Deal Optimism in 2019

Just about a month into the new year, small-to-middle market M&A confidence appears to be gaining. A few recent surveys questioned M&A participants and business owners about their expectations in 2019. Most responded that they believed M&A activity would increase due to a strong economy, baby boomers exiting their businesses, GDP growth, and a favorable business environment.

Both strategic buyers and Private Equity firms are sitting on a lot of cash, eagerly looking for solid deals. The majority of the respondents also stated that they expect the average size per transaction to increase this year as well.

On the sell-side, we are noticing the same as there are many family businesses and baby boomers contacting us as they are exploring their exit options. Some are looking for outright exits, while others are open to taking most of their money off the table while sticking around for a prolonged transition.

On the buy-side, deal particulars vary as some buyers are seeking outright acquisitions while others would prefer to purchase a majority stake with the owner retaining a minority stake and remaining as the operator for some time.

While it is tempting to anticipate the future M&A market with rose colored glasses, there are some potential headwinds to consider. For instance, rising interest rates and economic uncertainty can be potential obstacles for deals.

Many respondents of a recent Deloitte study, “The State of the Deal M&A Trends 2019 Survey”, said that rising interest rates would slow their activity or reduce their ability to execute on deals. However, the “baby boomer effect” does remain a powerful potential tailwind as many of these small business owners ($100,000 to $10 million in sales) are looking to retire soon.

Last year, 36% of small business owners who responded to the survey said they plan to sell or transition their business within the next five years, which is up from 27% just seven years ago.

Therefore, based on Economics 101 – Supply vs. Demand, with a larger number of businesses up for sale over the next five years and with the current economic environment and corporate tax code, the conditions for a ripe M&A market are surely favorable.