M&A middle-market activity: What businesses need to know

 Understanding the ins and outs, trends and activities going on in M&A markets can help businesses make informed decisions including whether to buy, hold or sell. After a brief pause and slowdown of M&A activity due to the COVID-19 pandemic, middle-market M&A activity has rebounded and is continuing to increase at a fast pace. This can be seen from the increases in both the number and dollar value of deals – which hit record highs in 2021. For businesses questioning if the right time is now to buy or sell, The Bonadio Group’s latest Middle-Market M&A Report breaks down new data, insights and trends related to middle-market M&A activities (in the U.S. and in Upstate New York) that owners should be aware of.

The Growth and Rebound of M&A Activity
Middle-market M&A activity continued its blistering pace throughout 2021 and shows no signs of slowing down. The quantity of M&A transactions is being driven primarily by vast amounts of “dry powder” held by private equity funds, large amounts of cash held by corporate buyers, and the availability of leverage at low interest rates. Additionally, growth in M&A activity is likely being driven by the aging population of middle-market business owners who are placing middle-market businesses up for sale, and fierce competition for those businesses continues to result in a frothy marketplace.

North America and Upstate New York M&A Activity
When looking at M&A activity across the U.S., deal count and value have been growing strong for multiple years with 2021 setting a new record. Looking back at activity in recent years, M&A activity tapered off at the end of Q1 2020 due to the COVID-19 pandemic and stayed low through Q3 2020, after which it staged an impressive comeback, and has increased in each quarter of 2021.

Deal activity in upstate New York has been consistent with the national trends in recent years. In 2021, deal volume recovered from the pandemic lows of 2020, and hit a new five year high. Quarterly deal counts returned to historical levels in Q1 2021 and finished the year at a record level. Approximately 64% of the upstate New York deals closed in Q4 2021 were in either the Rochester, Syracuse or Buffalo regions. The Rochester region specifically ranked third among major cities upstate for total number of M&A deals in 2021. From an industry perspective, the industrial businesses had the highest number of M&A deals followed by consumer products and technology and communications.

Purchase Prices Soar
Another key insight on M&A activity in the middle-market relates to price. Purchase price multiples remain at a high-level heading into 2022. Potential buyers have access to both debt and equity capital and continue to aggressively look to expand their operations and/or portfolios through middle-market M&A. Fierce competition and low costs of capital continue to drive up transaction multiples. Data shows that larger firms consistently attract higher transaction multiples than smaller firms.

Shifts in Family-Owned, Founder-Owned Businesses
All businesses were affected by the COVID-19 pandemic, especially businesses that are family- or founder-owned. The COVID-19 pandemic caused many family- and/or founder-owned businesses to rethink their long-term priorities and plans. That coupled with high transaction multiples continues to drive business owners to explore liquidity through middle-market M&A transactions.

How to Evaluate Middle-Market Business Values
For businesses considering buying or selling, performing an analysis of the value of the company’s is a key first step. One of the most common ways to value a middle-market business is to multiply the company’s EBITDA (earnings before interest, taxes, depreciation and amortization) by a market-based EBITDA multiple. Multiples reflect the market’s perceptions of a company’s strengths and growth prospects as well as risk. Bottom line: multiples are a simple way to discuss valuations, but every business is unique and middle-market business owners should generally not draw conclusions from overall market multiples or specific transactions. It is far better for middle-market business owners to have an investment banker analyze the business through the lens of potential buyers to help set expectations regarding potential valuation in the marketplace.

Future Outlook on M&A Middle-Market
As both businesses and the economy continue to rebound post-pandemic, M&A activity is expected to continue to grow in 2022; however, only time will tell how inflation, raising interest rates, supply chain constraints and the geopolitical environment may affect the M&A markets.

  Jeff Lewis, Partner and Investment Banking /Transaction Advisory (IBTA) Team Leader, The Bonadio Group. With over 25 years of experience, he advises clients in buy-side and sell-side M&A transactions, to learn more visit www.bonadio.com.

 Disclaimer: The summary information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader.  If the reader of this has legal questions, it is recommended they consult with their attorney.

In The Bonadio Group’s report, “middle-market” is defined as companies with enterprise values between $10 and $250 million. However, certain third-party data sources do not present data for deals falling into that size range on a standalone basis, as doing so would potentially exclude deals where transaction values were not disclosed (which is often the case for transactions in this size range). As such, we may reference overall North America and Upstate New York M&A trends as a proxy for what’s happening in the middle market.