Headlines of articles covering the M&A market over the past couple of months and years have painted a challenging picture, says UBS Market Executive, Philadelphia & DC Market Julie Fox. However, they may not tell the whole story, especially when it comes to the middle market.
UBS Managing Director, Head of the Business Owners and Multigenerational Wealth Client Segments James Jack, who helped kick off the Philadelphia Smart Business Dealmakers Conference, says more deal conversations have been happening in the past few weeks than in the beginning of the summer.
The company's investor watch survey, which published in July, found that 40 percent of middle-market business owners regretted not selling their business in 2021, and 60 percent were worried about lower valuations. However, Instacart's so-far-successful IPO and word from network of boutique investment bank partners that deals are coming to market to close makes him incredibly optimistic.
"I don't know a private equity person who wants to pay themselves less," Jack says. "Maybe that's a dim view of humanity, but they're going to deploy the funds that they've raised. And so, you bring all of that together, all that dry powder, some optimism of things, maybe we're at the end of the rate hike cycle. So, I think from that sense, we're optimistic."
Because of that optimism, this, he says, is the moment to get back in front of business owners and ask what have they done to be ready to sell?
"Because one of the other insights from the investor watch survey is that they're grossly underprepared," he says. "They haven't done their estate planning work. They don't know the valuation of their business, or they say they have but they probably really haven't done it to the fullest extent. With all of the estate planning rules, at least right now, there's about two years left on them if there's no action done on some of those things. So, act now. Do that planning. Be intentional. You don't have to execute anything, per se, but you can at least think it through and start thinking about what makes your business great and why would someone want to buy it and build on that stuff. And even if you're not going to market right now, you can work on that. And maybe in a few weeks or months, you're ready to go. Or if you get the knock on the door, you can make a decision to sell. That's what we're talking about now is seeing some green shoots, having conversations with business owners and entrepreneurs about getting ready, even if you're not actioning right this moment."
Osage Venture Partners Partner Emily Foote says she looks across the business-to-business software segment, there are ebbs and flows. She thinks the sector is coming out of a trough.
"If you look at '21, '22, the public Software as a Service multiples were 18x," Foote says. "And right now, they're six x. But I think they're starting to come up, especially with the IPO market."
She says in the Philadelphia area in 2021, there was $8 billion invested in 395 deals. In 2022, there was $5.2 billion invested in around 400+ deals. This year, she says it's $1.1 billion in the first half of the year in about 200 deals. A dip, she says, but what can be seen in that dip is a lot of consolidation.
"There's these PE firms with $1.5 trillion in assets and 4,000 companies that they're going to deploy that money," she says. "So, I think this was really interesting; in the tech world, from an M&A perspective, we're up 10 percent from last year — there was 5,000 deals, and now there's 5,500. But the values have gone down 70 percent. From '21 to now, they've dropped 70 percent — they're just smaller deals. Sixty percent of the tech M&A deals have team sizes of less than 50, so they're just smaller, tuck-in deals. There's a lot of activity. If you want to sell, you can. You're going to get slammed on the valuation. If you can hold on and prepare and wait, I do think we're at the beginning of seeing better times."
CPTL Advisors Principal Alan Feldman says those considering an M&A deal need to take the emotion out of it, work hard, stay focused on their strategy and the luck will come.
"But the luck is going to come by doing a smart, noncash M&A deal," Feldman says. "Or, in real estate, everyone talks about distress — you got to find distress. Well, there'll be some, but the best thing you might do now is just buy a small acquisition that's a little bit outside of your zone, because it's an opportunity to deploy capital."
He also says not to worry about multiples from previous years.
"Because if that's what you're consumed about, that's not what your business is worth," he says. "Your business's worth from today forward is what you can make it. When the multiples come back up to 18, hopefully you have a good business to sell."
