2023: A Year to Get Creative

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Despite some obvious challenges in the economy like inflation, rising interest rates, a looming recession, a bear market, soft staffing, and an ongoing war in Ukraine…deals are still taking place among main street and lower middle market companies. There was a dry period for buy/sell transactions during the pandemic but, since that time, the pent-up demand among buyers and sellers has resulted in a strong wave of activity with more creative deal structures.

Here’s what we’re seeing for the year ahead:

Creativity is the name of the game in main street deals

Owner-operated businesses under about $5 million are considered “main street” deals. If they made it through the pandemic, most of them have emerged stronger, healthier, and with more market share in their industry thanks to competitors that didn’t survive. That dynamic has helped preserve multiples, so valuations haven’t been hurt much, but sellers shouldn’t expect all their money up front given the rise in the cost of money. SBA loans have traditionally been a predictable source of financing in this space, so with double digit interest rates, sellers should expect to participate with some less expensive seller notes and earn outs for businesses that are growing.

Merger & Acquisition (M&A) activity remains strong

M&A activity has been strong and will remain strong this year. There is a tremendous amount of capital among large companies looking to acquire and private equity groups that need to add to their portfolios. True to form, most buyers in this space are looking for solid topline growth and strong earnings, even if they have to buy multiple smaller companies to get it. Almost like laddering fixed income investments, they are laddering smaller, mid-sized, and larger companies in their portfolios. Especially strong industries include staffing, transportation, and distribution. This is also a great way for larger companies to acquire the talent they need to cover gaps vs. raiding competitors and paying exorbitant wages. (Like we talked about here.)

Opportunities in 2023

You may have heard that when you have cash and the market is down, it’s a buying opportunity in the market because stocks are in the bargain bin. The same is true this year for transferring ownership of businesses: there are many great businesses opportunities out there. The demographics of baby boomer sellers haven’t changed just because the economy is a bit scary. Sellers will have a preference toward buyers with plenty of cash who won’t be impacted by rising interest rates (just as buyers will lean toward opportunities that offer seller financing. We certainly expect to see plenty of creativity in deal making for those who need (or prefer) to incorporate some level of debt. Make sure your deal making team (and especially your business broker / M&A advisor) can guide you through that well.

Most people don’t know where to begin when buying or selling a business. We guide clients through the complicated process so that they get to the closing table successfully. Let us know when you’re ready to have a confidential conversation about buying or selling a business this year. Cheers to a happy, healthy, and productive 2023!