In this Market is There Still a Demand for Quality Businesses?

How current conditions are affecting the M&A marketplace.

As a business owner, you have likely thought about selling your company and you may be wondering how current market conditions are impacting the possibility of a successful sale. The past three years have certainly had a significant impact on every business. The effects of the COVID-19 pandemic and rising interest rates are currently two market factors but not the significant factors driving the market.

The pandemic’s rapid onset and unpredictable consequences forced most businesses into an unplanned stress test on their business. Companies that survived this period with supply chains intact, strong client and employee relationships, and solid revenue growth and profits have proven their value.

Another high-profile market condition has been the rise in interest rates which has increased the cost of capital. At first glance, you might think these factors would have a negative impact on the M&A market. However, a closer look reveals a more complex economic landscape that could work in your favor.

There is still a demand for quality businesses.

In any economic environment, well managed, profitable companies remain highly sought after by buyers with long-term strategic goals. Your company’s track record, customer base, intellectual property, and growth all contribute to its value. In fact, buyers with a long-term vision may be willing to pay a premium for a company that aligns with their strategic goals. They are not solely focussed on short-term gains; they are planning for the years to come. This means that even with rising interest rates, the demand for quality businesses remains strong.

Economic cycles have their ups and downs, and savvy business owners recognize that these cycles create opportunities. Many strategic and financial investors are looking to make their next move. If your company has remained stable and grown year over year during these challenging economic times, it is an attractive asset for those looking to acquire and grow their business.

The good news from a selling perspective is that the valuations of healthy mid-market companies remain strong, reflecting their ability to adapt and thrive. We have observed that there is significant demand for quality businesses from both private equity firms and strategic buyers.

Private equity buyers are sitting on trillions of dollars in “dry powder” waiting to be invested. Many buyers deferred plans in 2020 through to 2022 and are now actively pursuing acquisitions. Yes, they are more selective, but find mid-sized private companies attractive because they are smaller, present less overall risk and are easier to integrate and manage.

Strategic buyers, which include your competitors, are looking to grow by acquisition as well. These companies may be looking at you as a potential acquisition target right now. As competitors seek growth through acquisition, businesses with existing client bases, profits and good relationships become more attractive. However, not all acquisitions revolve solely around revenue, EBITDA and the multiples that apply; motivations for acquisitions can include acquiring new talent, obtaining new technologies, eliminating a competitor or expanding to a new territory.

In the grand scheme of things, rising interest rates and the lingering effects of the COVID-19 pandemic are just a couple of factors overshadowed by the general economic energy and demand for quality businesses. Buyers with long-term strategic goals are always on the lookout for quality companies.

You might be thinking it is not a good time to sell. But it is.

If your company not only survived but thrived through the stress test of the COVID pandemic, you may be an attractive acquisition target. The basics for any transaction at any time are always the same – solid financials, profitability, a track record of growth, a strong management team and a diversified customer base.

The question now is what do you want to do?

Stage Left Partners has helped dozens of clients manage this journey. Please let us know how we can be of service.

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