by Stan Bailey, Chairman

Business Environment Impacts Deal Activity

What Ironline is seeing for 2023.

Just The Facts:

  • Inflation, interest rates and Washington D.C. have put a drag on the 2023 M&A market so far this year.
  • While 1Q2023 deal volume remained level with 4Q2022, 2Q2023 showed a marked decline, reaching the lowest level since early 2020. The first six months of 2023 were down 23% in closed transactions compared to first half of 2022.
  • Corresponding with deal volume, EBITDA deal multiples also declined approximately 1X in the Lower Middle Market ($10-25 million deal value) to 3X for larger deals ($250-500 million deal value).
  • Private Equity platforms continue to lead transaction pricing followed closely by Add-Ons.
  • “Quality Premium” – the reward in valuation for above-average financial performance – declined from 122% premium in 2022 to 108% in 2023YTD.
  • Healthcare and Business Services sectors showed increased purchase price EBITDA multiples so far in 2023 compared to 2022 while Manufacturing, Distribution, Technology and Retail experienced declining multiples.

Inflation, interest rates and Washington D.C. have put a drag on the 2023 M&A market so far this year.

Outlook for the Remainder of 2023 and 2024:

  • While 2023 historical M&A indicators are generally negative through mid-year, there appears to be some relief coming in the Second Half of 2023. The first half 2023 deal volume decline reflects delays in transaction market timing, not cancellation of transactions. Remember, Baby Boomer business owners aren’t getting any younger!
  • A recent survey of our Southeastern engagement pipeline showed companies displaying continued growth in sales, record earnings, and robust business pipelines.
  • Owners’ outlook for the remainder of 2023 into 2024 are generally positive as inflation cools.
  • In a recent “Business Plus Survey” by Barlow Research Associates, respondents expect improving financial conditions by a 4:1 ratio. This is consistent with Ironline’s observations with regards to company sales and earnings growth by our clients looking forward.
  • M&A deal activity is picking up in 3Q2023 as private equity funds continue to raise new capital.
  • Opportunistic investors (i.e. Family Offices and Private Investors) with substantial dry powder may start taking advantage of the current environment to acquire “good companies” at lower pricing premiums.

Looking beyond 2023:

While 2023 will not receive recognition as a banner M&A year, its correction should not be surprising as the “soft landing” recession scenario seems realistic, and no major economic impediments (excluding the Presidential Election) appear on the 2024 horizon.

Ironline Advisors is a full-service advisory firm focused on sell-side, buy-side and value maximization of Lower Middle Market (LMM) private companies. Ironline, with offices in Birmingham, Atlanta and Nashville, brings large firm execution experience and resources to help companies achieve their maximum potential value.