Please be aware: More recent data has been published since the time of this post. To see current market trends, check out the most recent issues of Market Updates.

After a few years of robust merger and acquisition activity, policy uncertainty has the market poised for a temporary breather. There are some mixed signals from the first quarter (Q1) of 2017. For starters, overall M&A activity in the United States started relatively modestly in 2017 according to Pitchbook, at least in contrast to the past few years. However, transaction multiples edged up to a multi-year high. The increase in valuations is likely a result of the investors who were active in Q1 perceiving that potential tax cuts and infrastructure spending bills will increase free cash flow for investments going forward.

Diving deeper into lower-middle-market M&A activity for Q1 2017, we see relative steadiness. According to GF Data®, the same number of deals were completed in Q1 2017 as in Q4 2016. This is notable because there is typically a 25% decrease from Q4 of one year to Q1 of the following year.

 
Valuation multiples were also flat quarter-over-quarter. Incorporating this data point suggests that the lack of a drop-off is likely the result of a carryover of companies that began the sale process before the 2016 presidential election. Since the pre-election political and economic environments were defined by relatively low-growth government policies—compared to post-election speculation about lower tax rates and less regulation, suggesting a higher-growth environment—it would be expected that transaction multiples would be consistent with pre-election levels.

 
Furthermore, total debt levels remained consistent with those in 2016 and 2015, further supporting the notion that Q1 2017 deal activity is a carryover from the prior administration’s economic policy environment.

So the question remains, will near-term deal activity moderate as sellers take a “wait and see” approach to potential tax, regulatory, spending, and other changes? This is very possible, although our experience suggests that if there is a drop-off in deal activity, it will likely be for only a quarter or two. Despite the volatility coming out of Washington, D.C. these days, it is relatively safe to say that the macroeconomic environment will be more pro-growth, with likely lower tax rates and less regulation, which will in turn drive deal activity and valuations. 

Potential sellers are wise to begin preparations today so when new policies begin to make an impact, they are well positioned to take advantage of the M&A market. The M&A market has already been experiencing attractive conditions: banks are still eager to lend in support of companies that demonstrate the ability to maintain profitability and manage their business effectively, equity markets are continuing to rally, and business and consumer sentiment has improved to attractive levels. Combine this with potentially lower taxes and less regulation, and the time to sell may never be better. Talk to your advisors sooner rather than later to see how to best position your business in the M&A market, whether you are intending to sell tomorrow or five years from now. 

Our skilled WCF team brings a strong understanding of how to best prepare to maximize value and position your company to various buyer groups. Preparation is vital in all markets, particularly when there are significant anticipated macroeconomic and government policy changes. Once you are armed with a roadmap to maximize value, our team is highly skilled in executing sale transactions, including marketing your company, identifying buyers, negotiating value and terms, and coordinating with your other key advisors (attorneys, accountants, and wealth advisors).

The content of this material should not be construed as a recommendation, offer to sell or solicitation of an offer to buy a particular security or investment strategy. The content of this material was obtained from sources believed to be reliable, but neither Wipfli Corporate Finance Advisors, LLC nor RKCA, Inc., warrants the accuracy or completeness of any information contained herein and provides no assurance that this information is, in fact, accurate. The information and data contained herein is for informational purposes only and is subject to change without notice. This material should not be considered, construed or followed as investment, tax, accounting or legal ad vice. Any opinions expressed in this material are those of the authors and do not necessarily reflect those of other employees of Wipfli Corporate Finance Advisors, LLC or RKCA, Inc. Investing in the financial markets involves the risk of loss. Past performance is not indicative of future results.