O'Keeffe & O'Malley Managing Partner, JB Mason, recently sat down with Ingram's Magazine to discuss our view on the current M&A landscape. JB discusses deal flow trends, interest rates, valuations, and the importance of exit planning. Please see below for an abbreviated version of the Q&A. To read the full version refer to the July 2023 version of Ingram's Magazine or read online here.
Examining the M&A Landscape
Q: Could you set the stage for us? What's the state of the M&A landscape in 2023?
A: Our focus lies at the intersection of Main Street and the Lower Middle Market—businesses with valuations ranging from $1 to $50 million—a segment that encompasses the majority of US businesses. While the headline-grabbing mega-deals have slowed, the Main Street and Lower Middle Market, buoyed by factors like Acquisition Entrepreneurship, is showing signs of renewed activity. Industry reports indicate a pickup in deal momentum. The pace of transactions in the small to midsize business segment has remained steady. While growth may have plateaued, deal velocity remains comparable to previous years. This resilience can be attributed, in part, to the rise of Acquisition Entrepreneurship, heralding a transfer of successful small businesses to the next generation. This transition is poised to invigorate local economies and foster the growth of new business leaders.
Q: How do interest rates influence deal discussions and outcomes?
A: Investors have to be a bit more disciplined and put more scrutiny on their deals, which means seller’s may need to rein in their valuation expectations. In a low interest rate environment, a buyer may be willing to overpay a bit because they can get competitive financing. However, at current rates, buyers have a much lower willingness or ability to overpay. It should be noted that this is a bit of a simplistic way to look at things as price is only one piece of the deal-making puzzle. If either party is sacrificing on price then usually the discrepancy is made up in the terms.
Q: What types of businesses are going to have the most success in the current market?
A: Businesses that are going to perform the best in any M&A environment are the ones where the seller has taken the time to plan for an exit. In an environment where there is extra scrutiny on a deal or a desire to take less risk, that will be exacerbated. That’s why it’s important to have a strong management bench, systems and processes, modern technology, and organized and consistent financials. Seller’s that have focused on building a transferrable business will have the most success when going to market.
Q: Do planning efforts become moot when economic conditions are rapidly changing?
A: In a rapidly changing economic environment I would argue that planning for your exit is even more important. Timing is a game for the public markets—selling stock, going public, or mega mergers. Selling a small to medium sized business isn’t as much about timing as it is planning. The best thing an owner can do to set themselves up for a successful exit is to build a transferrable business and to start planning their exit.
Q: What would you say to owners who feel that they may have waited too long to sell?
A: You always want to avoid a situation where an owner is forced to sell. That’s agnostic of the market. You don’t want to be in a situation where the owner wakes up and maybe has a terrible medical condition and has to sell or has been dealing with burnout for years and just wants to go to market. Even in that situation, a good adviser will do everything to maximize the value of the deal. And a good business will sell at a solid multiple.
It’s important to understand that it will take nine to 15 months to execute a sale, from the initial consultation to closing the deal. Considering an owner is often asked to stay on for a transition period, that could push to 24 months. Sellers could start the process in a bear market and by the time they’ve exited it could be a bull market. Timing is a game for the public markets. Selling small to mid-size companies is not about timing, but about planning. That’s the best thing an owner can do to set up a successful exit: Start planning.
If you're ready to start planning for your exit or would just like to learn more about the M&A process then please reach out to our team for a confidential discussion. JB can be reached at (913) 300-1672 or via email at firstname.lastname@example.org