With the first half of 2024 behind us, UHY’s Corporate Finance and Financial Due Diligence teams collaborated to share some key insights and observations from actual M&A transactions in 2024.
Post-pandemic normalization
COVID was either a catalyst for growth or a catalyst for decline for most companies. And in many cases, these trends were/are temporary in nature. We’re seeing different buyers having very different views around what is driving performance in ‘23/YTD’24 vs. ’20-’22 and spending more time trying to define the normalized, go-forward operating environment for a company. On the performance driver side, buyers are questioning whether volume or price drove results in ‘23/YTD24, whether further price increases are possible, or whether declines are on the horizon, for instance. These factors are resulting in a much wider range of bids on sale processes and quite a bit of focus in diligence on customer analysis and the financial forecast.
Diligence is taking longer
There are a myriad of factors causing diligence to take longer, including: The cost of capital and increased lender scrutiny, geopolitical uncertainty, whatever a “new normal” looks like for a company, and the supply of quality/prepared assets on the market. For sellers, being prepared for a transaction helps capture and retain value and typically offers a larger prospective buyer pool and a quicker time to close. For buyers, we’re seeing staggered approaches to diligence whereby confirmatory diligence is completed before introducing operational and other diligence streams. This trend will eventually reverse as buyers and sellers become accustomed to the new normal (or lack of normal) in M&A and the presumption that monetary policy will soften in the coming quarters/years.
Momentum is everything
The spirit of “time kills deals” is alive and well in ‘24’s M&A market. Whether we are on the buy-side or sell-side, we have seen extended deal timelines (whether due to diligence taking longer or sellers not prioritizing the launch preparation process) kill deals. We are seeing buyers get “cute” over-negotiating on deals for attractive assets, only to be passed over by another buyer. And we have seen several instances whereby sellers take 3-4 months to gather information required to launch, only to hit a speedbump (e.g., lost customer, sector headwinds develop, etc.) at an inopportune time in the sale process (i.e., post LOI). Hiring the right advisors and getting to market quickly should always be the goal for sellers.
Add-ons vs. larger transactions
With interest rates still at multi-decade highs and regulatory scrutiny increasing, we continue to see more attention in fragmented markets to add ancillary or niche capabilities and/ or geographic or customer expansion. Lower-middle and middle-market M&A have seen increased attention in the last 18 months as buyers recognize the value proposition and remain cautious on larger/transformative and speculative transactions. This proves out in the numbers, as overall U.S. M&A has struggled in the past couple of years, while middle-market M&A activity has outperformed.
2024 elections
60+ countries will hold elections in 2024. This amount of potential geo-political change is sure to impact M&A, but this impact is likely to play out over years, not months. As such, we don’t recommend sellers try to “time the market.” We have observed many would-be sellers trying to force a quick close pre-election or hold off entirely on preparing to take their company to market. Frankly, there are too many variables to try to predict, so we always recommend sellers take their company to market based on their own personal goal and objectives (e.g., retirement, partnering for accelerated, long-term growth, etc.). We have observed some sellers of attractive businesses sit on the sidelines waiting, while we close multiple deals at stretch values for companies in their same industries.
While we can’t predict the future, the number of business owners set to reach retirement age in the coming years, coupled with buyers hungry to put their capital to work, suggest that middle-market M&A will be alive and well for some time.
We will continue to provide updates on new developments unfolding in the dynamic middle-market M&A environment. In the meantime, feel free to reach out to a member of UHY Corporate Finance and/or Financial Due Diligence teams to learn more or to determine how we may be able to assist in formulating and/or executing in your firm’s M&A strategy.
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