M&A outlook for 2022: Fast and furious

Business valuations have hit record highs and deal teams are bracing for what is expected to be the largest M&A run most advisors have seen in their careers. Business confidence, buyer capital, seller burnout – it’s all combining to create a perfect storm of deal activity. Here’s what’s driving business owners to market right now:

Peak Valuations:

Businesses may be worth more than ever. GF Data, a company that tracks privately held M&A transactions, reported that Q3 multiples hit the highest level they’d seen in their 16-year history. What’s raising valuations? Check out the next two items on this list.

Buyer Bemand:

Competition is fierce with more buyers than sellers on the market. Private equity continues their never-ending hunt for quality businesses. They’re still raising record funds, and they need to put that money to work within set deadlines.

And yet, we expect to see a resurgence among corporate buyers in the year ahead. After two years of holding back during the pandemic, there’s pent up demand to make something happen. Their balance sheets are very healthy, but they can’t get the talent they need to grow organically. Acquisitions will be at the top of the strategy list.

Lending Climate:

Lenders are aggressive as they, too, have money they need to utilize. Their regular commercial accounts are flush with cash, and that means bankers are searching high and low for new loan opportunities. Money is still cheap, and that’s helping boost valuations.

Seller burnout: Talent shortages, supply chain issues, inflation. Running a business will remain particularly challenging in 2022, and many owners are ready to call it quits.

Employees are demanding higher wages and, for the time being, those wages are supportable. But how long will supply imbalances justify the increase? It can be nearly impossible to take away wage hikes once you’ve offered them.

Inflationary costs are another complication. You quote a customer today, but one week later the price of material jumps. Do you raise the price or eat the margin and do the job for free? New day, new headaches.

Tax increases:

While we did not see capital gains taxes increase in 2021, some analysts believe they’re still on the table. Depending on the outcome of the mid-term elections, business owners could see a capital gains increase in 2023.

Under Biden’s original plan, capital gains would have nearly doubled. Will they, or won’t they? It’s impossible to say, but it’s enough of a concern for some sellers to accelerate their exit plans.

It’s going to be a busy year. As confidence increases, more sellers will enter the market. If you ever wanted to get ahead of a trend, this might be one to beat.

 

By Scott Bushkie