State of the Market for Private Equity and M&A

2023 has seen an increase in deal quality but a decrease in deal volume. The AM&AA Summer Conference, which took place in San Diego last month, hosted a panel discussion on the current state of the market for private equity and M&A transactions.

EisnerAmoer Partner & National Private Equity Growth Leader, introduced the following panelists for the discussion:

• Graeme Frazier, President, Private Capital Research (moderator)
• Jonathan Sanchez, Principal, FTW Capital Advisory;
• Eric Sloane, Partner, Southfield Mezzanine Capital;
• Robert (Bob) Woolway, Senior Managing Director, B. Riley Securities.

The speakers shared their insights on valuations, deal volume, how business owners can prepare to sell their companies and more.  

Valuations 

• Although deal volume decreased in Q1, the quality and multiples on deals getting done was robust.
• The average valuation multiple for completed transactions in Q1 was strong standing at 8.0x EBITDA. Graeme noted, “that’s about as good as it gets.”
• Frazier shared some insightful metrics compiled by his M&A data company, GF Data. The data set was comprised of completed transactions with TTM enterprise value at closing between $10M and $500M. Key takeaways from this discussion included:
• Multiples on deals ranged from 3x to 18x.
• The Q1 data was made of up of only 70 deals, signaling a decrease in volume. However, Graeme points out that “the quality and the multiples on the deals getting done in Q1 were very good and strong.”

Current Deal Volume

• Increased cost of capital and constraint on debt availability due to tightening moves in the macro economy has stifled deal activity.
• Recessionary pressure has forced mature family businesses to contemplate wealth preservation and to either take a business to market or take the risk of continuing to operate in an increasingly changing environment.
• Quality companies are seeing high demand and premium multiples, while average companies are seeing soft multiples, mostly due to outside factors such as margin compression, high interest rates and labor availability.

Mindset of the Business Owner and the Drive to Sell

 The industry has seen greater attention to how business owners can prepare to sell their companies as the aging population heads towards retirement and skepticism that younger generations share the same career intentions as the retiring generations.

• Business owners are re-evaluating the timing of the sales process and are instead looking to button up their current business structure to correct shortfalls and increase value.
• There has also been an increase in sell-side due diligence beyond the typical QofE with increased efforts to take a holistic view of the business and work on correcting business functions, from IT security to HR, within the organizational structure.
• Finally, in an effort to avoid earnouts, there has been an increase in sellers pulling deals off the market to re-assess business performance. Moreover, sellers use this time to look for opportunities to bolster top line revenue before going back to market.

Market volatility and inflation has created increased headwinds for M&A. However, this environment has bifurcated the market and provided quality companies with an edge over average companies.