M&A Activity Stronger in 2024, after a Slower 2023

As we enter the last quarter of 2024, momentum in M&A activity is building and deal volume and values are now significantly stronger than last year, when the total number of M&A deals dropped by 20% compared to 2022's blockbuster level of activity.  

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Fears of an economic slowdown have dissipated, and the economic environment is looking significantly better than last year. Interest rates have begun to decline, and strategic and private equity buyers in the lower middle market are aggressively looking for opportunities. However, would-be-buyers are finding a limited supply of strong businesses that are actively being marketed for sale, as many potential sellers continue to grapple with slower consumer and B2B demand.   

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Current State of M&A 

Valuations

‍GF Data reports that deals completed in 4Q 2023 averaged 7.5x trailing-twelve-month adjusted EBITDA, up from valuations of 7.3x in 3Q 2023 and 6.7x in 2Q 2023.  In 2024, valuations are climbing modestly, driven more by individual company performance against peer companies than by industry wide increases.

‍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 and lower interest rates will drive ongoing growth in acquisitions in 2025.

What’s the Outlook on M&A Activity?

While there are many ongoing economic concerns, US interest rates have begin to decline, inflation has dropped, employment is high, and the S&P 500 is back up to all-time highs. An improving economy is driving increased interest in business acquisitions. While everyone has their opinion on when we'll return to the very strong market of 2022, we are in the early stages of a rebound -- and businesses that are ready to sell at the start of this 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. Buyers are ready to get back into the market, but there are very few good opportunities to choose from. Once there are more strong businesses on the market, 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. 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 M&A market has picked up during 2024, and we expect the level of interest from buyers to continue to build. But as always, the best time to sell will vary business by business, and entrepreneur by entrepreneur.

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We're happy to discuss what we're seeing in the M&A market now, and 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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