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M&A Report – Mid-Year 2024

Could it be the light at the end of the tunnel? 


During our last newsletter, we talked about how the M&A market experienced significant challenges, marked by a 27% decrease in global deal volume from 2022 attributed to the lingering effects of the COVID-19 pandemic, rising interest rates, and slow adjustments in owner expectations. 


There are some significant differences in what dealmakers anticipate for 2024, yet a common expectation shared by all is that it will be a year of change—and largely for the better. 


While 2024's deal value is expected to approach the robust levels seen before the post-pandemic spike in 2021, assuming a return to normalcy might be premature. Despite substantial available capital, activity remains subdued by historical standards. For perspective, 2024's deal value is projected to align with 2018's figures, yet today's buyout capital exceeds 2018's by over 1.5 times. 


Leading M&A consultancies caution against expecting a return to the exceptional levels of 2021. That year saw a unique combination of favorable conditions: plentiful and easy borrowing, near-zero interest rates, substantial stimulus funds for strategic buyers, record inflows of committed capital into private equity, and the resurgence of deals paused in 2020. Such a rare confluence of factors is unlikely to be replicated in the foreseeable future. 


Overall Market Insights: 


  • According to the latest EY-Parthenon Deal Barometer the forecasts that 2024 US corporate M&A deal volume will increase 20% and US private equity M&A deal volume will be up 16%. 

  • Q1 2024 saw a 36% increase in global deal value. The Deal Barometer M&A outlook shows CEOs are looking to make acquisitions, and there is a rise in those looking to divest assets. 

  • Historically, corporate M&A deal volumes have been relatively stable at around 1,000 deals over $100 million per year. But the low inflation and low interest rate environment in 2020–21 resulted in a large positive shock for deal volumes, registering an impressive jump of more than 40% in 2021. M&A consulting firms largely anticipates a return toward pre-pandemic levels of activity with the number of deals in 2024 only about 4% below the average number of deals in 2017–19. 

  • In the pessimistic scenario — where growth is weaker, inflation hotter and interest rates higher — deal volume is expected to show a muted recovery with 13% growth in 2024. 

  • 90% of middle-market companies that were sold or merged and 70% of middle-market companies that acquired in the last three years had little or no previous M&A experience. This leaves them more reliant on advisors and makes it more difficult to avoid mistakes and ensure a smooth transition. 

  • Having a thorough M&A strategy is as important as having a business model for a business to work. According to the Deloitte 2024 M&A Trends Survey, 44% of corporate executives name M&A strategy as the key aspect in achieving deal success. 


Supply Side Dynamics (Sellers) 


  • Valuation Multiples: Business owners in the lower-middle market, while not solely focused on EV/EBITDA trends, use them as important decision-making factors. Deals under $100 million ended 2023 with a valuation multiple of 7.6x EBITDA, up from 7.0x in 2022 but still below the 9.0x seen in 2021. The ten-year average from 2010 to 2019 was 7.9x. As valuations stabilize near this average, sellers are likely to be motivated to bring their businesses to market. 

  • Earnings/EBITDA: Corporate earnings across various industries have rebounded after the challenges of 2020-2022. This, along with improved valuation multiples, creates a favorable environment for sellers to consider a sale, especially with ongoing concerns about potential economic downturns. 

  • Aging of business owners: The average age of a lower-middle-market business owner in the U.S. is 53, suggesting a growing pool of potential sellers as owners look to retire. This demographic trend is expected to drive M&A supply in the coming years. 

  • Election Year: Election years typically bring concerns about regulatory and tax changes. As campaigns progress and candidates propose new policies, the fear of regulatory shifts motivates sellers to enter the market. 

  • Summary for Supply: With healthy and growing valuations, stable earnings, an aging ownership demographic, and concerns about regulatory changes, 2024 could see a significant increase in willing sellers entering the market. 


Demand Side Dynamics (Buyers) 


  • Valuation: Despite a general upward trend, valuations remain below recent highs. This discrepancy is likely to prompt motivated buyers to engage actively in M&A activities in 2024. 

  • Balance Sheet Liquidity: Corporate M&A activity was subdued in 2022 and 2023, allowing companies to replenish their cash reserves. Despite a slowdown in private equity fundraising, substantial committed capital still needs deployment. The urgency for private equity to invest, coupled with strategic buyers' eagerness, is expected to boost buyer demand. 

  • Credit Costs: Credit costs surged in 2022 and 2023 due to the Federal Reserve's inflation-curbing measures. However, these costs are expected to stabilize or decrease in 2024, providing assurance to return-driven investors and encouraging participation. 

  • Credit Capacity: Banks have shown fluctuating credit appetites over the past 12-24 months due to economic and asset class uncertainties. As market stability improves, buyer motivation and confidence are likely to increase. 


Overall, the M&A market in mid-2024 is characterized by a resurgence of activity, driven by stable valuations, improved economic conditions, and a motivated pool of both buyers and sellers.  

 

 

 

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If you are considering a business in the second half of 2024 and early 2025, please contact us at your earliest convenience to explore our capabilities and discuss how we can contribute to your success. 


About Pacifica Advisors 


Pacifica Advisors is a cross-border mergers and acquisitions advisory firm serving small to medium-sized businesses with $1.5 to $25 million in EBITDA across the US & Mexico. Our M&A services include sell-side representation, buy-side advisory, capital markets, and business valuation. 


Visit PacificaAdvisors.com for a FREE opinion of value or learn how we can help prepare your business for a successful sale. 

 

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