Matt Gilbert
January 24, 2022
No one has a way to predict the future with 100% certainty, but there are various market indicators that lay the groundwork for healthy speculation. In this month’s issue of GaP Insights, I’ve prepared a list of what I think 2022 has in store for the M&A market and reasons private business owners considering an exit could reap the rewards if they act decisively in the early part of the year.
• Incredibly robust M&A activity is poised to continue.
• Financial institutions are ready to use the excess liquidity they’re holding and the stockpiles of cash on hand to boost M&A lending.
• Fees for large investment banks will continue to increase to make up for 4Q21 earnings miss.
• Interest rates remain conducive to M&A for now, but the Federal Reserve is signaling up to three hikes in 2022, which will predictably slow activity.
• The amount of M&A activity has due diligence providers such as CPA firms (who perform Quality of Earnings valuations), lawyers, appraisers (property or equipment), environmental assessors, etc., busier than ever. This will extend timelines and drive overall deal expenses up.
• 2019 results are the “pre-Covid” benchmark – the most desirable businesses are those climbing back to those levels.
• Businesses that experienced a Covid-period boost in sales and profits will be forced to prove the new levels are sustainable.
• Cash and credit availability to buyers mean lofty valuations for sellers.
• Competition for quality businesses is driving the seller’s market.
• Real inflation felt by privately-held businesses and their labor forces will continue to rise, pressuring margins in commoditized businesses.
• Increased freight costs and supply disruptions are forecast to remain throughout 2022.
• Sellers will keep their advantage for a little longer, but forces are coming that will flip circumstances to a “buyer’s market.”
• Predicted Income tax hikes are taking shape.
• Concerns regarding a sustained economic downturn are causing business owners to exit.
• Forces dampening revenue that businesses would have otherwise captured are creating pent-up demand that could be used to validate sustainable growth forecasts.
• There is a distinct M&A differentiation between:
- Businesses hurt by Covid showing distress – buyer’s advantage
- Businesses boosted by Covid showing market share and margin expansion – seller’s advantage
• Creative deal terms are more common than they used to be which is good for many sellers.
• A lot of sellers will be required to remain with the business for up to 3 years post-sale to maximize their exit.
Overall, 2022 promises to be another record-breaking year for Mergers & Acquisitions activity. Privately-held business owners who have contemplated selling their business may not realize how long it takes to locate a great buyer and close a sale. They would be well-served to start the process at the beginning of the year and not wait for the market changes that are expected.
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