The State of Middle Market Mergers & Acquisitions

With recent financial disruptions and recession fears, a potential door has been opened for increased dealmaking. After a lack of robust dealmaking and a slowdown in industry activity, the financial development of 2023 could lead to a brighter outlook for M&A activity. Historically, an uncertain economic environment has shown potential to produce outperforming downturn deals despite the challenges that come with putting a deal together in similar climates.  

Company valuations are down considering the economic uncertainty of the times, and pairing these valuations with higher interest rates can affect the economics of dealmaking. The affected economics have the potential to either positively or negatively impact the M&A market and its dealmakers.  

For sellers, on one side is a reluctance to sell. The most attractive targets for acquisition may be reluctant to sell if the valuation is not a fair price in their eyes. In parallel, loss-averse sellers looking to exit the market may close deals regardless of lower valuations if they feel that there will be sustained losses.  

For buyers, on one end is risk-aversion. Potential buyers without a strong working capital position may be reluctant to make deals considering the increased risk that comes with uncertainty. On the other side are the attractive prices for buyers. For those who think disruptively and creatively about developing their business, this climate could be the best time in years to close transformative deals that propel strategic growth and increase competitive advantages. The increased levels of dry powder and the aspirational move towards megatrends creates an atmosphere ripe for dealmaking, and fast actors could have their pick of undervalued companies. 

With the current lack of business confidence and disruptions in financial markets, an increased focus on diligence is needed. While shaky markets and low valuations could open the door for massive gains, they could result in equivalent losses if the wrong deal is made. To ensure that a deal is aligned with your portfolio or strategy, it is integral to identify synergies and structural longevity to ensure the target company is the right fit.  

Considering the current economic uncertainty, it is pivotal that dealmakers utilize expertise in business processes and operations to evaluate the non-financial components of a target organization. Sound operational due diligence can prevent catastrophe from a risky purchase and contribute to an outperforming deal with synergy assessment and value-creation readiness. Operational synergies not only make the deal smoother, but also provide an opportunity to realize increased returns, as efficient operations with the right resources can elevate the profit potential of an organization. 

Those looking for a first-mover advantage in this market have an opportunity to make transformative deals, so long as diligence is thoroughly completed. 

MFR Consultants

MFRConsultants.com