In October Jessica and I talked to about 20 people about what they’re seeing in the market, the highlights are below. I also attended the ACG meeting and got some insights on lending in today’s market. Finally, our very successful Getting the Deal Done Breakfast Conference on November 8 had all of us giving some market updates.
The following is from our conversations and the event.
- Q2 saw a lot of volume but horrible deals. Q3 is slower but better quality.
- We’re seeing larger seller notes.
- It’s tough finding good deals.
- There’s more buyer control (of deals and terms).
- Clients are skittish on borrowing unless they have to; doing only what’s necessary.
- If an owner really needs to sell negativity doesn’t affect them but otherwise they’re moving slow.
- Stress testing debt coverage at 10%.
- Some owners don’t understand they need a full year of recovery (profits like pre-Covid) and maybe two or more quarters of growth.
- We are in a recession.
- Not seeing any change in activity because the market is age driven.
- Clients are changing plans and postponing decisions.
- SBA deals will decline sharply as interest rates rise.
- People are timid.
- There will (need to) be more equity in deals.
- I’m trying to figure things out as we’re heading into unknown territory.
- PE deals won’t decline as much (down 20%) and there will be more caution.
- [From a non-M&A related person] We’re seeing caution and pullback across the board.
- Buyers are more cautious
- Inflation is a concern for all
- Less deals being done (election, world issues)
- New projects being put on hold
- Owner-user in need of larger space still wants to buy real estate properties, even though rates are higher. For them, rents are rising as well so buying their own properties would make sense.
- Sellers are not sure if this is the right time to sell.
- With rates rising sellers wonder if they will get what they want for their business.
- Rates from my perspective are impacting the M&A space in today’s market. Prior to the Fed rate hikes, we could finance a transaction with a buyer that wanted to put 10% down on a business that was trading 5x EBITDA. Today, that just doesn’t work. This means that something needs to give…more cash down, more seller financing on very favorable terms or the price needs to come down. While some buyers are catching on, not everyone has quite yet.
- Expect more earnouts and seller financing.
- Those who have cash in hand will move quicker and get to deals first.
- Deals are taking longer to get done.
- The other thing is inflation. I have reviewed a handful of deals of late where YTD numbers are down year over year primarily because businesses have not adjusted their pricing due to inflation.
- There is still a lot of PE activity.
- A lot of money out there waiting to be invested.
- Cash flow is tighter in certain industries.
- Valuations will come down.
- 2023 could be a “wild one” as per John O’Dore.
The following are comments from four lenders on a panel at an industry event
- Credit more discerning but no panic
- Who has pricing power and can cover labor increases
- Leverage coming down but enterprise values holding – but more equity
- Debt service will get interesting
- Enterprise values down especially when cyclical
- Enterprise values good if on right side of market curve
- See the bid-ask widening
- Things have slowed a bit
- Adjustments aren’t as well received (by lenders) as before
- Longer processes with more scrutiny
I, and the others on the panel, don’t expect this to change anytime soon.
