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Is the So-Called “Great M&A Slump” Affecting Middle Market Transactions? Capstone Says “No.”

With Bloomberg headlines like “The Great M&A Slump Is Shaking Up Giants of Investment Banking,” and “M&A Deal Slump Sparks Turnover at Investment Banks Goldman Sachs, Morgan Stanley,” it’s easy to draw the wrong conclusion about the state of the M&A market–especially as it relates to middle market businesses.

At Mastery, we like to say that we specialize in helping businesses spanning “main street to middle-market.” In other words, most of the businesses you and I knowingly interact with on a day-to-day basis. They’re your local service providers or shops that are often left out of larger-scale financial discussions—especially those centered on the M&A and exit processes. Qualitatively speaking, these are businesses that comprise $10 million to $100 million in enterprise value.

It’s no surprise that the collapse of Credit Suisse has instigated a massive turnover of senior managers in the financial sector, and statistics do show that M&A deal volumes are down about 40 percent to roughly $1 trillion as compared to this time last year. But do perceived volatility and recession-related panic impact the transaction of these “main street to middle-market” businesses described above?

According to Capstone Partners, a major force in middle-market M&A, volume declined by around 14.3% year-over-year in Q1 of 2023. And while that’s not a great statistic when viewed through the lens of 2021’s record-breaking volume, it pales in comparison to the 25.2% reduction in total M&A transactions this year. But volume isn’t the only place where middle-market M&A is setting the pace. As average EBITDA/EV multiples sit around 9.1x, a definite increase over December’s brutal 7.2x, core middle market businesses have held steadily at 10.9x. That’s especially impressive when you factor in 2022’s average of 11.1x.

Source: Capstone Capital Report

Though inconsistent economic conditions and the rising cost of debt have greatly impacted the broader M&A market, right now is considered by many (including those at Capstone) to be the “trough” of the mergers and acquisitions market. Even better, there is great precedent for what follows this “trough,” and it’s good news for business owners looking to sell their businesses. Sellers can reasonably expect greatly increased interest from buyers looking to get in on inorganic growth during market recovery.

Whether you’re looking to sell now, or on the heels of a potential market recovery, Capstone and Bloomberg have one observation in common: quality companies with strong margins shouldn’t be worried. Though buyers are more selective, strong-performing companies with a quality backend can still expect premium valuations.

So, what can you do to prepare for, and take advantage of, this climate? If you consider yours to be one of these “premium” companies I mentioned above, give me a call! I’d love to connect with you and get you started on the process of preparing to transition.

If your company needs work, remember that you have time! Value can be different on paper than in your head, and the work you put in now will pay dividends when you go to market. A great place to start would be my book, Maximize Business Value: 65 Specific Actions to Drastically Increase the Value of Your Business. As the title suggests, it has 65 chapters each detailing a different element of your business potential buyers may look to for help in determining valuation. At the end of each chapter, you’ll find specific actions you can take to improve your company and ensure you get what you deserve when you go to market.

The exit process is tedious, drawn-out, and will always end in disappointment if you don’t ensure success from the get go. We’re here to help you from start to finish–all you have to do is ask! Visit our website for information on our process and access to free resources; from eBooks to blogs, we have you covered! You can also schedule a time to talk with me and we can determine where you are, where you need help, and how we can help you get from here to where you want to be!

Remember friends, it is NEVER too early to get started!

If you would like access to Capstone Partners’ complete report on middle market M&A, you can find it here.

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