If you are considering selling your business, now is the perfect time to start preparing. The Mergers and Acquisitions market is experiencing tremendous activity given the rare confluence of five unique factors. There may not be a better time to sell over the next decade.
The current sellers’ market for Mergers and Acquisitions is being powered by the following five factors:
1. Pent-Up Demand
Many deals were put on hold during recent periods of economic uncertainty.
As market conditions have stabilized, many previously stalled M&A processes are becoming active again. Private Equity and Strategic Buyers that were unable to fulfill their acquisition mandates and deploy capital are now seeking to accelerate their acquisition efforts.
2. Buyers Are Flush With Capital
Financial buyers (Private Equity firms and family offices) have an abundance of capital ready to deploy. In fact, private equity firms have continued to raise record amounts of capital, with well over a trillion dollars in committed dry powder seeking businesses to invest in.
With intense pressure to put this capital to work, the need for buyers to deploy it keeps growing. Corporate buyers also have cash earmarked specifically for growth through acquisitions.
3. Likely Tax Increases
While we don’t yet exactly know how future tax legislation will impact tax rates, changes to corporate, individual, and capital gains taxes are always possible — and rarely in the seller’s favor.
Business owners considering selling in the next few years are asking themselves: “Why kill myself for a few more years to sell later, only to net the same amount, even if the company grows between now and then?” This is the right question to ask and one that should be factored into your exit planning strategy.
4. Healthy Financing Markets
Interest rates have stabilized after the post-pandemic spike, and lenders remain eager to finance quality acquisitions.
Acquisitions are analogous to the housing market where interest rates are inversely correlated to purchase price—the lower the interest rate, the higher-priced house you can buy. Similarly, the lower the interest expense, the more you can borrow from a bank (assuming, of course, that your business has sufficient cash flow to support debt-coverage ratios).
The bottom line is that today’s financing conditions still enable buyers to pay strong prices for quality businesses while maintaining ample cash flow to service the debt.
5. Increased Demand for Resilient Businesses
Periods of disruption have a way of exposing the strengths and weaknesses of various businesses.
Naturally, periods of rapid change create winners and losers. Businesses that have proven resilient — such as digitally native brands and essential home services (to name a few) — are especially in demand. Buyers are willing to compete and pay a premium for these businesses.
Aside from these five factors, many business owners are re-evaluating their life priorities.
The cumulative effect of economic uncertainty, increased regulation, and emerging cyber threats has caused business owners, especially ones approaching retirement age, to realize that having time to enjoy a higher quality of life may be a higher priority than continuing to run their businesses indefinitely.
For all the reasons mentioned above, we expect the M&A market to be especially hot in the near term (over the next 12-18 months). If you are a business owner contemplating selling, it makes more sense than ever to take some risk off the table and gain liquidity.
If you are interested in learning more about how you can take advantage of this unique seller’s market before any adverse tax changes take effect, we’d love to have a confidential conversation with you.
Kevin Berson is an M&A Advisor with Kinected Advisors, based in Los Angeles. He specializes in helping business owners maximize outcomes in selling their businesses. He is also the founder of Kinected, a Management Consulting firm that advises companies with strategic planning, exit planning and merger and acquisition diligence. Kevin can be reached at kevin@kinected.com.
Kevin leads sell-side M&A engagements for businesses with $10M–$100M in revenue. He has advised on ~$1B in transactions and can be reached at kevin@kinected.com.