For the M&A deal market, 2021 was a year of extraordinary rebound from the economic depths of the pandemic in Q2 2020. Valuations are reaching all time levels and high deal flow volume is causing some transactions to be delayed leading to potential backlogs going into 2022.
GF Data® stated valuations in the third quarter averaged 7.6x EBITDA—the highest quarterly mark in GF Data’s 16-year history. While GF reports on private equity transactions in the $10- $250 million transaction range, valuations and activity are also higher than normal for deals in the $2 – $10 million range. In the past, we would have expected an average of 4 offers on deals in the $5 – $10 million range. This year we are obtaining 6 to 7 on many deals along with more offers above historical norms.
We are seeing more buyers and sellers enter the market in 2021 and expect this to continue into 2022. Reasons for business owners selling now follow three main tracks:
- Businesses survived the pandemic, are doing well again, the market is good, and now it is time to retire.
- Growth is difficult due to labor shortages and owners lack the desire to make a hard push for growth.
- Fear of tax increases.
While we heard a lot about fear of tax increases earlier this year, this seems to have faded somewhat and is the least frequent factor we hear and is more of a secondary impetus. Particularly for older business owners, the tight labor market is limiting their growth potential and they no longer desire to make acquisitions or the investments to overcome the hurdles. Like their peers, these are baby boomer owners who have lived thru a major recession, a pandemic and now see the current market conditions as a good time to finally exit.
Many industry participants have been predicting a surge of baby boomer sellers, but it is only recently that we see evidence of this happening. However, rather than the predicted glut of businesses for sale creating a buyers’ market, for now the market is balanced against buyers as the quantity and quality of buyers has also increased. Both strategic and financial buyers are well funded or have access to cheap capital and they are hungry for platform and add-on acquisitions. Smaller companies also see a strong contingent of well-funded individual buyers taking advantage of government loan programs. We see all of these dynamics continuing into 2022.
Private equity groups have told us they had so many deals they were trying to close by the end of 2021 that they were no longer looking at new businesses coming on the market, and so some companies that would be of interest, will not get a look until 2022. Likewise, strategic buyers are also in the middle of acquisitions and are asking for extra time before they can look at new target companies. Further supporting our view of a hyperactive market, S&P Global Market Intelligence reported global deal activity in 2021 is expected to easily outpace the previous 3 years in both deal numbers and total value. This high level of activity is also impacting time to close where we are seeing more offers and follow-thru on quick close timelines. Historically we have seen many promises of quick closes without the follow thru but now we see real commitment. The exception currently is where banking relationships are not strong, and banks are backed up with too many deals resulting in some slowing of time to close on certain financed deals. This is putting well-funded buyers in a better competitive situation.
As noted, valuations are up but it is not even across industries. Manufacturing seems to be the strongest versus historical valuations with buyers engaging in highly competitive bidding for good companies. Others such as healthcare and construction are not moving much on valuations. Healthcare suffered somewhat from the pandemic and is still struggling with related issues. The construction industry continues to do well and by the job backlogs, looks to be strong right thru 2022. This industry continues to suffer lower valuations creating value buying opportunities for buyers willing to look beyond the perceived cyclicality. Deal flow is strong in IT M&A as it always is, but IT also received a boost from the pandemic and the opening it provided in the work from home space.
Overall, 2021 was a great year for businesses looking to sell and this party should continue in 2022. Buyers are active and well-funded, and economic forces continue to make acquisitions attractive for acquirers.