Mergers & acquisitions (M&A) in the lower-middle-market were at a peak in 2021 and 2022 as money was both plentiful and cheap. As belts tightened in 2023 due to economic uncertainty and rising interest rates, the M&A market tightened as well. So, what was learned in 2023 and where is M&A activity headed in 2024 and beyond?
In this article Eric Gall, founder and licensed broker of Edison Business Advisors, discusses the top eight trends he expects in the lower-middle-market M&A expected over the next 12 to 36 months.
- Healthcare Roll-ups: Through 2022, medical and dental practices were being rolled-up at an unprecedented pace and at historically high EBITDA multiples as private equity backed medical service organizations and dental service organizations sought economic efficiencies through scaling. Although activity has slowed down in 2023 and multiples have gravitated back to normal, demand is still strong. Consolidation is expected to continue.
- Digital Revolution: The increase in remote work and decrease in the labor pool driven by COVID restrictions has driven the development of new tools for digital technologies, data analytics, and artificial intelligence (AI). Not surprisingly, there has been a significant increase in the number of private equity groups and technology companies wanting to acquire software developers and digital, data, and AI service providers.
- Remote Connection: As COVID required nearly everyone to connect and work remotely the use of digital communication tools, such as Zoom and virtual data rooms, exploded. Gone are the days of face-to-face meetings between buyer and seller teams. As a result, there has been a significant increase in the number of private equity groups and technology companies wanting to acquire software developers and service providers in the digital communication space.
- Private Equity Activity: In 2019 through 2022, private equity groups generated a record number of M&A transactions. Even though they tightened their belts in 2023, they still accumulated a respectable amount of liquid capital. Private equity groups are expected to continue their pursuit of opportunities, especially across industries that tend to do well in recessions, e.g., healthcare, energy, food & beverage, pharmaceuticals, and maintenance & repair.
- Talent Seekers: Due to the present labor shortages, companies are more than ever looking to acquire other companies with strong leadership and skilled labor. Many companies are having a difficult time hiring and retaining management and labor. This is causing problems meeting current demand and as a result they are turning away work. One way they have been able to overcome shortages is to acquire smaller companies who have underutilized management and labor and are struggling to find work or bidding less profitable work to keep their labor busy. As a result, there has been a significant increase in the number of companies acquiring other companies specifically to increase their management and labor pools.
- Geographical Expansion: Companies outside of the U.S. are actively looking to expand their geographical footprint and their customer base in the U.S. due to economic challenges in their local markets. There has been a significant increase in the number of Canadian, Mexican, and European private equity groups, family offices, and companies looking for specific types of U.S. companies.
- Distressed M&A: Economic uncertainty always creates opportunities for distressed M&A transactions. Just as M&A activity increased in stressed industries due to COVID restrictions, the present economic uncertainty, specifically high inflation, interest rates, consumer debt, etc., is expected to put additional stress on once successful companies. These companies naturally become targets for mergers or acquisitions.
- Regulatory Changes: There has been an increase in government regulatory changes in many markets. Changes to minimum wages, benefit requirements, environmental impacts, etc. have caused delays and withdrawals from some M&A transactions. Buyers and banks are paying much more attention to and shying away from deals with potential regulatory implications. This is expected to continue due to the present political environment.
Conclusion
The future is never easy to predict as global crises, such as COVID, can come literally out of nowhere. However, barring any unforeseen events, Eric Gall believes these eight trends in lower-middle-market M&A are worth watching in the coming 12 to 36 months.
To learn more about Eric Gall, founder and licensed broker of Edison Business Advisors, click here.