3 M&A Trends You Should Not Take for Granted

I recently attended and spoke at a mergers and acquisitions (M&A) conference, and the general news about the industry has stayed roughly the same. There is a lot of pent-up capital that investors are trying to move off the sidelines, leading to the same high middle-market multiples we have seen for a few years now. In such an environment, it is easy to assume everything is business-as-usual, but do not underestimate or take for granted the power of these three current trends.

1. The Appeal of the Small Deal
   Today, many private equity funds are looking at smaller deals than they would have previously. This is occurring because they need to invest their capital and because there is a scarcity of deals that fit their usual investment guidelines. Where once they only did deals of $50 million or higher, now they might consider investing as low as $25 million. This means that many investors are chasing the same deals. Buyers today often have to pay more than they had previously or are forced to search for smaller options.When it comes to choosing to pay more, a buyer’s decision is all based on the possibility of the eventual return on investment (ROI). They may pay a multiple of eight times when they historically have not gone above a multiple of six times, but if they have operational efficiency changes they can make to add value right away, they will likely make the deal. This also applies if they can buy a few companies and roll them up into one. Some investors will go buy a platform company at a multiple of five or six times and do two or three add-on deals; people will pay a multiple of seven or eight times two years later, even if the investor did not improve anything about the company itself. Today, the appeal of the small deal is not for the long-term investment but for the short-term springboard on to bigger things in a few years.
2. Impact of Family Office
   Today, we are also seeing more family offices getting involved in M&A. Often, these investors are breaking into industries with which they are unfamiliar. Some are even basing their acquisition decisions on whether they know someone qualified to run the company for them. Like equity funds, the main concern for family offices is adding value to the acquisition once it is made. Having a team that knows how to add value is critical.Many family business owners do not want to sell because they will make more running the company than they would if they sold it and invested the proceeds. Plus, they may not be emotionally ready. However, valuations have been going up, and many business owners are now entertaining thoughts of selling strictly due to the high multiples they could receive from the sale. They are now thinking they could hit a home run if they sell at the right time. However, they do not want to miss out by selling too early or by waiting too long. This hesitancy on the part of business owners is part of what is driving the limited number of deals available in the market. And because family offices are doing more direct investing, they are becoming competitors with private equity funds for the same deals.
3. Trends Toward Diversification
   The quest for investment opportunities has taken many private equity funds outside their traditional investment industries, and that trend is likely to continue. Funds are investing in industries such as food, manufacturing and healthcare and will seek any opportunities for add-ons in different sectors to add value. This is especially true of technology add-ons. Every industry, from advanced manufacturing to healthcare, is looking to integrate more technology into its operations. “Bricks and clicks,” or companies with both a physical and an online presence, are attracting better valuations than those with a physical presence only. That is because owners can capitalize on alternative distribution channels, especially e-commerce. This increasing willingness to diversify has already impacted the middle market and will continue to do so through high valuations and increased competition for top-tier add-ons – regardless of industry sector.

For anyone looking to acquire a new company or merge an existing one with their own, an understanding of these trends is necessary to make the best decision for your future. But keep in mind that no two deals are alike, no matter how steady the growth and patterns in the market. If you are looking for someone to help you carry out a transaction with success, our team of transaction experts is here to help.