What do we know about Middle Market M&A in 2023? 

First and foremost, economic uncertainty led by inflation and rising interest rates, provided headwinds for the financial markets in 2022. Uncertainty and its impacts will likely continue in 2023.

Specific M&A Market Impacts In 2023

Amidst market volatility and economic uncertainty, middle market M&A remains open for business, albeit at a slower pace than the recent record setting years, with increased buyer scrutiny and rigorous diligence on deals. Everyone is facing a reality of elevated interest rates, consumer spending softness translating to lower earnings, and a resetting of expectations on how deals can be financed. 

Market activity, in terms of number of transactions, through the 3rd quarter of 2022 reflected the impact of those issues. Pitchbook, a database of private equity transactions, reports 537 transactions (US transactions $5-$50M in enterprise value) closed in 2022 versus 818 for the same nine-month period in 2021, a decline of 34%. It should be noted that comparison just to 2021 levels is somewhat misleading given 2021 was all-time high.  When 2022 activity is compared to Pitchbook’s average number of transactions completed in the same period for years 2015 through 2020, the result is 2022 transaction activity levels are very similar. 

What will 2023 look like for numbers of transactions?  All indications now are that the numbers will stay muted for the next few quarters. 

2 Important Trends For 2023 Markets

Two bright spots of note, and good news for our clients (sellers), are the deal multiples and the level of investment capital aimed at the lower middle market. 

Regarding multiples, according to both Pitchbook and GF Data, also a database of private equity transactions, for the above deal size reference group of companies, for both years, the average company sale multiple is approximately 7.5%, both all- time highs.  This can likely be attributed to lots of buyers with considerable capital chasing fewer deals.

However, we do expect multiples to cool somewhat from these all-time highs given the current economic trends, particularly interest rates impacting buyers’ cost of capital. With GF Data reporting “…initial pricing on senior debt averaged 6.5% in the 3rd quarter, up nearly 200 basis points from the first half of the year. Mezzanine pricing has so far resisted a similar move.”  

Regarding investment capital, in 2022 it was aimed at the middle market rather than larger deals. The trend is expected to continue through 2023, as companies seek to stabilize their supply chains through acquisition. As reminder, private equity firms have $1.8 trillion in uncommitted capital they need to put to work.  With money to spend, a timeline to do it, the buyers may help keep valuations high.  

What About Market Resiliency? A Positive Outlook.

Despite increasing fears of a recession and the Feds response to it, as well as multiple headwinds in the macroeconomic environment, the market will remain slower.  However, fundamentals still exist for healthy M&A activity at levels approximating the pre-Covid era, which, as a reminder, were all-time highs. 

Private equity investors are well-equipped with considerable dry powder. Large corporates have not shied away from strategic acquisitions as the explore alternatives for growth as long as the tight talent market constrains organic expansion. 

Good companies sell in any market. To help navigate current opportunities and risks, it’s important for business owners, if considering a transition, to be armed with the information they need to make an informed decision. 

As such, we are glad to have those conservations. CKS Advisors, for over 20 years, has specialized in the sale of middle market companies. We help owners get to the next phase, whether it’s retirement, partnering with a larger company to facilitate growth, or creating liquidity. Please reach out if you would like to learn more – Mark Young – Managing Partner – or 602.501.4414.

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