M&A Outlook 2023
2022 has been a reasonable year for M&A activity, despite a turbulent period.
What can we expect going forward? Is now a good time to sell?
To answer these questions, we draw on our own experience, and that of the market.
From our viewpoint, our project platform and level of enquiries remains strong. In fact, we are seeing a number of good companies with owners nearing retirement coming onto the market. Most are in no rush – wanting to invest the time on ‘house-keeping’ and getting ready for an orderly company sale. The uptick that we see is perhaps a ‘bubble’ following several years of challenging business conditions – Brexit and the pandemic specifically. And, perhaps, due to our growing reputation as an M&A boutique. Hard to say exactly, but for us, business is strong, and the outlook remains positive.
In terms of the wider market, Firmex, a provider of virtual data rooms, regularly solicits feedback from a wide number of M&A advisory firms on the mid-market outlook. In its ‘Deal Bulletin Q4-2022,’ M&A advisors reported that deal volume has remained constant, with 49% of respondents forecasting deal volume in the coming three months to increase.
Over half of the M&A firms questioned observed a growing gap between prices asked by seller and prices buyers are willing to pay. The gap in value expectation is being increasingly filled by ‘earn-outs’ – with four in ten M&A advisors saying that earn-outs are becoming more common. That certainly resonates with our own experience here, where we see around half of deals falling into this category.
Most M&A firms see valuations remaining ‘average’ (as opposed to ‘high’ or ‘low’) and see the valuation outlook remaining static.
This is good news for business owners – it may well not be a bull market, but it is neither a bear-market.
Firmex goes on to state that the top reason that companies put themselves up for sale is ‘fear of difficult future conditions.’ That does not resonate fully with our experience, with most of our clients bullish about future trading, despite inflation and interest rates.
Overall, M&A firms in the Firmex study concluded that future deal-flow will increase by around 6%, with the outlook for 2023 remaining average – i.e., ‘business as usual.’
Taking this wider market view into account, the collective view seems to suggest that ‘deal-making’ will continue at historic norms. And that chimes with our view that now is as reasonable a time as any to consider an exit.
But what does the data tell us?
According to Pitchbook, a data and research company, global M&A continued to decline for the third consecutive quarter, falling 30% in deal value from a peak in Q4-21. But Pitchbook does go on to state that 2021 was quite an exceptional year for M&A when looking back to the average run-rate 2017 – 2020. In fact, the number of deals is on track this year to surpass historical run-rate pre-pandemic.
Various headwinds are in-play right now – the US Federal Reserve has elevated interest rates, as has the European Central Bank and the Bank of England. Aiming to collectively tackle inflation, the side-effect has been downward stock valuations as future earnings of companies are discounted. Both the euro and the pound have been driven to record lows – but of course, one person’s pain is another’s opportunity – and hence European and UK assets become attractive to US investors!
As Pitchbook states, despite fears of recession and economic headwinds, the fundamentals remain in-place for a healthy M&A market. Private equity, a key upstream driver, is estimated to sit on $1.2 trillion of liquidity – or ‘dry powder.’ Larger companies can sit on large cash reserves, and if publicly owned, there is always shareholder interest in maximising returns. For many of these, acquisitions will continue to drive strategic interest, especially where smaller, niche companies can be acquired.
For smaller companies with revenues less than, say, £50M – £100M, the market for strategic acquirers or indeed a financial sponsor remains active and strong.
One final observation is the increasingly demanding ‘due diligence’ environment. Even with smaller deals in the £3M – £10M range, we are seeing buyers engaging very large advisory and legal teams to conduct target due diligence. This can involve teams of up to 20 – 40 advisors (legal, tax and financial) investigating a target business.
Whilst clearly expensive for a buyer and disproportionate to the deal size, this appears to be the ‘new norm’ for some buyers who wish to scrutinise a target at a detailed and granular level.
Most sellers are completely unaware of the level of scrutiny their business will come under. By the time due diligence is underway, a seller will be exposed to increasing costs. That, and the time invested, means that an aborted sale is very expensive.
It remains critical to ensure the business is properly prepared for an exit. This requires a business owner to engage, some way upstream of the planned exit, a specialist guide to identify risk areas within the business, and to remedy. This will usually involve some form of pre-exit financial due diligence and legal review. It does cost money – but is considerably less expensive than an aborted sale process due to ‘skeletons in the closet.’
If you are considering an exit 2 – 3 years from now, please contact us, in complete confidence, to discuss how we can help.
Tags: advisory, company sale, due diligence, earn-out, good time to sell, M&A, Outlook 2023, virtual data rooms