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James Johnson, Assistant Director at Momentum Corporate Finance, discusses how to navigate deals in a difficult market.
Economic challenges, including the cost-of-living crisis and higher interest rates, have impacted on overall levels of M&A activity this year. Global M&A volumes decreased by 9% in H1’23 compared to the same period last year, and it was the slowest first-half period for deal making since 2020 (source: Refinitiv). However, despite overall deal volumes being down, there continues to be strong appetite and competition for high quality businesses.
Demand in the market
Despite the negative outlook, the right deal could still be out there for many business owners. This could be due to sector – as expected, much of the current deal activity is in sectors which are resilient to economic challenges, such as technology, defence and national security. However, we are also seeing strong activity in sectors which are adversely impacted by current macroeconomic challenges. There are still many potential reasons behind the decision to sell a business, for example:
- business owners who have reassessed their risk profile post-Covid
- those who are considering their retirement plans
- those looking to further accelerate growth using external funding.
Therefore, for many it is still be a great time to consider an exit or fund raising.
Why is this given the difficult market conditions?
Although valuations have leveled off in recent months, they are still above pre-Covid levels. This is driven by trade and private equity players still having significant “dry powder” and fewer high-quality assets coming to market than in recent years. This pent-up demand has driven continued appetite for strategic acquisitions from both large corporates and for bolt-on opportunities for private equity-backed businesses. These bolt-on acquisitions are seen as a key route to expansion in the current market conditions.
Getting deals over the line
Several considerations have become forefront in getting deals completed in 2023:
- Resilience – Demonstrating that a business has an established and defensible market position along with a clear long-term growth strategy has been key in driving interest from purchasers, even where market dynamics have meant that short-term performance has been softer than expected. More resilient sectors, particularly those providing B2B products or services with a technology focus, have continued to perform well.
- Preparation – Processes are typically taking longer than they were twelve months ago, with buyers undertaking more due diligence and being less willing to ‘take a view’ on risk areas or short-term underperformance. This means that preparation before coming to market is more important than ever. Working with advisors well in advance of going to market to ensure the business is thoroughly prepared, including preparation of a clear and robust business plan and integrated financial model, will reduce issues down the line and increase deal deliverability.
- Flexibility – Having an element of flexibility is key for vendors in the current market. With short-term uncertainty across many sectors, flexible or innovative deal structures offer solutions to bridge valuation gaps and de-risk the transaction for purchasers, such as those which combine cash at completion with an element of rollover or deferred consideration. This can provide significant opportunities for vendors to benefit from future growth whilst giving protection to the purchaser.
Willing buyers and willing sellers will find a way to get a deal done.
Having completed five deals with a combined EV of over £250m so far in 2023, and a record pipeline as we head into Q4’23, at Momentum Corporate Finance we are still seeing very positive signs in the market. We have also continued to see a strong level of international interest in our processes, with half of our sell side deals this year having involved US-based purchasers.
As inflation peaks and businesses continue to adapt to the higher interest rate environment, we expect that stability in the market will result in a steady increase in M&A activity for the second half of this year. A recent survey of 327 UK M&A advisory firms noted that 72 per cent of advisors had an optimistic expectation for H2’23 (source: Dealsuite).
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