The CMG team just returned from the annual DealMax conference (formerly Intergrowth) hosted by the Association for Corporate Growth (ACG) in Las Vegas. This annual conference (which was chaired by CMG’s Ramsey Goodrich a few years ago) brought together a record breaking crowd of more than 3,000 M&A transaction professionals including private equity firms, family offices, strategic acquirers, financing sources, investment banks and other transaction service firms.
Several key themes emerged from the conference. We are happy to share the collective perspective on the current M&A landscape.
Key M&A Themes from ACG DealMax
The past two quarters have seen a dramatic slowdown in M&A volume, especially when compared to the blistering activity in 2021 and early 2022. This stems from persistent headwinds, including rising interest rates, bank failures, and uncertain economic, and persistent geopolitical concerns.
The transactions that have closed in 2023 have been primarily driven by:
- Deals that planned to close in 2022 but were delayed until 2023
- Private equity portfolio exits primarily driven by fundraising priorities
- Continued add-on acquisitions for existing private equity platforms
Notably, in 1Q 2023 more than 65% of transactions under $100 million involved either founder-led family-held businesses (source: Pitchbook). While transaction volume is down, the drop has been driven by private equity investors concerned about the rising cost of capital or larger transactions where the financing markets are more volatile. The core middle market M&A is less volatile and there is still plenty of capital looking for the right opportunities.
Supply and Demand Imbalance for "A" Quality Companies
Valuations, in general, have pulled back from the peak levels observed in the ‘frothy’ markets of 2021 and early 2022. As one equity firm stated emphatically that sellers today “missed the peak, but valuations for good companies remains really strong.” With fewer companies in the market recently, “there is definitely a supply and demand imbalance for "A" quality companies and we continue to pay up for great companies.”
- “A” companies = recurring revenue, operate in non-cyclical growth markets, have strong management teams, rely on data-driven strategies, enjoy good visibility, and operate in fragmented markets. The current premiums for “A” companies continues to be robust, especially for ‘tuck in’ or ‘bolt on’ acquisitions.
- “B” companies = good companies that may have a couple of areas for improvement, such as margin compression, supply chain instability or lack of visibility. Valuations for “B” firms have reverted back to their long term averages, down from the incredible highs over the last couple of years, but the market remains solid.
- “C” companies are encouraged to hold for a while and focus on addressing key areas of risk (customer concentration, transitioning management, operational improvements, margin concerns). Once there is more confidence in the future economic environment, and the cost of capital is more predictable, this market will come back.
With that said, there was abundant enthusiasm for a rebound in the M&A markets later this year and early 2024. PE groups are preparing their portfolio companies, while also keeping their ‘powder dry’ for an active market. Similarly, strategic buyers will be more active once there is more stability and confidence in the economic outlook.
Our Recommendations for Family-Owned Companies
Unless your company falls into the "A" or "B+" quality, there is no need to hastily rush to market. We recommend using this time to plan and prepare for a future transaction by assembling your Core Four M&A team: investment banker, legal counsel, quality of earnings and wealth management team. You can never start too early, so take advantage of this temporary lull in order to maximize the future value of your business.
Contact Us Any Time
If you have any questions or need guidance selling your business, navigating the ever-evolving M&A market or steps to prepare for a transaction, please do not hesitate to reach out to us.