2021 M&A Outlook
The year 2020 will likely be remembered for the historic health and economic toll of the pandemic, but the promise of a brighter 2021 may be on the horizon, thanks to newly developed vaccines and federal stimulus’ that could help cure what has been ailing the nation physically, psychologically, and economically. While not a prognostication, we thought we’d reflect on what we have witnessed firsthand from the pillars of industry, Entrepreneurs!
The economy started off very strong in 2020. The pandemic hit, shutdowns began, and uncertainty ensued. After the shock of the pandemic passed an unexpected rebound happened for many but not all sectors. A bifurcated market arose as the economy began to strengthen. While certain industries were prepared for these uncharted waters and others pivoted with the prevailing winds, clear damage had been done to many sectors of the economy.
With all the negative headlines, M&A activity in 2021 bounced back stronger than expected following a tumultuous 2020. Both the number of deals completed and the aggregate value of those deals were at their highest levels in the last decade.
With the incoming administration’s plan to enact higher tax rates, entrepreneurs who expected to sell in the future expedited their plans before tax increases substantially reduced after-tax proceeds from a business sale. By late spring owners were flocking to the private capital markets in an effort to complete a sale by the end of the year. Concerns that the rush to close by the end of the year would negatively affect valuations in the 4th quarter (mimicking the tax increase with the Affordable Care Act) were not substantiated. In November, when the House passed the Build Back Better Act, those concerns were significantly reduced as the House agreed to more modest increases.
Fundraising for Private Equity remained strong in 2021 with mega-funds dominating the market. The use of Special Purpose Acquisition Companies (SPAC) by Private Equity remained strong in 2021. However, it is expected to hit some turbulence as the administration looks to tighten SPAC regulations.
As the 2021 pandemic recovery navigated the virus variants, shutdowns, and labor shortages, entrepreneurs adjusted operations to compete in the ‘new normal’. According to a survey by JP Morgan|Chase, entrepreneurs “found innovative ways to run their companies and flex their entrepreneurial muscles. As a result, many of these companies are stronger today than they were before the pandemic”. 1
Earnings multiples continued their strength in 2021. The private capital market continued to be a Seller’s market. Competition for quality businesses, the availability of liquidity, the cost of money, and the continuing economic rebound supported strong multiples.
The market strength we foresaw last year panned out for sellers with well-run companies. As 2022 begins, we expect to see continued improvement in economic conditions tempered by rising interest rates, a tight labor market, and inflation concerns.
We also expect the number of deals and multiples will continue to be strong through 2022 and into the foreseeable future. Well-run companies will have plenty of competition for buyers in 2022 due to the expectation of strong multiples.
If you’re prepared to take chips off the table, you should get started in 2022 before this favorable environment changes. If you’re not sure how prepared your company is for the private capital market, Strategic Exit Advisors offers a complimentary Readiness Assessment. It takes less than an hour to complete and will illustrate where to improve your company’s attractiveness to the market. Call or email us today at info@se-adv.com to schedule a video call.
Strategic Exit Advisors continues our growth as we enter our 16th year. Our historical selling successes with a high rate of closing on favorable terms are expected to continue in 2022. This is indeed good news for our entrepreneurial business owners. With this momentum, we anticipate another prosperous year for our current and prospective clients.
We believe 2022 will be a better year than last year. At the very least, it certainly should be another exciting year!
We look forward to Strategic Exit Advisors continuing to be your trusted partner. We’re available for a call anytime (215) 489-8881.
12022 Business Leaders Outlook, 12th annual survey
