Time to sell? Last year’s upturn in middle market M&A activity is likely to continue through 2022

Domestic M&A activity for middle market companies continued its sharp rebound in 2021, according to Eaton Square’s U.S. M&A Middle Market Update, released in March.

Eaton Square is an international M&A and capital service firm with 26 offices in 11 countries, including IBG Business’s six U.S. offices.

Included in the Eaton Square report are the seeds of optimism for would-be business sellers:

• Middle market U.S. M&A activity – i.e., sales of companies with equity value (EV) below $250 million – saw a 22% increase in reported deal count in 2021, with associated transactional dollar value increasing by 42%, year over year.
• All U.S. M&A valuations below $1 billion in EV for 2021 averaged 8.88x EBITDA, versus 8.97x for in 2020.
• Not surprisingly, transaction growth was highest (67%) among companies with EV above $1 billion.

“The M&A marketplace remains highly liquid,” the Eaton Square report noted, “with well over $800 billion of dry powder in equity funds in US PE Sponsors, coupled with almost $2 trillion of cash on non-financial corporate balance sheets in the US.”

The 2021 trend is expected to continue through 2022, the report predicts, if “for no other reason than the sheer amount of liquidity in the market.”

The deal growth reported by Eaton Square is reflected in rosy predictions across the board for 2022.

“Expect another strong year for deal-making,” predicts Morgan Stanley, “as all the elements that drove 2021’s record activity remain in place." (See “2022 M&A Outlook: Continued Strength After a Record Year.”)

An Ernst & Young report concurs, projecting that more than 60% of U.S. companies plan to pursue M&A acquisitions this year. Ditto at KPMG, where the 2021 year-end M&A report suggests no signs of a slowing deal market.

“M&A is poised to climb higher in the year ahead,” wrote KPMG’s Philip Isom, citing “easy access to capital, low interest rates, and a recovering global economy.”

While those sentiments focus on larger companies, M&A activity should also be robust for private middle-market companies.

“Growth in 2022 should be fueled in part by what we see as a growing number of larger family and closely held companies coming to market,” predicts John Zayac, managing partner of IBG Business’s Denver office. “More than ever, business sales will serve as liquidity events for Baby Boomers hitting retirement age.”

To maximize a private company’s market value, John notes the timeless importance of fundamental preparatory steps:

• Don’t be indispensable to your business. Build a strong middle management team, and have written employment agreements with your key people.
• Have written policies and procedures: Buyers will pay more for companies that are professionally organized and documented and perceived as low risk.
• Perform a Phase One environmental site assessment before you put your company on the market.
• Remember that buyers buy the future. Recast your historic financial data to project what your company can do.
• Look at the sale of your company from a buyer’s point of view. Sell the future, not the past.
• Identify and document your intangible (“phantom”) assets, and keep their valuations current.
• Begin creating a “confidential business report” that will educate potential buyers.

See John Zayac’s white paper, “Building Your Company’s True Value: How to Sell Your Business for More Than It’s Worth.”

If the solid 2022 predictions for M&A growth suggest that now is the time to sell, now is also the time to start the preparation process.

John Zayac’s checklist can rarely be completed overnight – but you can start on it today.

IBG Business’s M&A professionals can lead you through the process and, in many cases, shorten it and ease the burden on you, so that you can continue to grow your company and build its value while your company is being made ready for sale.