What is happening in M&A in the mid-market?

Our Corporate Finance partner, Andrew Feeke, analyses M&A in the mid-market and what we should expect in 2024.

With interest rates rising and a squeeze on consumer spending, it feels like transactional activity should be at a low point…but that is not the case in the mid-market.

Whilst the wider economic environment has indeed impacted transaction structures, with less ‘debt’* being available to underpin transactions, mid-market transaction often incorporate a number of ‘drivers’ for a transaction, only one of which being the headline price. Succession and the acceleration of a market opportunity being two other drivers in the mid-market OMB arena.

The multiple drivers and associated flexibility around transaction structures has allowed the mid-market to continue a strong run of form and with the outlook beginning to look more positive on the wider economic front, it feels like there should be no let-up in activity levels.

A potential change in Government in 2024 and the associated changes to the tax regime that this may entail will also ensure transaction levels remain strong going into the New Year.

Do the economic headwinds noted above mean valuations are lower?
It well documented that transaction volumes and associated (over recent years) in a number of sectors peaked during 2021, with a relative decline from 2022 onwards. This generalism may sit true for a business that has traded consistently throughout the last few years, but, in many cases a year can be a long time in business. By way of example, a fast growing ‘tech’ business that was in its infancy in 2020 / 21 may have missed out on the peak demand from acquirors, and associated strong multiples, in play at this time, but as the business matures and capitalises on its market position with strong growth fundamentals, it is highly likely that this business would be an attractive proposition for a number of buyer groups, both national and international and therefore could reasonably anticipate a significant valuation through a competitive (but targeted) disposal strategy.

In short, a business with all the facets of a well run business with significant growth opportunities will remain an attractive business in today’s M&A environment. These are the very businesses that excite buyers and Private Equity (“PE”) investors alike, all of whom have access to significant capital to deploy in M&A activities.

What are the most active sectors currently?
Unsurprisingly the TMT** and Healthcare sectors have been the most active in recent years and the anticipation is that these will remain the most active in the coming years. Our BakerTilly M&A 2023 Dealmakers report set this out in more detail earlier on in this year.

From an MHA perspective, we have concluded 5 transactions in the field management software niche over the last 2 years, the most recent transaction being the sale of Depotnet Ltd to Everfield displaying the high levels of activity in this particular software vertical.

Equally, there are good levels of activity across most sectors, with advanced manufacturing, ESG consulting, professional and business services driving a good deal of cross border M&A activity.

Are there any sectors that are struggling?
There are a few discrete sectors that are less active than most, Construction and Retail (Consumer) being two key sectors showing much lower levels of M&A activity as they are both directly exposed to spending levels and ‘sentiment’ in the wider economy.

More and more M&A activity is being pump-primed by an active PE market. Construction and Retail are not key sectors for PE currently, albeit we are beginning to see some PE entities look at investing on a counter-cyclical nature given the potential value to be had for doing so.

Would you advise a business owner to consider a sale at the current time?
Current market dynamics as such would provide a strong opportunity for businesses in many sectors to successfully undertake an exit process.

Finally, going back to referencing PE, this investor type actively plans for ‘the exit’ before acquiring the relevant business. Having an outline exit plan in play and taking the appropriate actions early, no matter how far out the eventual ‘transition’ may be, will always leave a business owner in a good place should an exit opportunity come earlier than anticipated.

Please reach out to me or my MHA colleagues to understand the options available to you in the current climate.

Original source: What is happening in M&A in the mid-market? – Moore & Smalley (mooreandsmalley.co.uk)