Middle Market M&A update

Despite the economic turbulence that has prevailed for much of 2023, the M&A market has fared better than had been expected.

However, there is a qualification needed here. There has been a marked drop in the number of IPO’s and ‘mega deals’ and, sadly, an increase in the number of business failures – of both large and small companies.

The middle and lower-middle market has however been much more stable. Businesses in this sector of the market usually have less debt and offer greater potential to scale. This makes them an attractive proposition for trade and financial buyers alike as they pursue their strategic growth agendas.

After the massive post-Pandemic boost to dealmaking in 2021, the market began to settle in 2022 before being subdued by inflation, war, and general uncertainty – all factors that quickly impact deal making.

It’s important to remember however that these are global factors, and we see no decline in interest from international buyers. The UK has always been a key target country for global acquirers. This year it is the USA/Canada that has led the field moving Europe to third place.

M&A is a driver of economic activity and there is still an enormous amount of cash around looking for a home – despite rising interest rates. An article by PWC noted recently “Whether a company needs to transform its capabilities, supply chains or its ‘go to market’ approach, the market is impatient and one of the fastest ways to accelerate transformation is through M&A.”

The M&A market is also cyclical and reacts to uncertainty, putting pressure on deal volumes and valuations. This means that advisers may be more cautious in their valuations, and business owners should be prepared for a longer sale process as the due diligence part of a transaction is taking longer.

Opportunities for buyers and sellers

M&A provides companies with opportunities to address strategic needs that could be market expansion or capability gaps, both human and technical. Smaller to midsize deals are always the bulk of transactions; they carry relatively less risk, generally attract less regulatory scrutiny, and provide greater opportunities for growth.

That doesn’t mean that business owners should put a business sale on the back burner. Rather, they should use this time to get the business in the best shape to sell.

For example, focus on creating transferrable value. Maximise earnings, minimise risks and secure your most valuable assets, such as contracts, intellectual property, or skilled employees.

The latest EY CEO Outlook Pulse survey noted that 98% of CEOs anticipate actively engaging in strategic transactions within 12 months, an increase of 9% over the 89% reported in January 2023. Moreover, with interest remaining high, both trade and financial buyers are seeing the attraction of smaller deals as a means to diversification and growth.

This is a time for both buyers and sellers to consider the opportunities that 2024 will bring.

If you would like advice on whether your business is ready for sale, please call us on 0118 959 8224 or contact us at info@evolutioncbs.co.uk.

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