By Ryan Binkley
“M&A is a confidence game. With political certainty, the end of the pandemic in sight, and strong capital markets, the confidence levels in the C-suite and board rooms are high. That bodes well for M&A.” – Anu Aiyengar, Global Co-Head of M&A, JP Morgan
When the COVID-19 pandemic brought economies across the globe to a standstill in the early months of 2020, M&A professionals could have been forgiven for fearing the worst.
But, the resilience of the industry has been tested time and time again and has consistently persevered to come out even stronger. 2020 proved to be no different – after a few tense months, dealmaking activity bounced back with real gusto in the second half of the year, setting new records along the way.
Out of the $3.6 trillion in recorded global M&A activity across last year, an astonishing $2.3 trillion came from the beginning of July through the end of the year. That was an 88% increase over dealmaking in the first half of the year, as confidence among investors continued to surge in the final stretch towards 2021 – and I expect it to maintain throughout this year as well.
Backed by the insights of many M&A experts and our own specialists at Generational Group, I will outline in this article why there is plenty of reason for dealmakers – and consequently, business owners considering their exit plans – to be optimistic this year.
At a time of uncertainty in many areas of our lives right now, dealmakers have never been more certain or assured about the future. Don’t take my word for it – that is the conclusion of Dykema in their annual M&A Outlook Survey, where respondents are the most optimistic than they’ve been in its 16-year history:
“71% of respondents expect the M&A market to strengthen over the next 12 months, up from 33% in 2019, and 87% believe M&A activity will increase in the same timeframe.”
Canvassing a wide range of CEOs, CFOs and other M&A professionals, Dykema’s survey is a strong indicator of the positivity surrounding deal activity following its massive revival in the latter half of 2020, and the belief that COVID’s influence will continue to wane over time.
It is particularly positive for activity in the lower-middle market. In the first three quarters of last year, 68.7% of all M&A activity involved deals under $100 million – the highest proportion since 2016. This boom in buyers scouring for smaller, more agile deals should persist throughout 2021, presenting incredible opportunities to lower-middle market business owners to attract more interest.
We’ve actually seen this first-hand at Generational. Last year saw us close more transactions than at any other point in our history – a record we intend to build on in the coming 12 months.
But what is driving this strong, growing confidence in the M&A landscape? Well, I believe it is driven by four key factors:
Firstly, private equity firms are in as strong a position as ever before to invest in companies across all industries and geographies. A survey conducted by ACG in the closing months of 2020 found that 75% of private equity professionals surveyed have a positive outlook heading into 2021, while only 6% held a negative perspective.
This optimism largely surrounds the $1.7 trillion in dry powder that PE firms have at their disposal – money that can only be used to invest into companies to help them grow and develop until they can deliver an even greater return for their investors. This resource means that PE firms are likely to be incredibly active in pursuing opportunities this year and beyond.
The ambitions of PE firms carry even more benefits for lower-middle market owners considering their exit strategies, due to the relentless rise of add-on acquisitions. In 2020, add-on acquisitions accounted for the largest percentage of buyouts by far, an astonishing 72.5% (significantly ahead of the 68.5% in 2019).
The uncertain nature of the pandemic pushed the popularity of add-ons even further, and that trend will likely persist throughout 2021 as we work towards the “new normal”.
This again puts smaller businesses in the spotlight of PE firms looking to expand and enhance their platform companies, with these investors more willing than ever to pay a premium for opportunities that harmonize well with their existing portfolios.
While PE firms represent a consistent, tried-and-tested acquirer in the M&A landscape, a burgeoning buyer is expected to play a growing role in activity across 2021 and beyond.
The number of special purpose acquisition companies (SPACs) has grown substantially the last 12 months, with 242 of these organizations created by mid-December, four times more than those created in 2019. Furthermore, they accounted for approximately 25.3% of global IPO proceeds raised in 2020.
As these companies, with no commercial operations outside of the raising of capital through IPOs, continue to expand and thrive, they will drive activity and represent another potential avenue for owners looking to maximize their exit plans.
The inauguration of Joe Biden as President comes with a lot of speculation and expectations, one of the most notable surrounding potential tax changes. While details remain unclear for now, it is widely believed that taxes could increase in 2022:
What does this mean in relation to M&A activity in 2021? Well, in order to minimize any negative repercussions of these expected tax changes, it encourages business owners considering their futures to really look into cementing their exit strategies.
Remember – the year you sell your business is likely going to push your earnings past $1 million, as you cash in on your years of running and growing the business, and you’d be required to pay a greater share of tax.
So, there is as much (if not more) emphasis on people looking to sell before 2022 than those actively searching for acquisition targets, and this combination should result in a significant amount of M&A of activity. This is why I’d highly encourage anyone stalling on their exit strategy to move quickly and talk to their wealth manager, CPA, or an M&A advisor to explore their options and next steps.
Finally, we can’t ignore the impact that digitization has had on numerous facets of M&A activity as we headed into 2021, much of it influenced by the events of the pandemic.
Chiefly, virtual dealmaking is now firmly established and here to stay, even when the grips of COVID-19 finally start to loosen. Although there is no substitute for face-to-face consultations and negotiations, the flexibility that the use of video calls and similar technology offers may go a long way in helping deals over the finish line faster and easier.
With less dependence on arranging in-person meetings and appointments, this allows deals from further afield to be completed more successfully, and allows dealmakers, buyers, and sellers to be more agile in their approaches.
Meanwhile, the importance of digital technology across the whole spectrum of industries in the current environment will inspire companies to pursue acquisitions to fill any technology void in their repertoire. It is no shock that the technology sector logged 3,171 US deals valued at $447 billion in 2020 – 32% of total deal value.
But it’s not just technology companies that need to keep their heads up. Any business with a product, service or team that can help to diversify another organization and make it more sustainable will be more highly sought-after this year.
The pandemic has made people more aware of the fragility of businesses than anything since the Great Recession in 2009. Now, more than ever before, companies will be looking around for targets that can make them more secure in the most testing times.
Confidence is high in the world of M&A, and the momentum gathered in the closing months of 2020 shows no sign of dissipating in the early weeks of this new year.
As dealmakers become more comfortable in this challenging environment, and the reasons I’ve delved into above influence increasing amounts of deal activity, I don’t believe it is outside the realms of possibility that 2021 could set new records for our industry.
However, in order for the owners of privately held companies to fully capitalize on these encouraging conditions, you must be in the process of building a buyer ready business. And this will depend on how much you know about what buyers are looking for.
To enrich your understanding and put you in the best possible position to secure an optimal return on the investment made into your company, get in touch with our team at Generational Equity, or book your attendance at an upcoming Growth and Exit Planning Conference.
President & CEO, Generational Group
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.Salvo Stoch, Founder and CEO of Sleeping Partners
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.Rick Greene of Dobbs Equity Partners LLC
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.Caroline Connelly, CEO, OptoTest
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward.Tom Currier, Former President & CEO, Rackmount Solutions
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.Shane and Johanna Kline, Owners of Vision Upfitters
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!JoAnn Ellis, Owner of Fondren 5 Star Kennels
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.Betty L. Brennan, President, Taylor Studios
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.JoAnn Ellis, Owner of Fondren 5 Star Kennels
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
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