As we have examined in recent Insights, 2023 is projected to be the year of the middle market deal transaction. This was recently confirmed by WTW, a firm that provides data-driven, insight-led solutions in the areas of people, risk and capital. In partnership with the M&A Research Centre at Bayes Business School, WTW releases quarterly M&A updates and forecasts. Their latest is:
Here are some of their key insights from recent research:
“While geopolitical tensions, inflation and rising interest rates had an inevitable impact last year on deal activity and performance, the extraordinary pace set in 2021 was also unsustainable,” said Duncan Smithson, senior director, M&A Consulting, WTW. “Rather than being interpreted as a downward trend, current M&A volumes reflect a return to healthy pre-pandemic levels”.
“Macroeconomic uncertainty will persist in 2023, yet deals will still get done. Despite the bar being raised on difficulty, the positive M&A performance sustained over the past two quarters clearly indicates the ability of strategic buyers to succeed in challenging environments. By looking at target companies with an even finer lens, investing more time and resources to ensure quality due diligence, dealmakers will be well placed to generate value and drive longer-term growth from deals.”
I have highlighted a segment in the paragraph above because it is critical to consider. As we have seen during times of economic uncertainty in the past, deals still close, they just take longer because buyers enhance their use of all facets of due diligence in order to ensure an adequate ROI on each acquisition.
Due diligence tends to be the part of the M&A process where if a deal is going to fall apart, it will. Here are some thoughts on due diligence from a few of our clients:
The bottom-line for 2023: Be prepared to answer up to 100-200 questions (and sometimes even more) in a typical due diligence questionnaire. These inquiries will cover all facets of your operation, not just your financials. A buyer will delve deeply into your operations, HR procedures, hiring practices, documentation from every department, client relations, just to name a few. We actually published an Insight piece on what to expect in a typical due diligence process:
Getting back to WTW’s latest quarterly overview, one trend that they identified for 2023 really stood out:
Return of the “small purchase effect”
Buyers will increasingly focus on smaller deals as recessionary fears trigger a “small purchase effect”: when economic downturns lead to a rise in spending on smaller, more affordable — rather than big ticket, more expensive — goods. For the first time in over three years, no mega deals (valued over $10 billion) were closed during the third quarter of 2022, and large deals (valued over $1 billion) were significantly down compared with the same period in 2021 (49 versus 67).
As we have seen time and time again, when uncertainty and unknowns are on the horizon, professional buyers move down stream to safer havens, typically lower middle market deals that are valued below $100 million. These often provide the safest, longer term ROI than “hoping” to land a billion dollar deal that if it goes south, can bring an entire organization down with it.
For example, there are now hundreds of private equity firms that specialize in acquiring companies in the lower middle market. Thirty years ago this number was decidedly smaller.
All of this is great news for owners of privately held companies in 2023. Despite recessionary fears, inflation, and geopolitical uncertainty the fundamentals of strong M&A cycles never change. Currently there is still more buyer investment capital than there are quality deals, making it a great time to consider a full or partial sale.
Generational has a track record of success in all economic climates and we have helped our clients weather many business storms in the past. We stand ready to do the same for you. Contact us to find out how our services can benefit you and your business.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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