Everywhere you go, people are moaning and groaning about the economy. These armchair experts believe we are in a recession and agonize over rising interest rates. You’d think this level of pessimism would have a negative impact on mergers and acquisitions—but it hasn’t.
If you’re looking to sell your company but worried that you’ve missed your chance, you may be pleasantly surprised. Sure, M&A activity is slower compared with last year, but that’s to be expected: 2021 was one of the best years ever for buying or selling a business. This year we continue to see a strong appetite for acquisitions, however, and conversations with private equity groups and strategic acquirers only confirm our experience.
Here are four reasons to ignore the doomsayers and consider the opportunity to sell your company in 2022.
1. Companies continue to perform well.
A company’s financial performance is the most important factor influencing its appeal to potential buyers, and most companies right now are fighting inflation, supply shortages, and a tough labor market. Our clients and prospective clients, too, are struggling to sidestep whatever negative impacts the economy throws at them—yet these business owners continue to prosper. Conversations with others who serve the M&A community reveal that our experience is not an anomaly, so your company may be in the same boat. Have you managed to pass along price increases to your customers, find additional sources for inventory, or discover creative solutions to manage labor shortages? All this adds up to growth for your business—a crucial factor in attracting acquirers.
2. Strategic acquirers are strong and looking to grow.
Observing that middle-market companies continue to perform well in the current economy, strategic acquirers have remained active participants in M&A. In fact, their strong balance sheets are an excellent foundation for these corporations to seek growth for all the traditional reasons, whether to add a new product or service line, extend their geographic reach, enhance a certain capability, or consolidate a sector. Some strategic buyers have pressed pause on acquisitions due to concerns about the economy, but not so many as to significantly narrow the market. Whatever the opportunity, you’ll always find some buyers who end up passing on the deal due to timing or other private concerns. But forgoing a purchase opportunity due to general anxiety over the economy is rare—so rare that it’s notable when we hear it. In addition, with high cash balances and debt being relatively cheap, buyers are looking for opportunities to utilize their capital and foster growth.
3. Private equity groups are hungry to invest.
In addition to strategic acquirers, private equity groups (PEGs) remain very active and continue to deploy significant levels of capital through investments in new and existing portfolio companies. With an estimated $873 billion in dry powder, according to investment data company Preqin, PEGs are pursuing new platforms and add-on acquisitions for current platforms—and with limited time to invest before turning around to sell, they are reluctant to sit on the sidelines and let good opportunities pass by.
PEGs tend to be quiet when they are not actively seeking deals; during the financial crisis of 2008-2009, for example, we received few emails or phone calls from them. In the spring of 2020, however, when most people were still trying to figure out the pandemic, we received numerous inbound inquiries from PEGs on the lookout for acquisitions. Quick to realize that certain sectors would thrive during this period, PEGs chased companies that proved their resilience amid major disruption—and the number of inquiries about deal prospects has yet to dissipate. Furthermore, PEGs can gather effective intelligence on the state of the economy through their portfolio companies, and based on our conversations, PEG portfolio companies are seeing no drop-off in performance yet.
4. Interest rates are relatively low.
Unfortunately, the extraordinarily low interest rates that we have become accustomed to over the past few years are not normal. Now that rates are rising, you might think this would have a massive impact on M&A, but strategic and financial acquirers see things from a different perspective. Historically speaking, interest rates are not particularly high, and thus deal activity has largely been unaffected. Interest rates continue to rise overall, but acquirers recognize that debt remains cheap and will continue to use it for acquisitions. The increase in interest rates may impact valuations at some point, but we have not seen this yet.
The upshot: M&A activity remains very strong, and all signs point to this trend continuing for now. Strategic and financial acquirers are still pursuing acquisitions, and debt remains inexpensive. But if you’re looking to sell your business, don’t wait. (We covered our concerns about waiting in our previous article.) Your strong financial performance will be critical to selling now, and you should take advantage of it. If this situation sounds familiar, please contact us for help in deciding whether the time is right for you to sell.