
rmurphy@pkfod.com
561.337.5324 | 201.788.6844
M&A Deal Activity Surged in Second Half of 2020
After a precipitous decline in Q2 2020, mergers and acquisitions transactions in North America rose 84% from Q2 to Q4 2020 after experiencing a 38% decline in Q2 and a 22% decline in Q3. The sharp recovery saw the total number of deals in 2020 reach 8,413, only an 11.4% decline from 2019.
Q4 2020 closed as one of the strongest quarters for M&A over the past decade.
Closed M&A Deals in North America (2019-2020)
Source: Factset & PKFIB research. Private company targets only.
Lower middle market M&A activity in Q4 2020 mirrored the pattern of the broader market, showing strong resilience in spite of the challenging economic environment. Activity was particularly robust in several sectors:
• Technology – came out ahead and was the only sector to gain in transaction value over 2019.
• Healthcare – transactions involving both inpatient and outpatient care facilities increased sharply in Q4.
• Financial Services – M&A activity also accelerated in financial services, insurance and related industries.
Transaction Multiples Remained Strong in the Lower Middle Market
Transaction multiples in 2020 for deals with Transaction Enterprise Values (TEV) of $10 million to $250 million finished strong, with an average of 7.1x EBITDA equal to the 2019 average.
Total Enterprise Value (TEV)/EBITDA
Multiples improved in Q4 2020 after a .6x COVID-19 impact in Q3. The decrease of .8x EBITDA in the $100 million to $250 million TEV range can be partially attributed to a tightening of debt leverage in this category. Valuation multiples remained stable as buyer demand for quality deals outstripped supply. Companies that performed well through COVID were in high demand, and companies significantly impacted by COVID held off going to market.
Debt Leverage Decreases in 2020
Total debt leverage decreased on average .3x EBITDA in 2020 compared with 2019. The main reason for the decrease was COVID-19-related uncertainty about the economy and business performance. The average debt leverage in 2020 of 3.7x EBITDA comprised 3.1x senior debt and .6x subordinated debt, compared with 3.2x and .8x in 2019, respectively. The average total debt leverage in Q2 dropped to 3.3x but rebounded to 3.8x in Q4. According to a recent GF Data report, the average senior debt rate across all TEV categories was 5.2% in 2020 and 11.2% for subordinated debt.
Total Debt/EBITDA – All Industries by Deal Size
Favorable Deal Trends in 2021
Market conditions that fueled increased deal flow in Q4 2020 are expected to persist in 2021. These and other growth drivers include:
• Deals interrupted last year continue to re-emerge in 2021.
• Company financial performance has rebounded from the lows in Q2 and Q3 2020.
• Financial buyers and companies seeking growth through acquisitions have a record amount of cash that needs to be deployed.
• Opportunistic buyers are seeking out distressed companies.
• Significant private equity participation in industry consolidations.
• Low interest rates foreseen in 2021 will support a dynamic M&A market.
These salutary trends, coupled with intense buyer demand that continues to exceed the supply of attractive companies, reinforce our forecast for an active M&A market in 2021.
Contact Us
Robert Murphy
Senior Managing Director
rmurphy@pkfod.com
561.337.5324 | 201.788.6844