The Seventh Inning Stretch (Extra Innings, Anyone?)
With the third quarter wrapping up, the M&A markets continue to show more strength than weakness. Are we in the seventh inning stretch, and are there extra innings to look forward to?
To fully analyze the current state of affairs, we must look to secular dynamics and their impact on valuations. Even in those sectors, which are off of their all-time highs, with a longer term perspective, valuations remain strong.
Several externalities — tariffs, trade wars, interest rates and the overall geopolitical environment, just to name a few — have already impacted the business environment and are poised to continue to create uncertainty.
The debt markets continue to flourish, and average lending multiples remain in the 6x EBITDA area.
A favorable lending market should help maintain valuations for the remainder of the year.
"... the M&A markets continue to show more strength than weakness."
Another driver of valuations in the market is current trends in debt pricing. Pricing spreads on senior and subordinated debt remained at elevated levels through the second quarter of 2019, which suggests lenders are recognizing an increasing level of risk.
"There are signs that the window of opportunity may be narrowing."
Relatively favorable valuations have persisted throughout several past quarters. There are signs that the window of opportunity may be narrowing. Manufacturing, distribution and healthcare services have seen nominal declines in their valuations. Business services shined bright by growing in three out of the four size categories.
Many macroeconomic indicators remain favorable. For example, unemployment has been below 4% for the past seven months and wages have increased by 3.2% year over year.
In addition, the lowering of the Federal Funds rate in July 2019 to 2.25% contributed to a positive borrowing market.
Playing in the Seventh Inning Stretch
With the markets and valuations staying strong, Wipfli Corporate Finance Advisors expects continued relative strength and high deal activity throughout the year. As such, we advise clients considering a business sale to act now, while the window is still open. We may be in the seventh inning stretch, and the time to capitalize is now. Contact us for more information or to 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.