As with any other market, the mergers and acquisitions market is cyclical and governed by supply and demand. With a lack of quality companies coming to the table to sell, demand is exceeding supply, fueling our current seller’s market. M&A cycles typically last 2-5 years and we have recently passed the midpoint of this cycle.
There is no way to reliably predict exactly how long the seller’s market will last, but industry experts have reasonable expectations that a downturn in deal valuation will occur in the near future. Many business owners don’t factor in the time required to exit their business properly, so prudent owners looking to maximize the exit value of their business will move forward soon.
The Current Seller’s Market: A Perfect Storm
M&A experts are calling the current seller’s market “The Perfect Storm” because of a collision of favorable conditions:
- Ample Capital to be Deployed – Private equity groups have raised an unprecedented amount of capital and are searching for opportunities to deploy it. Combined with a sluggish global economy, corporate buyers are offering premiums to deploy excess liquidity and secure their growth strategy.
- Interest Rates are Down – Interest rates are at all-time lows and banks are lending aggressively. Access to cheap capital consequently allows private equity groups to place higher bids to compete with strategic acquirers.
The Buyer’s Market is Brewing
But like with any storm, it blows through just as quickly as it comes in. The industry opinion is that this shift will take place in anywhere from 1-3 years.
- The Baby Boomers are Coming – The fact that baby boomers are approaching retirement age will continue to increase the volume of businesses coming to market.
- The Global Economy is Unsettled – The economies of North America, Europe and Asia are likely to continue to worsen.
- Liquidity Will Dry Up – Eventually, we will work through the excess liquidity. Interest rates will inevitably rise. At that point, it becomes a buyer’s market and owners that need to sell will have to be willing to take a discount.
Why Jump Start Your Exit Strategy?
This chart by GF Data shows historic deal multiples arranged by business size. We are at the M&A cycle midpoint, so in the next 1-3 years experts predict a downturn in deal valuation. Owners who jump start their exit strategy today will still be able to take advantage of favorable market conditions.
Jerry R. Watkins
Director of Research
Phone: (214) 694-2264