Deal Activity Continues to Be Robust — When Will the Slow-Down Hit?

Mar 29, 2019
Market Updates

Several things have driven deal flow and valuations for the last several years — namely, demographics, available capital, a favorable lending environment and generally favorable economic conditions. The low unemployment rate is also cited by the Market Pulse Fourth Quarter 2018 report as fueling high demand by buyers.

However, many sources are forecasting a slowdown in the future. The question continues to be not if, but when the slowdown will occur. Market Pulse reports 83% of the respondents to their survey of the lower middle market (up to $50 million in transaction value) say the strong M&A market won’t last more than two years. Nearly one-third predict it will turn within the year.

Total U.S. Mergers & Acquisitions in 2018 continued to increase, going from 11,799 transactions in 2018 to 13,391 transactions in 2019, an increase of more than 13%, according to FactSet. January 2019 activity shows continued robustness in the broad market, with an increase of 3% in the number of deals year over year but a decrease in U.S. private equity activity of 4.9% in January compared to December.

Deal value is showing both tailwinds and headwinds, according to GF Data®. From their pool of 200 participating private equity firms, multiples year over year fell for deals on the lower and upper end of total enterprise value and increased in the middle two tranches.

"The question continues to be if, not when the slowdown will occur."

The GF Data M&A Repor t says its data suggests that “valuations on ‘A’ properties in ‘B’ segments of the market may have eased, while ‘B’ properties in ‘A’ segments continue to find new headroom.” The industry categories with higher valuations include Technology, Media and Telecom, and Healthcare. We have also seen Food and Beverage multiples in the higher end of the ranges.

Another interesting trend is the number of months to close. We have seen this increase because buyers are being more diligent when it comes to premium deal values, and lenders are applying increasing scrutiny to financial forecasts. Market Pulse reports the time-to-close for deals in the enterprise value range of $5M to $50M averages 12 months, up about 15 days from the year before. The number of months from LOI to close averages four months.

"Buyers are being more diligent when it comes to premium deal values."

The amount of leverage on deals has decreased over the past year, offset by higher amounts of equity funding. To a large extent, this has driven the moderation of deal values, consistent with historical trends. GF Data’s Leverage Report by quarter shows the following trend:

Total debt to EBITDA in 2018 in the GF Data set was 3.6x, down from 3.9x in 2017. Senior debt to EBITDA averaged 2.7x in 2018, down from 2.9x the year before. In the lower end of the GF Data valuation range ($10M-$25M enterprise value), senior debt to EBITDA is 1.9x and hasn’t fluctuated as much as deals in the $50M and above enterprise value range.

"The pool of interested financial and strategic buyers is strong."

Preparing for the Expected Slow-Down

At Wipfli Corporate Finance Advisors, we continue to see robust deal flow and are having good discussions with our clients about exit timing and options. The pool of interested financial and strategic buyers is strong; however, there is abundant evidence that market sentiment is growing toward an expected slow-down. It is time to talk with your advisor about your strengths, weaknesses and future expectations. It is critical for middle-market companies to engage a quality M&A advisor to help position it for greater success.

Your experienced team at WCF Advisors knows how to prepare the business and effectively sell its strengths. We also have in depth knowledge of active buyers and a sale process that yields results! Contact us to learn more or get started.


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.

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