M&A in 2022: Is this the year to sell?

If you’re a business owner, you’ve probably had a rough couple of years – and the challenges aren’t over. While COVID-19 may be weakening its grip, talent shortages, supply chain issues, and inflation are still very much at play.

And yet, the economy is surging. Many of the business owners we talk to have all the work they can handle and strong balance sheets. So on the plus side, performance is good. On the negative, managing the business is really challenging.

If you’re analyzing the pros and cons and wondering if 2022 is the year to sell, here are some things you should know:

Buyers outnumber sellers

The buyer pool is as strong as it’s ever been, and there are significantly more buyers than sellers. Private equity has been driving demand and will continue to do so for the foreseeable future. This group of buyers is exceedingly well capitalized and needs to put their investors’ dollars to work.

Meanwhile, we expect to see corporate buyers ramping up their acquisitions. After a couple of years sitting back and waiting things out, these buyers are feeling a new sense of urgency. With the tight talent market limiting organic growth, companies will be looking to acquisition as a way to expand and evolve.

In terms of making an offer, strategic buyers could offer higher values because of the synergies that can be gained from a merger. And yet, private equity is up against deadlines to place their money in new investments. Pit these active buyer pools against each other and the battle should be pretty good.

Values are at an all-time high

Sellers are realizing record valuations right now. According to GF Data, a company that collects data on privately held M&A transactions, multiples for Q3 2021 hit the highest level they’ve seen in their 16-year history.

Lending is strong

Banks are looking to put their money to work in the same way buyers are. What we’re hearing from lenders is that their traditional clients are flush with cash. So instead of extending lines of credit to their established customer base, they’re out there looking for new loans to make.

Money is cheap. So even though valuations are high, buyers can still meet those prices with a smaller equity stake. According to GF Data, buyers’ total debt as a multiple of EBITDA “surged” by half a percentage point in Q3 2021 – a significant increase by debt standards.

Tax increases are still a danger

We didn’t see an increase in capital gains in 2021, but there’s a sense that it’s still coming. If the Democrats win the mid-term elections, some analysts predict we’ll see an increase in 2023.

The threat of tax increases sent sellers to market in 2021, hoping to get out in time. Now, we’ve basically reset the clock for another year. Business owners who sell today face a 20% tax burden, but if predictions come to pass, we could see capital gains rates increase by an additional 5% or more.

Business inventory will grow

With the uncertainties of the last two years, many sellers have been waiting on the sidelines. That exacerbated supply and demand issues and heightened competition for quality businesses.

But now the economy is going strong, and the market is gaining a new sense of equilibrium as we all learn to live with the lingering specter of COVID-19. As confidence increases, more business owners will enter the market. If you were planning to sell soon, it might be a good idea to act before supply increases.

Deal support teams are stretched

Deal teams are always running full bore in Q4. Between due diligence, financial reports, environmental inspections, contract negotiations, lending, etc., it can take a lot of third-party service providers to move a transition through to closing.

As one buyer’s banker told us, “We’re committed to getting this deal done. But this transaction is twelfth in line.” (And it isn’t a very big bank!) Sellers that don’t move fast enough could run the risk of missing their ‘close-by-year-end’ goals.

Selling your business is likely the largest financial transaction you’ll make in your life, and there are a lot of variables to consider. It’s a good idea to keep tabs on your business value as the market changes. Talk to advisors who can evaluate your unique business and circumstances. Find out what the numbers look like for a sale in 2022. You may have some big decisions ahead.

 

By Scott Bushkie