As we get settled into 2024, one area that all business leaders continue to monitor closely is what the merger and acquisition (M&A) market will reveal after about eighteen months of uncertainty and wavering expectations. With inflation leveling, potential federal rate cuts in our future, and a presidential election year upon us, there is a lot to evaluate and consider as businesses look to jump into the M&A waters once again.
Before evaluating common trends and insights for 2024, it’s good to reflect and assess how market leaders are seeing the M&A landscape as we move forward. Early indicators show that final M&A deal activity year over year will result in a ~20% decline in total M&A deals (source – WSJ.com). One of the bigger issues the deal space is facing is agreement on a purchase price. With continue rate pressure coupled with the recent memory of 2021 incredible multiples, deals required additional effort to get to an agreeable price point.
Though deal volume was down, enterprise value to earnings before interest, taxes, and depreciation/amortization (EBITDA) have been trending upwards. Quarter ending September 30th indicated multiples of about7.5x, which approximated the full-year multiple for 2022, and current 9-month ending multiples in 2023 of roughly7.3x have a chance to meet or surpass 2022 EBITDA valuation levels (source – GF data).
As indicated above, the challenging or uncertainty in the macro environment, coupled with company valuation misalignment, has caused stagnation within the M&A environment throughout 2023. Due to this, we saw an increase in private equities taking a less than 100% ownership stake in the companies they were targeting. According to data from Preqin, 2023 was on track to record a 4% increase in minority stake investments by PE groups compared to 2022. Further, deal structuring saw increases in equity rollover positions, seller earnouts, and/or seller financing to help complete deals in 2023 (GF Data). Approximately 43% of all deals closed in 2023 included a seller component mentioned above to get the deal done.
With 2023 now clearly in the rearview mirror, what can one expect in 2024? A great datapoint to unpack is the recent survey conducted by ACG’s 2024 Middle Market Outlook Survey that yielded some promising results:
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- Approximately 82% of respondents indicated deal flow at or above the 2023 levels with 55% predicting an increased in deal volume.
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- Though deal flow may appear to be headed for an increase, valuation predictions still show some challenging headwinds with nearly 91% of respondents anticipating multiples to remain at the same level (54%) or decrease in 2024
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- Types of deals predicted to close in 2024 still favor ‘add on acquisitions’ with almost67% of respondents predicting these dominating the M&A space followed by distressed/restructuring (about47%), and platform acquisitions (about36%) rounding out the top three
Though the optimism appears to be trending for better days, the fact of the matter is there is still a lot of “macro fog” that is real and uncertain at this point. The continued world conflicts taking place in Ukraine and the middle east, cautious optimism on fed rates, and the upcoming 2024 presidential election will play a big role in the M&A landscape for 2024. Per the ACG Survey result, respondents indicated higher interest rates (about34%) and economic uncertainty (about30%) being the predominant market issues that will challenge M&A growth and expansion. Specifically on the interest rates, respondents indicated approximately a63% chance of rates holding or staying the same throughout 2024 which will bring similar challenges from 2023 into 2024.
With the stats, data, and surveys now summarized, the key question is what are common trends and focus areas for 2024 that will continue to drive value creation and create a strong thesis for getting a deal done:
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- Improve the QUALITY of your revenue…A timeless classic that always holds true. Businesses that look to strengthen the quality of their revenue will continue to rise to the top and see increased multiples. That can be done with strategic efforts to diversity revenue streams, reduce reliance on a small number of customers, and find revenue streams that are sustainable and reliable.
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- DRIVE efficiencies and value…Whether closely-held or supported with private equity, ownership groups are leaning into driving overall value. Improving processes, reducing redundancies in the operations, and increasing accountability across teams and groups can see improvements in the operations and margins.
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- Build strong TEAMS…Evaluate as an owner/leadership group how you are developing and elevating your teams. Building an organization that can take the owner/leadership group out of the day to day will help strengthen the overall valuation proposition. Relying too much on one individual or one team can create a risk that can produce wrinkles in the M&A journey.
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- Continue to INVEST in growth…Through all the advising AGP does, we always counsel our clients to continue to run and invest in their business for the future. Continuing to invest in their people, their technology, and their process not only create a culture of growth, but demonstrates the commitment to a stronger organization.
In short, there is a lot of appetite to find great companies and get deals done. If anything, buyers and sellers are both becoming more energized to get deals to the finish line. Companies looking to sell have a great opportunity to showcase their story, their value to many organizations looking for growth. On the other side of the table, organizations looking for other ways to hit their growth goals and/or looking to create more value for their stakeholders could find a friendlier M&A environment in 2024.
As we have all experienced over the last several years, the M&A space has been dynamic and 2024 appears to continue that trend. As you and your teams evaluate your current growth and/or exit strategies within the M&A environment, give thought to your team advising on the tax and transaction advisory strategies. The team at Apple Growth is ready for an opportunity to partner with you to help you achieve your goals in 2024.