Debt, regulations, inflation drive mergers and acquisitions

Events during the past few years have changed merger and acquisition deal volumes, a trend we expect to continue, including large numbers of transactions driven by the amount of debt and equity capital available. We see this in all deal sizes and across all industries.

The main potential disruptor for M&A in the near future is debt. While there is, and will continue to be, substantial equity capital available in the market, many still rely on leverage when executing transactions. The availability and affordability of debt in recent years has had a substantial positive impact on deal volumes and valuations.

With the inflation we’re currently experiencing, increases in interest rates has followed. As debt becomes more expensive, buyers will expect higher returns, which may impact valuations. Additionally, many will have to rethink their capital structures and could slow deal activity.

In terms of regulations, potential tax changes represent the biggest unknown. While certain proposals have been announced, it’s still uncertain where capital gains and other business-related rates will move. Should those rates increase substantially, sellers may find it less appetizing to sell, which will impact volume in the marketplace. Some think buyers will compensate with higher valuations to continue to encourage strong deal flow. But that remains to be seen.

The advice we give many of our HORNE Capital clients is to pay attention. Many business owners we speak with continue to focus on their own personal timelines for selling their business. It’s important for all business owners to monitor the current transaction market if selling their business figures into their plans.

For lower- and middle-market businesses, companies in many industries are proving valuations and exit multiples at near all-time highs. The amount of capital that buyers must deploy has grown significantly. Competition for profitable businesses is high, and sellers who engage in a sell-side process retain more leverage. Potential sellers who can’t decide whether now is the time to sell should keep in mind the favorable environment and the length of time that a sell-side process can take.

Often, it may be better to explore a transaction a few years before you intend to sell. In response to a positive market, this also allows business owners a transition period after a transaction, which is important to most buyers.

Are you ready to sell your business? Contact us today.

Josh Edwards is a public- and middle-market partner at HORNE and joined the firm in 2007. He specializes in navigating the complexities of mergers and acquisitions, including strategic, private equity and venture capital investments.



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