In this video, I went into detail on some of the findings in the Alliance of M&A Advisors (“AM&AA”) 2021 Q2 M&A Report. This article will summarize some of those key findings. Just as a reminder, the AM&AA is an association of M&A advisors based out of the US that produces a quarterly report on the state of the market called M&A Access. Respondents to the survey are mostly M&A Advisors, CPAs, lawyers, exit planners, and valuation advisors. The most recent report was issued in July 2021 and it summarized and compared both deal activity and sentiment at the end of June 2021 in comparison with December 2020. Obviously, last year had moments of trepidations in the market, especially in 2020 Q2, but the second half of 2020 roared back strongly.
Deal Activity and Deal Value is Higher
So far, 2021 has shaped up to be an active year in the M&A markets. In fact, at the end of the first half of 2021, the deal value exchanged was higher than in all of 2020, thus indicating that the current market is alive and well. Deal activity was noticeably higher in two areas: smaller companies with EBITDA of less than (US)$500,000 (which would mostly be comprised of main street and lower Middle Market businesses) and companies with EBITDA of (US)$4 million or greater at the higher end. This is somewhat speculative on my part, but I think this is consistent with many smaller businesses not selling last year and now those deals have been moved forward into 2021. Meanwhile, for larger businesses with consistent and predictable cash flows, there is a large number of corporate and private equity buyers flush with cash seeking out returns on investment. Deal value at the higher end of the Middle Market was substantially higher, increasing by 68% from all of last year.
Multiple Expansion at Higher End
In general, there is a positive correlation between the size of the business (in terms of EBITDA) and the multiple a company can fetch, although this relationship works more as a step-function rather than being purely linear. In 2021, companies with EBITDA greater than $4 million fetched multiples in the range of 8x to 10x compared to 7x in 2020. Part of this may be due to the composition of deals at the higher end but may also be indicative the greater demand by investors for cash flow rich companies. Meanwhile, multiples at the lower end were mostly consistent with 2020.
Buyer & Seller Motivation is Driving the Market
Both buyer and seller motivations can drive a market. When owners are motivated to sell, this will result in more inventory on the market, and everything else being equal, may lower prices. However, owner motivations may not always lower prices if they have quality companies to sell in attractive sectors with few time constraints. Conversely, buyers may have different motivations depending upon the type of buyer they are. For example, corporate buyers may be strategically seeking out acquisitions to expand geographically and through additional market share. Meanwhile, private equity is seeking out returns but even here, depending on the sector, add-ons may very well be strategic in nature and subject to synergistic premiums. According to the survey, seller motivation is currently 86% either somewhat positive or strongly positive while buyer motivation is 76% somewhat positive or strongly positive. When both buyer and seller motivations are positive, this can result in a strong market with high deal flow.
COVID Concerns Continue
While the overall sentiment is mostly positive, one continuing area of concern is the impact of the pandemic on both companies and the market, although sentiment here was still somewhat mixed rather than overtly negative. This concern is understandable in that many businesses have been negatively impacted by the pandemic (even if only temporarily). However, as the last 12 months have shown, businesses with strong and predictable cash flows will transact for healthy multiples.
Deal Activity Is Less Concentrated
At the end of 2020, we noted that deal activity was heavily concentrated in a few industries (health & medical, manufacturing, and B2B services). So far, in 2021 the activity in the capital markets has been broader with more sectors participating. For example, construction-related businesses have seen an uptick in market activity this year. This is good news for most Middle Market businesses as this indicates the market is less bifurcated than we saw at the end of 2020 where only a few sectors were strong.
The Changing Winds of Private Equity
Private equity is renowned for its ever-changing shifts in focus from year-to-year. For example, last year, private equity was all about “bolt on” acquisitions while this year, the focus is clearly on platform acquisitions. While this makes trying to time the whims of private equity to be a difficult if not impossible task, the good news is if you wait long enough, private equity may be interested in whatever sector you fall within. For comparison, over 50% of deals in 2020 were add-on deals compared to only 24% in 2021.
The sentiment on a forward-looking basis is quite positive. About three-quarters of the survey’s respondents believe the deal flow for the remainder of the year will be the same or better than currently. In addition, positive buyer and seller motivations are expected to continue to drive the markets forward. Deal prices are expected to move forward slightly over the course of the year, with an aggregate increase of 4% anticipated.
What Does All This Mean for the Middle Market Owner?
For Middle Market owners, the latest M&A Access report is good news. If you are an owner of a business that is almost sell-ready, the market over the next year or so is expected to be positive for cash rich businesses. This is especially true if you have EBITDA of (US)$4 million or greater. If you are an owner who has not planned out your exit recently, this is an opportunity to start your transition planning process through assessing your personal, business, and financial readiness to exit.
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