Picky Buyers and Reluctant Sellers Slowed M&A in 2023, but the Improving Economy Bodes Well for 2024

As we enter the first months of 2024, M&A activity is in flux. On one hand, the number of businesses acquired in 2023 dropped 22% compared to 2022's blockbuster level of activity.  Facing economic uncertainty, higher interest rates, and ongoing inflation, buyers tightened their acquisition criteria last year, and focused only on purchasing businesses that were a perfect fit for their strategies and goals. As we enter 2024, the overall economic news is looking significantly better, and bodes well for a fairly fast rebound of M&A this year.

Current State of M&A 

Valuations

‍GF Data reports that deals completed in the first nine months of 2023 averaged 7.3x trailing-twelve-month adjusted EBITDA, down from 7.4x TTM in 2022* but up significantly from the valuations in the first and second quarter of 2023. However, average valuations reflect multiple industries, varying company sizes, and varying business performance. Business services and healthcare companies have seen increases in valuations, while valuations for manufacturing and distribution businesses have dropped. Also bear in mind that as more distressed opportunities come to market, average valuations drop, while businesses that perform well receive above-average valuations. In 2024, we expect to see valuations begin to creep back up, especially for high-performing companies.

Risk Management = Longer Processes

In 2022, buyers rushed to close deals quickly. By 2023, buyers were seeking to minimize risk, and they and their financing partners wanted to understand everything about the business they are buying. As a result, due diligence is taking longer and is more rigorous. Likely no changes on this front in 2024.

 Ongoing focus on smaller deals

Each buyer's definition of “small” varies, but compared to a larger transaction, a small deal is easier to close and integrate, has lower risk, costs less, and generally has higher upside potential. Financing is easier, or perhaps the company can be purchased with cash. As we’ve mentioned in other articles, private equity buyers have been moving to smaller deal sizes for platform investments and are also looking for more smaller add-on opportunities. In Q2 2023, 50% of private equity deals were add-ons, compared to 23% in 2022.

Dry powder is accumulating (again)

Strategic buyers have plenty of cash on hand (close to $2 trillion, according to Baird’s 2023 M&A Outlook). Many private equity firms are also sitting on significant amounts of capital that must be put to work, or if not, returned to investors. More financial dry powder = more acquisitions.

What’s the outlook on M&A activity?

While there are many ongoing economic concerns, U.S. interest rates have now most likely hit an apex, inflation has dropped, employment is high, and in early Spring 2024, the S&P 500 is back up to all-time highs. An improving economy will drive increased interest in business acquisitions. Everyone has their opinion on when that will happen, but we are in the nascent stages of a rebound -- and businesses that are ready to sell at the start of the return to strong activity will reap the highest rewards.

During COVID, M&A ground to a halt quickly. But after sitting around for a few quarters, buyers jumped back into the market astoundingly quickly once a few big deals were announced, driving fast and furious deal making. Once investors feel more confident in the overall economic environment, we will likely see a fairly fast return to deal making, to catch up on lost time. ‍

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What should entrepreneurs do? 

Plan Your Timing

Figuring out when to sell your business is a complex decision, that varies based on current and future business performance, and your personal goals. It's important to understand the dynamics that can impact timing to sell your business. For some entrepreneurs, this might be a good time to sell, while for others it may be more beneficial to wait. We are having many conversations with entrepreneurs to discuss specific drivers that impact their business and their timing to sell. If a confidential call or meeting would be helpful to you, please contact us.  

‍Prepare, Prepare, Prepare

Regardless of timing, every successful exit requires careful and strategic preparation. Even businesses that are performing well need to be prepared to present themselves well to the right buyers and to respond to due diligence scrutiny.

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Anything you do to prepare your business for sale results in a better, stronger, more profitable business --for you or for a buyer.

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The steps to best prepare for a sale will vary business by business. But these two factors are important for almost all businesses:

Plan for Growth

‍Revenue and income growth —both historical and projected — is generally the most significant driver of business valuation in any economic environment. Buyers want businesses that will continue to grow. As you think about preparing for a sale, you should be prepared to demonstrate and communicate how your business has and will continue to grow.  

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Build Buyer Relationships Now

‍It's also very helpful to understand and know the buyers who might find your business attractive. If an exit is in your future, and even if you're not ready to sell today, this is a good time to start building relationships with prospective private equity firms and strategic buyers, either directly or with the help of an advisor. It can be harder to get buyers’ attention when they are busy heads-down closing deals. Building relationships now will help ensure you are the recipient of in-bound calls expressing interest once the market starts to rebound.  

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How great would it be to have strong relationships with five or six buyers lined up whenever you choose to sell your business? Your work now can help create a positive outcome and the ability to sell your business on your terms.  

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The best time and process to sell will vary business by business, and entrepreneur by entrepreneur. We always welcome your feedback and the opportunity to discuss how we can help you plan for and execute a sale of your business. Please set up a call here, or reach out via email.

*GF Data reports on acquisitions by private equity firms with $10M plus in deal valuation.

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